Payments View - April 2022

Innovate Finance Global Summit 2022

April kicked off with the first in-person Innovate Finance (IF) global summit for two years. IF had put together a number of great sessions which covered sustainability and financial innovation, digital assets, open finance and of course payments. Sessions included:

What’s next for payments

This was an interesting panel discussion with representatives from TrueLayer, Plaid, Quant, Radar Payments and Trust Payments on what else we can expect for payments. As alternative payment methods have been thriving following lockdown the panel recognised that where things go next depends on the market, which is driven by regulation and costs. The UK is the most advanced economy for open banking and there is room to leverage this to simplify high value transactions by removing associated fees such as card fees on large purchases.

The development of trade networks with private stablecoins and blockchain networks to serve citizens are expected to shake things up in the payments space but overall, there was general agreement that the current payment rails won’t be displaced in the near future.

HMT Stablecoin Response

On 4 April, HMT issued its response to the consultation it launched in January 2021. It was announced by John Glen, the Economic Secretary to the Treasury and City Minister, at the Innovate Finance Global Summit, and you can see our summary of both his speech, and the 10 key points that you should be aware of from the response to the consultation here.

The key takeaway from the response to the consultation is that the government is going to bring certain stablecoins within scope of the UK regulatory perimeter using a modified version of the current e-money regime. Specifically, it seeks to regulate ‘payment cryptoassets’ (though this name is not yet confirmed), which would cover any “cryptographically secured digital representation of monetary value which is, among other things stabilised by reference to one or more fiat currencies and/or is issued and used as a means of making payment transactions.” The intention is that this will cover all fiat currency backed stablecoins (single or multi-currency), while excluding those that stabilise their value by referencing other assets or algorithms. At present, the aim is to capture only those that can be used as a means of payment specifically.

Read more about HMT’s response in our March edition of Crypto View and let us know if you would like to discuss this change in the UK’s regulatory attitude towards cryptoassets further.

Regulating Innovation - we need interoperability

IF’s Director of Policy, Andrew Jackson, led a lively session on Regulating Innovation. Panellists from Onfido, KPMG, Wise, Banking Circle and the FCA laid the foundations for a valuable discussion. Kay Swinburne from KPMG opened the discussion with a comment that the financial services sector is exemplary for collaboration and cooperation between regulators but there is much more to be done to provide a global environment that keeps competition central, focuses on consumer outcomes and facilitates innovation.

The representatives from the FinTechs highlighted some core difficulties for innovation. Firstly, they view their markets globally but must manage regulations at the national level and would welcome increased interoperability between the regulatory regimes in different jurisdictions. Secondly, fragmentation in data rules creates unintended algorithmic biases for consumers (e.g. local requirements to delete data means those customers don’t get “factored in”). Generally, the FinTechs noted that the FCA’s approach is positive towards innovation and they merit the principles based approach over the rules based approach they face in other jurisdictions.

Richard Fox, representing the FCA, agreed with the panellists that cooperation at an international level is a necessity and confirmed it was a focus for the FCA. Ensuring its participation at the Financial Stability Board helps the FCA shape principles and standards that are then built on by FATF and IOSCO. The FCA takes its role in these forums seriously and thinks interoperability is realistic in time. Fox also took the opportunity to highlight the FCA’s shift from principles focused to outcomes focused.

This shift from principles focused to outcomes focused is of course most evident in the new Consumer Duty which we are currently helping many firms interpret. Please let us know if you would like to discuss how the new Consumer Duty and the FCA’s outcomes focus impacts your business.

APPG on FinTech Panel Discussion - BNPL

The APPG on FinTech held a session on the regulation of BNPL. Following the Woolard Review’s key recommendation that the associated risks with BNPL mean it should be brought into the regulatory perimeter in a proportionate way, the future regulation of BNPL has been a hot topic for the industry.

There was recognition from the BNPL providers present that not all BNPL products are marketed in the right way but that on the whole, the industry has matured, and many consumers understand BNPL products better than they do traditional credit products with substantial information requirements.

The BNPL providers did not shy away from the prospect of regulation (which makes sense when it is certainly coming), in particular, Klarna referenced that having received its banking licence from the Swedish FSA in 2017 it was clearly not averse to regulation. When it comes to the substance of the regulations, an outcomes focus was preferred and a tick-box approach to be avoided. A major point in favour of introducing regulation is that it would enable users to build a credit footprint, which is particularly important for young adults who typically use BNPL and often don’t have credit cards or other means of establishing their creditworthiness for more significant purchases e.g. buying a house.

In general, there was support for BNPL products as they provide convenience to many people, in particular members of the Gig economy which has grown significantly. However, the potential harms to consumers, particularly given the increase in cost of living and the opportunity to buy your groceries through a BNPL product, means it is appropriate to regulate them.

Overall, it became clear from the discussion that regulation is not the problem but regulating firms in the right way to achieve proportionality is a concern. This goes wider than BNPL.

The Future of Open Banking

Pressure was mounting on the CMA and others to revel the successor for the Open Banking Implementation Entity (OBIE) and to clarify the definition of sweeping for Variable Recurring Payments (VRPs). Over 20 FinTech companies signed an open letter that criticised the CMA in March.

The CMA responded to the criticism by clarifying the definition of VRPs for sweeping on 14 March 2022. VRPs allow consumers to connect payments providers to their bank account so that they can make payments on the customer’s behalf within agreed parameters. The CMA recommended VRPs as the mechanism for implementing sweeping under A10 of the OBIE Roadmap in July 2021 but it was unclear to the industry which use cases would fall within the legal mandate. The letter published on the 14 March was targeted at clarifying the use cases for sweeping.

Although the CMA has clarified other uses cases where sweeping can be used (e.g. moving money to accounts which are used for unbundling overdrafts from a current account) its ability to mandate use cases for sweeping is limited to those envisaged under the CMA Order. The list of potential use cases for the future includes making eCommerce purchases, moving money to accounts used for the purchase of cryptocurrency and similar assets, moving money to use for online gambling and gaming services, and moving money to accounts used for foreign exchange or international money transfer services. There is also potential to consider e-money accounts which the CMA is asking the OBIE to consider.

On 25 March the CMA also announced its recommendations for future oversight and a Joint Statement was published by HM Treasury, the CMA, the FCA and the PSR on the future of Open Banking. The recommendation is for a Joint Regulatory Oversight Committee to be led by the FCA and PSR to agree and implement next steps. The hope amongst industry is that with clear direction restored at the top, the UK’s Open Banking framework will continue to develop and momentum will be regained.

Subscription Traps – New Measures to Protect Consumers

On 20 April 2022, the government announced that new rules would apply to businesses to tackle subscription traps. The rules are aimed at preventing businesses from making it difficult for consumers to exit a contract and leaving them stuck paying for a subscription they no longer want. The government says that households spend an average of £60 a year on unwanted subscriptions.

Under the new rules businesses must:

• provide clearer information to consumers before they enter a subscription contract
• issue a reminder to consumers that a free trial or low-cost introductory offer is coming to an end, and a reminder before a contract auto-renews onto a new term
• ensure consumers can exit a contract in a straightforward, cost-effective and timely way

The government’s decision follows last year’s consultation on Reforming competition and consumer policy. It is also an acknowledgement from the government that consumer rights need bolstering to manage the risks associated with online payments. The rules will be effective following parliamentary approval.

FCA’s Review of Financial Crime Controls at Challenger Banks

The FCA published the results of its review into financial crime controls at Challenger Banks which was prompted by the view that criminals may be attracted to the fast onboarding processes that challenger banks advertise and the risk the information gathered through these fast processes is insufficient to identify higher risk customers. The FCA reviewed a sample of challenger banks (E-money issuers and payment services providers were excluded from the review).

The “challenge” for these banks is balancing the reliance on rapid customer growth for success and the need to comply with CDD obligations. The FCA’s findings included:

• weaknesses in the processes of the sample banks that increased the risk of financial crime occurring
• inadequate customer risk assessment frameworks
• insufficient application of enhanced due diligence procedures which resulted in a higher volume of suspicious activity reports when exiting customers

Overall the FCA considered there are limited differences in the inherent financial crime risks faced by challenger banks, compared with traditional retail banks. The FCA noted that it expects financial crime control resources, processes and technology to be commensurate with a bank’s expansion so that they remain fit for purpose.

Amongst the FCA’s key findings and listed as an area for improvement was compliance with the Principle 11 notification requirement. This shows the significance the FCA continues to place on Principle 11 and we think it is important for firms to note this.