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Payment Matters: No. 42

Payment Matters: No. 42

  • United Kingdom
  • Financial institutions
  • Financial institutions - Payment services

26-07-2019

1. European Banking Authority publishes Opinion on SCA

2. UK government publishes a consultation regarding the extension of Open Banking services to a broader range of products/sectors

3. Non-bank payment service providers safeguarding under review

4. UK Finance issues good practice guidelines

5. UK Finance publish latest summary of the payments market, emphasising the need for access to cash in the UK

6. Data released by the Committee on Payments and Market Infrastructures demonstrates a dip in correspondent bank relationships

7. E-money firms express concerns over AML changes

8. The Bank for International Settlements published a note on the increasing introduction of big technology firms into financial services

9. Payment Systems Regulator issues access and governance report

10. Mark Carney delivers Mansion House speech

1. European Banking Authority publishes Opinion on SCA

The European Banking Authority (EBA) published an Opinion in relation to the implementation of strong customer authentication (SCA) under the revised Payment Services Directive (PSD2) on 21 June.

Responding to concerns raised throughout the market regarding the state of readiness to implement SCA from 14 September 2019, the EBA notes that it is not legally able to postpone the application date which is set out in EU law but competent authorities may decide to work with stakeholders to provide ‘limited additional time’ to migrate existing solutions to ensure SCA compliance.

The Opinion also includes specific comments, addressed to competent authorities, in relation to what may or may not constitute SCA. These specific comments include guidance on:

• what types of solutions would constitute compliant elements in each of the three categories of SCA: inherence, possession and knowledge;

• requirements regarding dynamic linking and ensuring the independence of the two SCA factors; and

• solutions which combine two SCA elements.

Interestingly, the EBA’s interpretations of existing authentication solutions appear to conflict with existing guidance on the solutions which would be seen as compliant by the FCA (e.g. using OTPs as a knowledge factor and using static card numbers as a possession factor are deemed unacceptable by the EBA).

What this means for you?

Many institutions across the industry will welcome the acknowledgment from the EBA that competent authorities can agree an extended period, after 14 September 2019, where firms can implement SCA without supervisory enforcement. However, inevitably the extended implementation period has resulted in many firms raising questions across the market. This has included, by way of an example, questions regarding:

• compliance with differing regulatory deadlines across different jurisdictions (particularly challenging for large retailers);

• the application of the extended period to channels such as online banking (rather than e-commerce transactions only);

• liability of PSPs who do not apply SCA from 14 September where the transaction turns out to be unauthorised;

• alignment of liability between the scheme rules and the regulatory requirements; and

• the potential competitive disadvantage if PSPs and merchants continue to implement their planned solution from 14 September if others aren’t applying SCA due to a higher number of declined transactions.

The supervisory flexibility is, of course, conditional upon a migration plan being agreed with the relevant competent authority, which UK Finance is leading on from a UK perspective, so we are likely to see additional guidance on these areas in due course but there is a clear lack of uncertainty in the market (particularly as firms are now having to revisit their finalised SCA solutions in light of the EBA’s opinion, which comes at a time when most institutions in the UK had already finalised the majority of their approach for SCA compliance).

2. UK government publishes a consultation regarding the extension of Open Banking services to a broader range of products/sectors

The Department for Business, Energy and Industrial Strategy has published a consultation in relation to the extension of third party services to include a broader range of products/sectors, including financial services, energy and utility and communications. The consultation also builds upon the FCA’s commitment to look at the opportunities which data-based solutions can offer in the financial services markets, including the feasibility of extending Open Banking to the savings market (non-payment accounts) and other financial service markets such as home and motor insurance. You can read more about the government’s plans to extend the accessibility of TPPs to different sectors here.

What this means for you?

Many TPPs and consumers will likely welcome the discussions regarding the extension of Open Banking services to different products within the financial services sector, and wider extension into other sectors such as pensions, communications and energy and utility. However, the proposals for extending the services bring a number of fundamental questions to the table, including: (i) how would the new service providers be effectively regulated in multiple sectors; (ii) how would the extension of the existing industry initiatives be funded; (iii) what legislative requirements would require businesses to share data with TPPs across different products/sectors (i.e. PSD2 only mandates access to ‘payment accounts’ which are accessible online). We, therefore, recommend all stakeholders across the industry (and other industries such as retail, pensions and energy) review the consultation and respond with feedback before the deadline on 6 August 2019.

3. Non-bank payment service providers safeguarding under review

The FCA has carried out a multi-firm review of the safeguarding arrangements of non-bank payment service providers in the UK. In particular, a number of PSPs have had their safeguarding processes fully audited by the FCA and all Authorised Payment Institutions and Electronic Money Institutions will have received a "Dear CEO" letter from the FCA requiring them to attest (by the 31 July) that they are compliant with the safeguarding requirements of the EMRs and/or the PSRs.

What this means for you?

An extensive amount of work is clearly required by a large number of Authorised Payment Institutions and Electronic Money Institutions and this is an area which the FCA is going to continue to focus on closely in the coming months. Reviewing end-to-end processes and following the FCA’s action points, where relevant, in a prompt manner, will be of paramount importance to help avoid further FCA action.

Additionally, prior to providing any attestation to the FCA, we are now seeing a large number of firms taking remedial action to work towards compliance. Such actions include the following:

Designation of accounts

• Engagement with bank account providers to obtain a letter confirming that accounts are designated for safeguarding and no other entity has any rights or interest in the assets in the account.

Segregation

• Full process reviews to identify where any co-mingling arises and the time periods of such co-mingling.

• Reviews of security funds and unclaimed funds held and consideration of the funds which constitute merchant funds.

• Documenting process and rationale for the accounts included within designated safeguarding.

Systems and controls

• Designation of responsible individuals.

• Creation of new governance structures and carrying out full annual reviews against safeguarding regulations and guidance.

• Safeguarding being included on the board’s quarterly agenda and ensuring it receives an annual review of safeguarding processes.

Safeguarding documentation

• Creation of new policies.

• Inclusion of rationale to safeguarding approach and how systems and controls would ensure compliance rather than simply reiterating the requirements in the regulations.

Reconciliations

• Full reviews and updates to reconciliation procedures, including current timings associated with such processes (eg ensuring at least daily reconciliation).

• Creation of a plan setting out actions to be taken, associated rationale and a timetable for completion.

• Creation of new committees and updating processes to ensure that procedures are signed off by the board.

4. UK Finance issues good practice guidelines

On 4 July 2019, UK Finance issued good practice Guidelines for access to payment account services. The Guidelines are addressed to both credit institutions providing access to payment account services and applicants seeking access to such an account within the UK.

The document provides a combined review of access to payment account services for applicants, focusing on recommendations in relation to the application process. For example, the Guidelines include recommendations regarding the objectivity, clarity and transparency in firms’ criteria for providing access to such services; timescales and processes for reach a decision on an application for such service; and processes for declining applications and handling appeals

Please see the Guidelines here for additional information.

What this means for you?

The Guidelines are voluntary and do not supersede, nor enhance, the regulatory and legal requirements to which credit institutions and applicants are already subject but we recommend that firms review the recommendations to determine what the industry would consider to be ‘best practice’ when providing access to account services in the UK.

5. UK Finance publish latest summary of the payments market, emphasising the need for access to cash in the UK

On 12 June 2019, UK Finance released its UK Payment Markets 2019 reports and announced a commitment to helping communities maintain free access to cash.

The report (summary only) looks to provide forecasts up to 2028 and comments on the impact of technology and innovation in providing further payment options (e.g. debit card payment was the most used method in 2018 and, although cash payments fell by 16% in 2018, it remained the second most frequently used payment method).

It follows that UK Finance’s support for access to cash is to build upon the Access to Cash Review chaired by Natalie Ceeney CBE, with an update and progress report expected by 30 September 2019.

UK Finance is also working with the Joint Authorities Cash Strategy Group, recently established by HM Treasury and comprising the Payment Systems Regulator, the Financial Conduct Authority and the Bank of England, with the aim of safeguarding access to cash for the future.

What this means for you?

There is the potential for significant changes to be made to the way cash is made available in the UK especially in areas where people are seen to rely heavily on physical notes and coins to meet their day-to-day payment needs. This is likely to involve and focus on the costs of physical cash being made available to end-users via ATMs and the effect this will have on participants in the cash supply chain.

If your organisation is involved in the wholesale cash market it will be important to monitor and assess the impact the findings of this review may have on your organisation’s business model, including any impact on revenues which are generated from the provision of wholesale cash.

6. Data released by the Committee on Payments and Market Infrastructures demonstrates a dip in correspondent bank relationships

On 27 May 2019, the Committee on Payments and Market Infrastructures issued data showing a 20% dip in the number of correspondent banking relationships over the past seven years.

Correspondent banks perform a vital role for global trade and for migrants sending remittances home but recent figures published by the Committee on Payments and Market Infrastructures show a 20% dip in the number of correspondent banking relationships over the past seven years. Cross-border payments sent in this way are often slower, more expensive and less clear than domestic payments.

Expressing concern over access to payment services in low income countries, Benoît Cœuré, Chair of the CPMI, on the sidelines of the High-level Meeting on Financial Inclusion hosted by the Bank for International Settlements said:

"Many families and small businesses rely on remittances to make ends meet but often face a choice between tolerating high costs or risking uncertain delivery of payments. The shrinking correspondent banking network is adding to these concerns. It may push people to use 'shadow' payment services such as cryptocurrencies that put the most disadvantaged at risk…”

"Collectively, our efforts can enhance financial inclusion by making payments more efficient and by lowering their costs."

To help understand trends and drivers associated with improved access to payments CPMI, along with SWIFT, plan to update its analysis each year for the next five years.

What this means for you?

A reduction in the number of correspondent banks is a consequence of banks looking to de-risk in the face of an increasingly stringent approach to anti-money laundering initiatives by regulators whilst also taking into account guidance issued by the Financial Action Task Force (FATF).

To the extent that your business is involved in the making of cross-border payments it will be important to monitor the existing relationships you have with correspondents to ensure that they will continue to support your business needs reliably and without an increase in costs. It will also be important to consider alternative solutions as a contingency.

Several different models are currently being explored to provide alternative solutions to the decline in the correspondent space. Such solutions involve:

- SWIFT Global Payments Innovation (gpi) as a messaging solution supporting transparency and risk management;

- National gross real-time settlement (RTGS) systems directly connecting with each other; and

- The creation of a global market utility connecting national RTGS systems as well as commercial banks.

We will keep you updated as these and other solutions evolve.

7. E-money firms express concerns over AML changes

In response to the HM Treasury’s now closed consultation on the 5th Money Laundering Directive (5MLD), the Electronic Money Association (EMA) and Prepaid International Forum expressed concerns over new restrictions on anonymous prepaid cards issued outside of the UK. One of the key aims of the Directive is to reduce payment options without know your customer checks particularly as anonymous prepaid cards were discovered as funding tools for terrorist attacks in France and Belgium. The EMA reply, although positive in terms of the goal of the restriction, warns that it will be difficult for individual acquirers to implement their own rules as to which cards will be accepted in payment based on the country of origin and this would need to be assessed on an ongoing basis.

What this means to you?

The e-money sector will have to carry out extensive work to understand whether legislation in non-EU states is equivalent to the MLRs in EU member states. This will need to be done both before the changes take effect and on an ongoing basis to ensure compliance in view of any further legislative developments or changes.

HM Treasury is currently reviewing all of the feedback received so look out for their responses in the coming months. The requirements of 5MLD must come into effect through national law by 10 January 2020 in line with Article 4 of the 5MLD.

8. The Bank for International Settlements published a note on the increasing introduction of big technology firms into financial services

In its Annual Economic Report the Bank for International Settlements included a special chapter on big tech in finance. Published on 23 June 2019 the report comments on the efficiency gains and improved financial inclusion likely with the entry of large technology firms into financial services. Firms such as Alibaba, Amazon, Facebook, Google and Tencent are participating in a range of financial services, including payments, savings and credit. BIS also notes that regulators need to ensure fair competition for these companies and banks and take account of financial stability and data protection risks.

On 18 June 2019 Facebook announced that its newly created subsidiary company Calibra, will introduce a digital wallet for Libra. Libra is described by the company as “a new global currency powered by blockchain technology” and is designed as a simple global currency and financial infrastructure. The wallet, planned for launch next year, will be available in Messenger, WhatsApp and as a standalone app. Calibra has reportedly received authorisation from the Financial Crimes Enforcement Network in the United States, to operate as a money service business and is set to comply with the European Union’s 5th Money Laundering Directive. However, regulation on a more global scale remains a huge question for Facebook to grapple with.

What this means to you?

“Big techs” have grown exponentially in recent years in respect of development and popularity largely due to their transition from social platforms into the financial sector. Although they have a long way to go, there is no doubt that in the medium term they will become direct competitors with the banks from a “payment services” point of view. In the meantime, regulators are adopting a more comprehensive approach around Big techs and data privacy which seems to be a major concern at this time.

Facebook’s proposition of a new global currency powered by blockchain technology is an interesting proposition although it is in the very early stages of fruition. Regulatory compliance on a global will undoubtedly be challenging. Therefore, it will be interesting to see how this is determined before the proposed live date next year.

9. Payment Systems Regulator issues access and governance report

The Payment Systems Regulator published an updated report on developments in access and governance over the past year along with an accompanying factsheet summary. The report highlights the number of new participants and the introduction of the first non-bank payment services providers. More indirect access providers are actively onboarding payment service providers and the growth in number of payment service providers has led to improved quality and choice of services for customers. 2018 saw a record number of direct participants (12, up from 7), joining Faster Payments Scheme, Bacs and CHAPS.

What this means for you?

The PSR has seen a number of improvements in the provision of access to and the governance of payments systems. We recommend that all PSPs who transfer funds for their customers review the report in detail.

10. Mark Carney delivers Mansion House speech

Mark Carney, Governor of the Bank of England, delivered a speech at the Mansion House Bankers’ and Merchants’ Dinner in London on 20 June 2019. Citing technology, demographics and environment driving change to create a new economy the Governor notes that this new economy requires a new finance. New finance that is more efficient, inclusive, sustainable and resilient and also best services the digital economy. He demands that the Bank of England changes to meet the needs of this new finance.

What this means for you?

Among the numerous areas which the Governor of the Bank of England explored, he referred to:

- the rebuild of the Bank of England’s RTGS system providing API access to users to read and write payments data and the tagging of each payment in a standardised information format;

- the opening of access to the Bank’s settlement accounts to alternative payment service providers (in addition to commercial banks which currently hold settlement accounts), subject to meeting appropriate regulatory standards; and

- the Bank’s full support of the Payments Strategy and Financial Services Regulation Review announced by the Chancellor.

All of these initiatives indicate the continued scrutiny which the payments sector remains subject to over the foreseeable future and the need for participants to respond to consultations and other opportunities individually and collectively to influence the agenda as these changes are proposed.

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