Archive:June 2016

FCA research into the issue of de-risking
Monetary Authority of Singapore – Consultation on regulatory sandbox for FinTech solutions
Blockchain catches a righteous break and avoids becoming unchained
Regulatory sandbox and innovative regulation
EU movement on virtual currencies and distributed ledger technologies
Gamification and financial services
Brexit: the effect on UK FinTech

FCA research into the issue of de-risking

By Jacob Ghanty

In July 2015, the FCA commissioned research into the banking phenomenon known as “de-risking”. De-risking refers to banks removing bank accounts and services from customers or other relationships that they perceive as having higher money laundering (ML) risk. There has been a perception that this process is driven by banks’ concerns about ML and terrorist financing (TF) risks posed by certain types of customer, which have been heightened by large regulatory fines imposed on banks, notably in the United States, for failings in anti-money laundering (AML) processes and breaches of sanctions. The FCA recently published the consultants’ report.

There has been much publicity of the effects of de-risking in the money services business (MSB) and money remittance sector. However, the report shows that the issue affects other businesses as well, including pawnbrokers, fintech companies and charities operating in geographical areas where the perceived ML and TF risk is greater. The report concludes that banks take the issue of de-risking seriously and are mindful of their obligations to treat customers fairly and of the financial inclusion agenda. The banks believe that they are attempting to apply the risk-based approach to financial crime in an even-handed and objective way, given inherent uncertainties about how customers will behave and how regulators and courts will view their own position in relation to misconduct in accounts that they hold. Regardless of the drivers of de-risking, the report confirms that there is no “silver bullet” for the issue. It suggests potential solutions may lie in balancing of costs and risks between banks and high risk sectors and a better developed understanding of how to measure ML and TF risk on a case-by-case basis.

The FCA’s response to the report is to admit that de-risking is a complex issue. It warns that banks should not use AML as an excuse for closing accounts when they are closing them for other reasons. The FCA also warns banks of their obligations under competition law when deciding whether to terminate existing relationships or decline new relationships.

Looking to the future, certain legislation may help some sectors affected by de-risking. From 18 September 2016, the Payment Accounts Regulations (SI 2015/2038) (PARs) will require some banks to offer a payment account with basic features to consumers legally resident in the EU. Also, PSD2 needs to be implemented by 12 January 2018, requiring payment institutions to have access to credit institutions’ payment account services on an objective, non-discriminatory and proportionate basis.

Monetary Authority of Singapore – Consultation on regulatory sandbox for FinTech solutions

By Nicholas Hanna and Penelope Davey

In a move that is targeted at promoting Singapore as a leading FinTech hub in Asia-Pacific, the Monetary Authority of Singapore (MAS), the regulatory authority overseeing financial matters in Singapore, issued a consultation paper on 6 June 2016 which outlined a proposal for a “regulatory sandbox” for FinTech solutions.

The proposal will permit financial institutions and other entities to experiment with new FinTech solutions in an environment of relaxed regulation whilst maintaining appropriate safeguards. It is hoped that this proposed relaxed regulatory environment will allow such solutions to take root without being impeded by regulatory compliance costs and will improve the viability of innovations in the FinTech sector.

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Blockchain catches a righteous break and avoids becoming unchained

By Tyler Kirk (ed. Cameron Abbott and Giles Whittaker)

Blockchain is alive and well – one of the greatest threats to blockchain’s success appears to have been seen off with the end of efforts to legislate “exceptional access” to all encryption in the United States. Tyler Kirk explains this in more detail in his article, “Blockchain Catches a Righteous Break and Avoids Becoming Unchained.”

You can read his full article on K&L Gates Hub here.

Regulatory sandbox and innovative regulation

By Daniel Knight

Australian FinTechs are closer to getting a regulatory “sandbox” after the Australian Securities and Investments Commission (ASIC) released its detailed consultation paper this week.  The paper details proposals for a testing ground for innovative robo-advice providers and other similar services.  It also highlights ASIC’s views about some regulatory options already open to FinTechs under the current law, as we discussed in a previous post.

In a sign of ASIC’s engagement with this nascent sector, ASIC launched its proposals at a fintech startup founders event in Melbourne.  ASIC emphasised it is seeking industry feedback and is open to making changes.

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EU movement on virtual currencies and distributed ledger technologies

By Jim Bulling and Michelle Chasser

The EU Parliament has called for the creation of a task force to be led by the EU Commission to monitor distributed ledger technologies (DLT) and virtual currencies (VC).  The EU Parliament proposed that the task force consist of technical and regulatory experts who will:

  • provide the necessary expertise to support EU member states’ efforts to monitor DLT;
  • bring together stakeholders;
  • foster awareness and analyse the benefits and risks of DLT;
  • identify best practice standards;
  • assess existing EU regulation with a view to updating it in response to increased DLT use; and
  • develop stress tests for widely used VCs and DLT schemes.

The EU Parliament also recommended that the EU Commission revise EU legislation on payments in light of new technological developments with a view to furthering competition and lowering transaction costs possibly by means of promoting a universal and non-proprietary electronic wallet. The EU Commission is currently considering proposals to include VC exchange platforms in the EU Anti-Money Laundering Directive to end the anonymity that has been traditionally associated with such platforms.

This recent regulatory activity in the EU reflects the increased attention that VCs and DLT have been receiving from governments around the world. Australia has recently focused on anti-money laundering and tax implications for VCs and Japan introduced regulations on VC exchanges in March.

Gamification and financial services

By Jim Bulling and Michelle Chasser

How would you use gamification to enhance the mobile and online experience for banking customers? That is the question Barclays Bank is asking developers during its Launchpad Business Challenge. Challenge applicants will have access to Barclays’ sandbox banking data and APIs to pitch their ideas. The Challenge will run for 3 weeks in June with successful applicants’ products being released on Barclays’ Launchpad platform for customers to explore and test.

Gamification involves applying game design elements and principles in non-game contexts and is used to improve user engagement and learning. A simple example of gamification is using a points based quiz to improve financial literacy.

This is not the first time that Barclays has experimented with gamification. In 2010 it released an interactive virtual city game in which players’ characters experienced the consequences of good and bad money management decisions.

Gamification is also a novel way to present important information to consumers in a way that is more approachable than traditional methods. In 2015 the Australian Securities and Investments Commission (ASIC) published a relief instrument which allows regulated disclosure documents such as Product Disclosure Documents and Financial Services Guides be disclosed in innovative ways. The accompanying good practice guidance issued by ASIC in Regulatory Guide 221 stated that disclosure documents can now incorporate a range of digital features including gamification.

Regulatory Guide 221 can be found here.

Brexit: the effect on UK FinTech

By Jonathan Lawrence

On 23 June 2016, the United Kingdom will hold a referendum about whether to remain in or leave the European Union. A British exit from the EU has been labelled a “Brexit”.

A recent Financial News poll has showed that the UK FinTech sector is substantially in favour of staying. Financial News surveyed 118 FinTech professionals to gauge their opinion.

More than two-thirds said Brexit would be detrimental to UK FinTech. However, nearly 18% believe it is still unclear what the long-term impact would be. The remaining 13% think UK FinTech would benefit from a decision to leave the European Union.

Often tech talent is sourced from countries such as Bulgaria, Estonia, Hungary, Romania and Slovenia. The ability to access talent was a major concern of some business people interviewed. The other key potential issue is regulation. There’s a circular debate over whether there would be lighter regulation after the UK left the EU, or whether it would be forced to stay in line with the rest of Europe as a price for continued market access. One theory is that the European market – already smaller than the US – would, in effect, be divided in two. US FinTech firms already have the advantage of addressing a bigger market – partitioning Europe would make this advantage greater still.

More than 84% of those who said Brexit would harm UK FinTech said it would make London less attractive for foreign FinTech companies as a location for their European HQ. However, the largest share believes London would maintain its dominance as a FinTech hub. Asked which European cities would most threaten London, 28% answered “none”, closely followed by Berlin, 25%. Frankfurt came third with 15%.

On the other hand, some 13% said the sector would be better off and 18% were undecided. Of those who believe UK FinTech would benefit, 63% thought it would free up resources that could be reinvested in innovation. Some 58% said Brexit would make it easier for FinTech companies to do business with clients in non-EU countries.

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