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Thursday, 27 March 2014

EC Support For Crowdfunding

The European Commission today published its communication on crowdfunding, following its consultation in 2013.

The EC proposes to facilitate, rather than regulate - a strategy I wish they would adopt in most areas. Specifically, it plans to:
  • establish an Expert Group on crowdfunding to provide advice and expertise to the Commission, particularly on the potential for a "quality label" to build trust with users; and promote transparency, best practices and 'certification';
  • raise awareness of crowdfunding, promoting information and training as well as raising standards;
  • map national regulatory and self-regulatory developments and hold regulatory workshops to ensure an 'optimal functioning of the internal market', and to assess if EU regulation is necessary;
  • issue recommendations via the SME Envoy network;
  • consider the possibility of matching public funds with private funds via crowdfunding channels, subject to State aid rules etc;
  • support efforts to promote regulatory conver gence of approaches at international level.
There will also be two EU studies - one on how crowdfunding fits in the wider financial ecosystem and which projects use what type of crowdfunding; and another on the potential for crowdfunding to support research and innovation, which will include consider possible tax incentives.

The Commission will report on its progress during 2015.

Wednesday, 26 March 2014

Could The FCA Do More To Foster Innovation In Financial Services?

Previously I've suggested that two things are choking the flow of money to people and small businesses who need it: broken regulation and perverse incentives. So it's important to give some credit for work on both fronts.

Financial regulation remains overly complex, but at least some reforms have been made to welcome innovation and competition at the retail level. And the recent budget showed the government is keen to ensure that ISAs and pensions encourage people to put their eggs in more than one basket. The FCA has also done some impressive research into insurance add-ons.

However, for this momentum to be maintained, financial regulation must become even more welcoming of innovation and competition - and much simpler and transparent for everyone to understand. So here are seven suggestions:
  1. Tailored rulebooks: By the FCA's own admission, about 10% of the rules spread throughout its giant, ever-expanding 'Handbook' are relevant to each regulated activity. But the FCA does not gather the relevant rules into 'tailored' rulebooks, as the FSA used to do. That means everyone must waste time and resources wading through the 90% of rules that don't apply to their given activity. But it's worth noting that the FCA still maintains the helpful “Approach” documents that explain its separate regimes for e-money and payment services. Why not adopt this same 'approach' in other areas?
  2. Registered small firms option: The FCA authorisation process involves 6 to 9 months' work in advance of filing, at an estimated cost of £150,000 per firm (see note 10 from this Treasury/Cabinet Office workshop). It then takes another 3 to 12 months to become authorised, depending on the permission required. This makes funding the launch of a new financial service very expensive compared to an unregulated service, and the slow time to market increases the risk of failure (ironically). A 'registered small firms' option already exists in relation to e-money and payment services, and would reduce the cost and delay of market entry for firms preparing for full authorisation. It should be brought in more broadly.
  3. Client-money banking platform: Many authorised firms are obliged to 'safeguard' their clients' money by keeping it separate from their own funds in 'segregated' bank accounts. UK banks can be particularly slow and uncooperative in opening these accounts, which delays time to market. This, along with the recent financial and IT problems amongst UK banks, suggests it might be wise to 'ring fence' segregated accounts on a separate platform, possibly under the supervision of the new Payments Regulator.
  4. Small Investor Option: Any web designer will tell you that the more 'clicks' you put in the way of a consumer, the less likely it is the consumer will go through a process. So 'dialogue boxes' that require people to certify things or take tests to invest in bonds or shares will also deter them. That's a barrier to the adoption of new 'crowd-investment' services, which many people might prefer to try out with small amounts. In fact it's far easier to gamble on lotteries and bingo than it is to invest. So allowing people to be invited to invest up to, say, £250 in debt securities or shares per project on authorised crowd-investment platforms with a clear, fair and not misleading description of the risks, but without any form of certification, advice or appropriateness test would seem appropriate (see the French proposals for crowd-investment).
  5. Platform-level regulation: current financial regulation operates on the basis of different types of activity related to certain types of legal instrument, regardless of the customer experience. However, the online 'marketplace' model is now being applied to many different types of financial service, enabling people to transact directly with each other in relation to payments, savings, loans and investments, for example. Insurance and other services will likely follow down this path. This offers the chance to removing doubt and duplication by regulating common operational risks with a single set of rules at the platform level, with relatively few extra rules for different types of instruments or different types of activity being financed.
  6. FCA 'Sandbox': coupled with the registered small firms option, the FCA could maintain a more dynamic focus on innovation and competition if it offered a dedicated space or channel for evaluating new services - both inside and outside the regulated sphere - which would also help it decide whether to flex its rules to suit.
  7. Seek solutions from outside the existing market: the FCA should not assume that every innovation is designed to circumvent the existing regime to the detriment of customers. There are plenty of entrepreneurs who have spotted opportunities created by poor banking and are trying to increase transparency and reduce costs. So where the FCA is aware of existing consumer detriment or other market problems, it could present these to the market in open 'innovation workshops' - similar to those fostered by the Treasury/Cabinet Office - and/or release them into its 'sandbox'.
Your thoughts?

Wednesday, 19 March 2014

At Last: ISAs Go To Work!

Readers of this blog will be familiar with my rants on ISAs. So you can imagine my delight that the Chancellor has finally announced an the extension of the scheme:
"To further increase the choice that ISA savers have about how they invest, ISA eligibility will be extended to peer-to-peer loans, and all restrictions around the maturity dates of securities held within ISAs will be removed. The government will also explore extending the ISA regime to include debt securities offered by crowdfunding platforms."
In addition, from 1 July 2014 ISAs will be reformed into a simpler product, the ‘New ISA’ (NISA), with an overall limit of £15,000 per year. You will be able to hold cash tax-free within your Stocks and Shares NISA (if your provider allows it). And you'll be able to ask NISA providers to switch your money between cash-NISAs and Stocks and Shares NISAs.

As explained here, these changes offer a huge boost to the real economy, because savers will be able to lend their 'dead' savings directly to each other and to small firms to help fill the funding gap left by the banks. At the same time, savers will improve the value of their investments, not only by diversifying into a new asset class, but also one that provides a decent return.

Hats off to the government and the Treasury for putting in the work to turn this situation around.

Thursday, 6 March 2014

FCA's Response And Final Rules On Crowdfunding

The FCA today published its response to its recent 'crowdfunding consultation'. 

In essence, the paper merely justifies why the FCA has refused to alter its earlier proposal. Accordingly, all the previous criticisms still apply... [sighs].

This won't be terribly welcome news, but at least crowd-investment platforms now know they can market to a restricted area of the 'crowd', if not everyone.

And, following Friday's release of the consumer credit rules that also apply to 'P2P agreements', peer-to-peer lending platforms now have the two rulebooks they need to begin preparing for the first wave of regulation in 25 days' time, followed by full regulation from 1 October.

ECB Moves To Kill Innovation in Payment Services

Last July, the European Commission proposed a new Payment Services Directive (PSD2), which was voted on in committee on 20 February. Apparently it was passed with certain changes, which have not yet been published. However, it's worth noting that earlier in February the ECB published its proposed changes to the draft directive, which are discussed below in a post that I've been trying to finish for the past 3 weeks (sorry). The Parliament is due to vote in plenary on 2 April. PSD2 will take effect 2 years after it is adopted.

The ECB's stated concern is to help the development of the payment services market. Yet readers in common law countries will be struck by the irony in its proposal to regulate on matters that the industry could otherwise agree contractually. So, rather than allowing for flexible contractual solutions, the ECB wants a rigid code that won't take effect for 2 years and will take many more to change. In addition, the ECB wants "further business rules, including technical and operational arrangements" to be "defined through the creation of a payment scheme."

But we can ill afford the pace of innovation and competition in payment services to be dictated by the glacial speed of the EU legislative process or the snail's pace at which established players form new trade organisations and agree standards. I mean, it took a decade to force UK banks just to implement Faster Payments.

The ECB's approach is of course typical of the civil law attitude to innovation and entrepreneurship, which is at odds with the vital role that contracts play in shaping markets, particularly in a global context. In common law countries we are free to act unless the law restricts us. The law follows commerce. Contracts therefore provide the rails on which entrepreneurial activity runs. Meanwhile, the citizens of civil law countries wait for their lawmakers to define how they may act - in continental Europe, commerce follows the law. Contracts should be used sparingly, if at all, to supplement civil law codes. As a result, entrepreneurship and innovation from outside the scope of existing law is viewed by continental Europeans as being rather dodgy, as are global contractual terms of service that transcend national laws and treaties. Europeans consider that governments should agree international rules through treaties, not the likes of you and me at the click of a mouse. So it's no surprise that so much global innovation thrives in common law markets, as illustrated by the growth of e-commerce. The European Commission's comment on amendments to the commercial agents' exemption in PSD2 is a case in point:
"The ‘commercial agent’ exemption has been amended to only apply to commercial agents which act on behalf of either the payer or the payee, and not to those which act for both payer and the payee. The exemption under the current PSD has increasingly been used with regard to payment transactions handled by e-commerce platforms on behalf of both the seller (payee) and the buyer (payer). This use goes beyond the purpose of the exemption and should thus be further circumscribed."
What UK officials make of all this is unclear. The Cabinet Office and the Treasury have held at least one workshop with some representatives of challenger businesses in the UK financial technology sector. But we have not seen whether and, if so, how those discussions have translated into UK policy. Meanwhile, the House of Commons European Scrutiny Committee has complained of receiving very little detail on the Treasury's position on PSD2, and only seems to have entertained submissions from MasterCard, the UK Cards Association and a few charities (see section 8 of its recent report).

Against this background, you might wonder if there's much point in caring about PSD2, and I suspect that is the point of government bureaucracy: to bore and frustrate everyone into submission - including many of those who are paid good money to participate directly. So let's call it sick fascination. At any rate, here's a quick summary of the ECB's proposals (none of which resolves the gobbledygook in Articles 67-68 and 72-75, by the way):

1. Payment access/initiation services: when you use a separate service to check the balance in one of your payment accounts or initiate a payment, you will not be able to allow the third party service provider ("TPP") to use your log-in details for the payment account you want to check or make a payment from. The TPP and your payment account servicer provider ("ASP") will need to figure out another way to interoperate using a European standard interface specified (eventually) by the European Banking Authority. 

2. Direct debit refunds: for privacy reasons (apparently), direct debit refunds should not be conditional on whether goods or services have already been consumed. Instead there should be an unconditional refund right for 8 weeks for all direct debits, except in relation to goods and services listed by the European Commission as items that 'debtors and creditors' can agree upon as not being subject to a refund. There is no suggestion that this will be consistent with consumer cancellation rights for distance sales. Note also the use of 'debtors and creditors' by the ECB in its explanation, when PSD2 refers to 'payer' and 'payee'. This highlights a problem with definitions in the PSD generally, where it is assumed that the payee and creditor (e.g. a merchant or the issuer of a bill) are the same when often they are not, a point the ECB has missed in trying to define the "acquiring of payment transactions" (see 5 below).

3. Territorial scope:  the scope provisions of the PSD and PSD2 are overly simplistic, given the range of situations involving payment transactions outside the EEA and the potential for a single transaction to be governed by the law in multiple jurisdictions. The ECB amendments not only fail to clarify these issues, but also increase the pressure on the interpretation by applying the customer disclosure and contractual requirements, as well as provisions relating to the supply and use of payment services.

4. Network and Information Security Directive: The ECB says this directive should not apply directly, but supervisory bodies may take that directive and any related guidance into account when assessing payment service providers' management of information security. Which means that they will have to comply with the NISD, in effect, but won't realise that's what they are doing because they didn't follow the tortuous passage of PSD2 through the EU quagmire.

5. Definitions: The ECB has recommended some additional definitions to clarify the application of PSD2. In particular, “acquiring of payment transactions” is defined to mean:
"a payment service provided by a payment service provider contracting with a payee to accept and process the payee’s payment transactions initiated by a payer’s payment instrument, which result in a transfer of funds to the payee; the service could include providing authentication, authorisation, and other services related to the management of financial flows to the payee regardless of whether the payment service provider holds the funds on behalf of the payee;"
Yet the issue of whether merchant acquiring is covered by the PSD lies entwined in the definitions of "payment transaction", "payer" and "payee"; mistakenly equating buyers with payers and merchants with payees; mistaken assumptions about exactly how payments are intitiated and by whom; and the fact that acquiring is actually achieved through a series of back-to-back contracts between principals that does not involve a direct contractual relationship between the buyer and seller at any point. There's even a Court of Appeal decision to this effect. But, again, that's clearly lost on officials.

The result? Slow, creeping, incremental change in payment services. Not exactly fertile ground for what you would genuinely call "innovation".

Wednesday, 5 March 2014

FCA Wants Your Input On Payment Systems Regulation

Are bad payment systems causing you needless expense, anxiety, sleepless nights, depression or hair loss? Save on therapy bills by contacting the Financial Conduct Authority - free of charge!

That's right. From now until 15 April you can unburden yourself to a professional just by answering the following questions:*
"Question 1: Do you have any views on which payment systems should be considered for designation? If this includes parties other than the UK payment systems listed..., please explain why.
Question 2: Where do you believe competition is effective or ineffective within UK payment systems? 
Question 3: At which level(s) is there potential for competition to drive benefits for service-users, in terms of costs, quality or innovation?
Question 4: What are the main factors impeding more effective competition at each level?
Question 5: What functions do you think need to be performed collaboratively in the industry? How best can this be achieved?
Question 6: Do you think the current ownership structure creates problems? If so, please explain your concerns with the current structure.
Question 7: How might the regulator address any issues with the current ownership structure? Please explain how any remedy, including any alternate model, might address any or all of the issues you have identified and also highlight any potential concerns associated with such alternate ownership.
Question 8: Do you have any concerns about the current governance of UK payment systems?
Question 9: What do you believe is the appropriate governance structure for UK payment systems?
Question 10: How do you access UK payment systems? Please provide details (e.g. direct or indirect, the conditions, fees and requirements for access etc.) for each payment system you have access to and any concerns you may have with your current arrangements. If you do not currently have access to UK payment systems, please provide details on how you participate within the UK payment industry, and detail any concerns or constraints you may have in this regard.
Question 11: For the access you described above (in question 10), are the access terms and conditions (including fees) fair and reasonable? If not, please provide details.
Question 12: Does the access arrangement you currently have limit your ability to compete or impact on the service - users’ experience in any way?
Question 13: If you access payment systems indirectly through a sponsoring agreement with a direct member bank, do you have sufficient choice in sponsoring banks? Would you prefer to access payment systems directly? What do you see as the benefits and risks of doing so?
Question 14: Do you act as a sponsoring bank, providing indirect access to any payment system participant in the UK (please provide details for each payment system you provide access to)? If yes: To whom do you provide indirect access? What are the major risks and costs associated with providing such indirect access? On what basis do you choose whether to provide indirect access? Are there any barriers to becoming a sponsoring bank?
Question 15: What changes to access rules and conditions would you like to see? Are there any alternative routes to gain access to payment systems that you believe should be developed (e.g. a second tier membership to payment system operators)?
Question 16: Do you have any other comments regarding access?
Question 17: What improvements or changes do you believe are required in the provision and use of infrastructure in the UK? We would also be interested in your views on the cost of such changes, for you or for the industry as a whole. What considerations, if any, need to be considered regarding the impact of any changes or improvements on the resilience and re liability of payments systems?
Question 18: What changes, if any, are needed regarding messaging standards in the UK? For example, would the adoption of ISO20022 standards alleviate any concerns or improve any constraints you experience? What timeframe and considerations would need to be taken into account in adopting new standards?
Question 19: What solutions can be developed to increase competition in the provision of infrastructure and/or managed services to support the technical and operational functions of agency banks partici pating in UK payment systems? How can this be achieved, and what will the impact and benefits of this be to your business?
Question 20: Are incentives to innovate clear under current arrangements? Please also include any concerns you may have regarding fee arrangements and the impact of changing fee structures (such as changes to interchange fees).
Question 21: Do any factors limit your ability or incentives, either collectively or unilaterally, to innovate within UK payment systems?
Question 22: What changes, if any, are needed to facilitate a greater pace of innovation in UK banking and payments? Please refer to your previous answers where relevant.
Question 23: What do you believe are the benefits and limitations of collectively driven innovation vs. unilateral innovation?
Question 24: Do you have any other comments or concerns you would like to highlight?
Question 25: What, if any, are the significant benefits you see regulation bringing?
Question 26: What, if any, are the risks arising from regulation of payment systems?
Question 27: How do you think regulation might affect your business and your participation in UK payment systems?

*Conditions apply. Your answers and any supporting material must be sent under an approved cover sheet set out in Annex 1 to the address shown in Annex 2. The FCA's new web page on payment services regulation is here.