The regulator is currently reviewing how easy it is for some payment service providers (PSPs), indirect PSPs (IPSPs), to get access to important payment systems through the banks that have direct access to those payment systems, indirect access providers (IAPs). A final report from the regulator is due in July.
In an interim report on its review (103-page / 2.78MB PDF), the PSR said that there are some "good outcomes" in the way indirect access to payment systems is being provided, including the "investment and innovation in new and improved service offerings" which the regulator said "should improve quality and choice outcomes for all IPSPs".
However, the PSR said it also has "specific concerns about choice, service quality and the ability of IPSPs to switch providers".
The concerns can, in part, be linked to "the perceived risk of compliance failures under financial crime regulations", such as anti-money laundering (AML) and requirements in relation to international sanctions, it said. The way some IAPs are addressing those compliance concerns is "limiting the provision of indirect access for some IPSPs", the PSR said.
"Some IAPs apply minimum revenue thresholds for new IPSP customers and have introduced de-risking policies for existing IPSPs – where they terminate access for customers perceived to be higher risk – in order to mitigate the perceived risks and costs associated with financial crime (chiefly money laundering and terrorist financing)," the PSR said. "This has particularly affected small non-agency IPSPs."
"IAPs also have different commercial appetites for attracting new (and retaining existing) IPSP business. Some want to expand their IPSP activities, while others are more selective about which IPSPs they serve. Generally speaking, large agency IPSPs and medium (agency or non-agency) IPSPs are seen as most attractive, while many IAPs have only limited interest in smaller non-agency IPSPs," it said.
The PSR said that some banks that facilitate others' indirect access to payment systems had told it that they "adopt a conservative approach to providing indirect access" as a result of regulatory requirements in relation to financial crime, such as customer due diligence checks and AML rules.
"Given the size and nature of the sanctions for breaches of these regulatory requirements – which can include the loss of a banking licence and significant financial penalties – some IAPs do not feel these risks can be appropriately factored into the price they charge for indirect access," the PSR's report said. "This may also lead some PSPs to decide not to become, or not to continue to be, IAPs for some categories of IPSPs (or even all IPSPs)."
"In some circumstances, IAPs are required to terminate supply arrangements with IPSPs if they are unable to conduct customer due diligence in accordance with the Money Laundering Regulations 2007. In other instances, IAPs chose to terminate arrangements, in particular with smaller IPSPs, because they felt the increased costs of mitigating the risks made the relationship uneconomic," the report said.
The PSR said that its ability to "assess whether the main IAPs’ risk perceptions and consequent actions are reasonable" under current rules is limited. It referred, though, to its powers to "grant new access to payment systems and to vary existing agreements in relation to payment systems" and said that it will "develop a framework" for how it will "exercise these powers" and consult on those plans at the time it publishes its final report into the market review.
The PSR said, though, that it would not take "immediate regulatory action" to address the concerns it highlighted about indirect access to payment systems.
It said it would monitor developments, including how recent or ongoing reviews "aimed at improving the transparency, clarity and effectiveness of the UK’s anti-money laundering and counter terrorist financing framework" before deciding whether to take regulatory action at the end of its review or later if its "concerns are not sufficiently addressed within 12 months".
"We will intervene only where we have clear evidence that we need to do so and where we expect the benefits of our regulation will outweigh any costs or unintended consequences," the PSR said.
Financial regulation and enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that a current focus of both regulators and prosecutors is the prevention and detection of financial crime and that this has been reflected in the way firms have addressed the risks of financial crime. He welcomed the PSR’s apparent willingness to work with firms.
"The FCA and SFO have both made it clear recently that they will be focussing on the issue of financial crime over the next two years," Ruck said. "When taken in conjunction with EU countries implementing the 4th AML Directive over a similar time period, this is a clear statement of the political desire within the UK to address this issue. It should come as no surprise that as a result many firms will become increasingly cautious in this regard with the issues of de-risking and access to payment and banking systems continuing to be hot topics."