FCA (Financial Conduct Authority) is the Financial Conduct Authority of the United Kingdom, established on April 2013, 4, with its headquarters in London, United Kingdom. Its predecessor was the Financial Services Authority (FSA).
The FCA inherited the regulatory responsibilities and related prudential duties for the UK financial market behavior from the FSA. It is responsible for supervising the business behavior of various financial institutions, promoting competition in the financial market, and protecting consumers. It is directly responsible to the UK Parliament and the Treasury..
In accordance with the FCA's client funds regulations, all client accounts worldwide are managed separately to ensure their interests and security, and a FSCS supplementary plan is formulated to protect investors.
At present, the types and scope of application of FCA licenses are divided into the following categories:
Crypto institutions are regulated by MLR
Under the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR), the UK Financial Conduct Authority (FCA) becomes the anti-money laundering and counter-terrorism financing (AML/CTF) regulator for businesses engaging in certain crypto-asset activities.
[Regulatory scope]
Applies to crypto-asset exchange providers (including crypto-asset ATMs, peer-to-peer providers, issuing new crypto-assets such as initial coin offerings (ICOs) or initial exchange offerings) and custodial wallet providers. Existing Financial Services and Markets Act firms, electronic money institutions or payment services businesses that conduct crypto-asset activities will also need to apply for registration.
How to supervise
New UK businesses carrying out crypto asset activities within the scope of the MLR must register with the FCA before conducting business.Comply with relevant regulations. In addition, the FCA requires crypto asset businesses to:
1. Identify and assess the money laundering and terrorist financing risks faced by its business;
2. Develop policies, systems and controls to mitigate the risk of the business being used for money laundering or terrorist financing purposes;
3. where appropriate to the size and nature of its business, appoint a member of its board of directors or senior management to be accountable for compliance with the MLR;
4. Conduct customer due diligence when establishing business relationships or conducting occasional transactions;
5. Enhanced due diligence should be performed when dealing with clients who may pose a higher risk of money laundering/terrorist financing, including clients who meet the definition of politically exposed persons;
6. Conduct ongoing monitoring of all clients to ensure that transactions are consistent with the client’s business knowledge and the client’s business and risk profile.
The UK regulator noted that it will actively monitor firms’ compliance with the new regulations and will take swift action if firms fail to meet standards and pose a risk to market integrity.
UK STO Regulation
According to the Guidance on Cryptoassets published by the FCA in 2019, tokens are classified into exchange tokens, utility tokens and security tokens according to their economic functions. Security tokens are defined as tokens with specific characteristics that meet the definition of a Specified Investment like a share or a debt instrument, which means that STOs issue debt financial instruments similar to stocks or ownership, so they are classified in the category of specific investments and fall within the scope of the FCA's authority.
Just as issuing stocks does not require a license, companies can issue STOs without regulatory permission, but any advisors, brokers, or any financial promotion mechanisms that help handle token sales will still need to be authorized by the FCA.
Regulatory Sandbox Program
This year, the new UK Chancellor of the Exchequer, Rishi Sunak, announced a new sandbox initiative in partnership with the UK Financial Conduct Authority (FCA). The Chancellor will create a Digital Scalebox for fintech companies looking to scale their products and services, launch the second phase of the FCA Digital Sandbox, and introduce a regulatory incubator for young fintech companies.
Currently, there are three types of FCA sandboxes that firms can apply for:
Digital Sandbox:The concept is relatively new, with only a group of companies joining the sandbox so far to validate their early ideas and proofs of concept, and without the backing of a regulatory sandbox.
Regulatory Sandbox:The longest-running sandbox, with six cohorts, is the Regulatory Sandbox, which is for companies that want to test their products in a real environment with a small group of real customers before rolling them out to a wider group.
Regulatory Nurseries:For start-up fintech companies, this is designed for newly licensed companies that need additional support.
It is reported that 108 companies have entered the six batches of the regulatory sandbox program, and if some companies are not ready to start testing in the initial grouping, they may enter the sandbox multiple times. After the application deadline at the end of 2020, the FCA has not yet made public the latest seventh batch of companies entering the sandbox.
The FCA’s sandbox program has helped many fintech companies and large financial institutions test the waters before jumping directly into new products and services. At the same time, the FCA continues to expand the scope of the regulatory sandbox pilot, including the Digital Sandbox and the Regulatory Nursery, which is good news for companies that want to participate in the upcoming regulatory sandbox.