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Innovation stymied by banking access issues

UK authorities must improve access to banking services for payments visionaries, legal experts have said, after industry unrest that innovation is being stifled by outdated and complex regulations. A recent paper published by the Financial Conduct Authority (FCA) revealed that many participants fear an antiquated, risk-averse and multifarious regulatory environment has developed.

The FCA responded by insisting payments innovators are free to use state-of-the-art compliance processes, such as digital due diligence and identity verification, provided they adhere to existing anti-money laundering (AML) laws.

But for London-based payments regulatory expert Bruno Fatier, a partner at Rosenblatt law firm, banks are often suspicious about those emerging fintech business models and react by shutting off their access to banking services.

“Those businesses need to open accounts with banks, and the banks need a thorough process of checking the identity of the sub-customers,” Fatier told PaymentsCompliance. “It’s that chain, and when you are dealing with potentially dangerous businesses like money remittance, banks will run away rather than open an account. “So the pressure is indirect.” He agreed in principle with the FCA’s suggestions, pointing out that emerging businesses that offer digital identity verification services could significantly help reduce compliance costs and improve efficiency, but said their effect is still limited if banks are not required to recognise them. “In general, there is a conservative position which is shared by the high-street banks, and this is that kind of unwillingness to open a bank account for businesses which are not ‘standard’,” Fatier said.

AML guidance issued by the Joint Money Laundering Steering Group (JMLSG), a group of industry bodies and associations, was singled out by payment and fintech firms as particularly troublesome.

The guidance warns the financial sector that relationships with payments and fintech firms are an area of substantial risk, as those businesses are “an attractive vehicle through which criminal and terrorist funds can enter the financial system”.

Despite revisions to the guidance published in November 2014, consultation respondents said the JMLSG’s stance remains outdated and “inherently biased against digital solutions in general”. “Respondents were concerned that these perceived barriers to the use of digital solutions for customer due diligence (CDD) mean the industry is failing to meet growing consumer demand for an end-to-end digital service,” the FCA said. “Some firms argued that this is also adding unnecessary inefficiency to the process of CDD for the purposes of AML.”

In its response, trade body and lobby group Payments UK expressed its concern at “uncertainties” within current legal frameworks for digital identity, urging the regulator to provide additional clarity. A Payments UK spokesperson told PaymentsCompliance that its stance remains the same, although welcomed the FCA’s response and said it would consider its suggestions.

The Electronic Money Association added that existing AML guidelines do not reflect developments in cloud computing, which it said could slash due diligence costs by outsourcing storage and analysis of identity and transaction information.

However, for Charles Kerrigan, head of finance and partner at Olswang’s London practice, there remains cause for optimism among payments firms. Kerrigan pointed out that most respondents “recognised the FCA’s commitment to foster innovation” and said it was “inevitable” respondents would request additional detail on regulation.

The Payment Systems Regulator (PSR) claimed last week that its infrastructure-level review of indirect access to banking systems has already prompted improvements, although acknowledged more needs to be done. Reviews are also underway at the Bank of England into access to its transaction settlement infrastructure, which it is considering “opening up … to a wider variety of financial firms”.

The FCA added it has been working with UK government officials on digital identity technology, and Rosenblatt’s Fatier added that efforts to harmonise approaches between different authorities could help address banks’ suspicion of those third-party providers. “There is a mixture of policy objectives: the fight against money laundering and against terrorist financing, but also looking at tax issues,” he said.

“A way we could improve is by sharing that information and having some kind of central data; so, as a customer, once you have provided your data to a centre, you allow other service providers to use that information under certain conditions. “Under the 4th Anti-Money Laundering Directive (4th AMLD), if one bank opens an account for a customer coming from another bank then it doesn’t have to check the identification, and whether this could be extended to other industries could be considered.”

By John Basquill,


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