Long reads

Labour’s Financial Services Review: Everything fintechs need to know

Níamh Curran

Níamh Curran

Senior Reporter, Finextra

The UK’s Labour Party published its  Financial Services Review this week and highlighted fintech as the future of financial services in the UK.

The Review has been released ahead of a potential election later this year. The foreword of the report said: “We believe a strong financial services sector will drive investment in jobs and new industries. Our financial sector can be a vehicle for growth not just from the top down, but from the bottom up and the middle out.”

Point five of Labour’s six policy priorities is to: “Embrace innovation and fintech as the future of financial services”, showing the Party’s commitment to fintech.

They hope to do this by “becoming a global standard-setter for the use of AI in FS, delivering the next phase of Open Banking, defining a roadmap for Open Finance, embracing securities tokenisation and a central bank digital currency, and establishing a regulatory sandbox for financial products to reach underserved communities.”

Here are the key areas Labour has directed at the fintech industry.

AI in financial services

Labour has placed a focus on the development of AI in financial services, saying its impact will be “profound” and they see it as a key source of innovation in the sector.

They argue that the UK can lead the world in AI due to its reputation for regulation. There is some competition from AI regulations globally, including the EU AI Act and an Executive Order in the US. The UK has tried to lead this discussion in the past, with the AI Safety Summit, but was somewhat challenged by France.

Labour has emphasised consumer protection in AI regulation. They stated they are currently still working on their AI strategy but will “set clear standards for AI safety, and adopt an agile approach to regulation so that the technology can be utilised by financial services firms and other organisations to boost growth in every part of the economy.”

In another part of the Review, the Party said that a Labour Government would work with regulators and the industry to support financial services firms to leverage data and emerging technologies such as AI to produce accessible and affordable financial guidance tools.

Open banking and open finance

Labour’s plan states they want to deliver the next phase of open banking to “unlock the potential for increased competition in retail payments”.

They state the successes of open banking now need to deliver new use cases for SMEs and customers and support JROC’s open banking roadmap.

This element of the plan has received praise from the industry, with open banking experts pleased to see the cross-party support of open banking. Richard Newman, director of corporate affairs at Open Banking Ltd, said it is clear Labour understands the need to maintain “momentum and the pace of innovation” in open banking.

He added: “Open banking is of huge value to consumers, businesses and has contributed to the UK economy – it’s important that we leverage what we have built to help deliver other smart data schemes in other sectors, such as energy and telecoms.”

Tom Burton, director of external affairs and public policy, GoCardless, agreed with this and said: “Although open banking has made great strides so far in the UK, our collective focus now needs to be on execution, with an emphasis on the fundamentals that are essential to driving mass adoption. These include the ability to collect recurring real-time payments across every use case, full coverage across banks and a great user experience. As the Review notes, getting the long-term regulatory framework and Future Entity in place, and making sure open banking is economically sustainable for all ecosystem participants, are key to this.”

Ben Ruffels, VP of Public Policy at Volt, discussed the use case of variable recurring payments, which was highlighted in Labour’s plan and said: “It’s essential that the work of JROC – in defining the next phase of Open Banking and establishing an economically sustainable ecosystem for the long-term – progresses without delay.”

Labour’s plans go beyond open banking into open finance, saying this system could be used to consolidate data from areas such as mortgages, pensions, and insurance.

They have proposed the Data Protection and Digital Information Bill, which Labour says will “enable the government to provide the regulatory foundation for the future Open Finance infrastructure.”

The Party have emphasised the potential of open finance to improve financial inclusion, support household saving and investment, and create a new pipeline of data to spur innovation, including personalised solutions for customers.

Tokenisation and CBDCs

The report recognises the case for the digital pound, and states they support the Bank of England in this area, but want to ensure that issues like privacy intrusion, financial inclusion and stability are effectively mitigated in the design.

Labour stated: “embracing tokenisation could increase liquidity, provide access to new asset classes and fractionalised assets, and strengthen risk management.”

The Party hope to make the UK a global leader in tokenisation by “advancing work to clarify the law around tokenisation, and working with regulators to establish a proportionate, outcomes-based regulatory regime to oversee the technology.”

Specifically, the Party aims to advance initial progress in tokenisation by introducing financial marker infrastructure regulatory sandboxes. They want to use these to work out the regulatory bottlenecks in tokenisation.

They also want to use these sandboxes to investigate the possibility of a pilot issuance of tokenised gilts via the Debt Management Office to test the impact of the technology and create the demand for tokenised assets.

In addition to these aims, the said that a Labour government would develop partnerships with other financial centres to establish interoperable standards and enable trade of tokenised assets across borders.

A CryptoUK spokesperson supported this plan and said: “Blockchain technology is essential to the tokenisation of financial assets and, as Labour and others within the financial services industry have noted, the adoption of tokenisation could boost the economy by providing more asset classes, whilst strengthening risk management practices. Clarifying the law and regulations around these innovations will be key to promoting more jobs and growth within the British economy.”

Regulatory sandboxes

In addition to the tokenisation sandboxes mentioned above, the Labour Party will ask the FCA and PSR to look into a new regulatory sandbox to “encourage development of innovative products to reach excluded and underserved customers.”

To support this they have pointed to examples of such sandboxes in Ghana, India, and the United Arab Emirates.

The Party have said they will ask regulators to “explore” a roadmap for after the sandbox stage to support participants in receiving regulatory authorisation to bring their products to market.

Other areas of importance

There are some other areas outside of the main fintech promises which may be of interest to those in the industry, including a number of promises under the banner of consumer protection and financial inclusion.

Fraud is one area of interest, with Labour calling for a “joined up” approach to fraud, including technology companies and telcos. In addition to this, they want to empower payment service providers to delay possibly fraudulent payments.

Financial inclusion is another area of interest for Labour. They aim to open more banking hubs, something announced in 2023. In addition to this they are proposing improvement in the financial advice gap, including through AI tools as mentioned above, and the creation of a national financial inclusion strategy.

The Party is also aiming to enhance the international competitiveness of UK financial services through an “innovation-centred” approach to regulation.

They said their aims in this area are to “streamlining the regulatory rulebook in line with the Consumer Duty, strengthening our international engagement in financial services, and building a more collaborative relationship with the EU.”

Riccardo Tordera, head of policy and government relations at The Payments Association, commented: “It’s refreshing to hear Labour promise to champion financial services and cut through the red tape in the UK. The Payments Association has been saying for years that if we don’t strike a balance between regulation and innovation then the financial powerhouses that the UK is famous for will go elsewhere, taking their revenue with them. This stance marks a positive step towards a more dynamic and inclusive financial ecosystem for the UK. This would allow us to embrace innovations such as CBDCs, security tokenisation, improve fraud prevention and enable the UK to become the standard-setter for the use of AI in delivering the next phase of Open Banking.” 

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