#PSD2: What Is An Account Information Service?

The Treasury is consulting on its proposed regulations to implement the new Payment Services Directive (PSD2) in the UK.  The consultation ends on 16 March 2017 and the regulations must take effect on 13 January 2018. The FCA will consult on the guidance related to its supervisory role in Q2 2017. Time is tight and there are still plenty of unanswered questions, which I've been covering in a series of posts. In this one, I'm exploring the issues related to the new "account information service", which is being interpreted very broadly indeed by the FCA.  Firms providing such services will need to register with the FCA, rather than become fully authorised (unless they provide other payment services); and they are spared from compliance with a number of provisions that apply to other types of payment service provider. But now is the time for assessing whether a service qualifies, and whether to restructure or become registered.

The Treasury has, naturally, copied the definition from the directive:

‘account information service’ means an online service to provide consolidated information on one or more payment accounts held by the payment service user with either another payment service provider or with more than one payment service provider (article 4(16)) - [my emphasis] - but has added:

"and includes such a service whether information is provided—

(a) in its original form or after processing;

(b) only to the payment service user or to the payment service user and to another person in accordance with the payment service user’s instructions" [which do not appear in PSD2]

This reflects the government's broad definition of the directive (para 6.27 of the consultation paper) - consistent with the UK needlessly creating a rod for its own back and particularly ironic in the light of Brexit. The account information service provider (AISP) should be granted access by the account service provider to the same data on the payment account as the user of that account (para 6.25). A firm will be considered an AISP even if it only "uses" some and not all of that account information to provide "an information service" (para 6.28).

Services that the government believes are AISs include (but are not limited to):

• dashboard services that show aggregated information across a number of payment accounts; 
• price comparison and product identification services;
• income and expenditure analysis, including affordability and credit rating or credit worthiness assessments; and 
• expenditure analysis that alerts users to consequences of particular actions, such as breaching their overdraft limit.

The services could be either standardised or bespoke, so might include accountancy or legal services, for example (para 6.30).

Some key points to consider:

• does it matter to whom the account information service is provided? The additional wording seems to suggest that the 'payment service user' must be at least one recipient of the information, but does that mean the payment service user of the payment account or the person using the account information service?  This would seem to cover every firm that prepares and files tax or VAT returns, for example, since these are usually provided to both the client and HMRC.

• the service has to be "online", but what if some of it is not?

• little seems to turn on the word "consolidated", since the Treasury says a firm only needs to use some of the information from the payment account to be offering an AIS, and it could be from only one payment account. For instance, what if a service provides a simple 'yes' or 'no' to a balance inquiry or request to say whether adequate funds are available in an account, and that 'information' or conclusion/knowledge is not drawn from the payment account itself, but merely based on comparing the balance with the amount in the customer's inquiry or proposed transaction?

• the payment account that the information relates to must be 'held by the payment service user' with one or more PSPs, so presumably this would not include an online data account or electronic statement that shows the amount of funds held for and on behalf of a client in a trust account or other form of safeguarded or segregated account which is in the name of, say, a law firm or crowdfunding platform operator (albeit designated and acknowledged as holding 'client money' or 'customer funds');

• it seems impossible for the relevant data to provided in its 'original form', since data has to be processed in some way to be 'provided' online, but this could cover providers of personal data stores or cloud services that simply hold a copy of your bank data for later access;

• what is meant by 'after processing':

1. it may not be clear that a firm is providing information 'on a payment account', as opposed to the same information from another type of account;

2. does this mean each data processor in a series of processors is providing an AIS to its customer(s) - which brings us back to whether it matters who the customer is - or does interim processing 'break the chain' so that the next processor can say that the information was not 'on a payment account' but came from some other service provider's database (whether or not it was an AIS), such as a credit reference agency?

3. what about accounting/tax software providers providers who calculate your income and expenditure by reference to payment account information but may not necessarily display or 'provide' the underlying data - although presumably the figures for bank account interest income (if any) in a tax return might qualify?

Sorry, more questions than answers at this stage!

Update on 21 April 2017:

The FCA has indicated in Question 25A of its proposed draft changes to the Perimeter Guidance that:

"Account information service providers include businesses that provide users with an electronic “dashboard” where they can view information from various payment accounts in a single place, businesses that use account data to provide users with personalised comparison services, and businesses that, on a user’s instruction, provide information from the user’s various payment accounts to both the user and third party service providers such as financial advisors or credit reference agencies." [my emphasis added]

UK Continues To Clear The Path For Growth Of Alternative Finance

Draft legislation has now been published to allow bad debt relief for investors in peer to peer loans, in addition to the new Personal Savings Allowance announced in the Summer Budget.

These measures are among those that address the key regulatory problems and perverse incentives that have been preventing the flow of finance to people and businesses who need it and improved returns to savers and investors. The first regulatory initiative was to regulate P2P lending, announced in 2013; while the first step in addressing incentives was to include P2P loans in ISAs - first announced in 2014.

In introducing the latest incentive measures the government says it remains "determined to increase competition in the financial sector, where new firms such as P2P platforms can thrive alongside the established players and compete to offer new and improved services to customers. This new relief will create a level playing field for the taxation of income from P2P lending when compared to the taxation of traditional forms of retail investment available from those established players."

The government's commitment is critical, given that the financial system is now less diverse than before the financial crisis blew up in 2008. Few bank reforms have actually taken effect - and some are being watered down. Recent fines and scandals also reveal little change in mainstream financial services culture from that described in the report of the Parliamentary Commission on Banking Standards and most recently in the damning report into the failure of HBOS.

From 6 April 2016, individuals investing in certain P2P loans will be able to set-off the losses they incur from loans in default against income they receive from other P2P loans, when calculating their savings income for tax purposes. 

In addition, under the Personal Savings Allowance announced in the Summer Budget 2015, the first £1,000 of savings income will be exempt from tax for basic rate taxpayers and the first £500 for higher rate taxpayers. An individual’s PSA will apply to interest they receive from P2P lending after any relief for bad debts. 

#Crowdfunding the EU

Suddenly it's all go on the EU crowdfunding front.

I'm still digesting last week's ESMA opinion on crowd-investing and the advice on how to regulate it, which is to be followed by the European Banking Authority's view on the regulation of P2P lending.

It's too early to expect anything conclusive - both ESMA and the EBA say they are merely supporting the Commission in its broader efforts to embed crowdfunding in a range of policy areas - but it's good to see official recognition of the benefits of crowdfunding, as well as the risks, and some sunlight on the highly technical challenges to accommodating the new business models. Let's hope they consider how any changes will impact customer experience, marketability and the need to scale these platforms quite quickly.

In addition to regulatory reform, it would be great if the EU agenda could evolve to include realigning traditional tax incentives to boost personal investment in new asset classes.

More on the detail soon!

Thoughts On The Growth Of EU #Crowdfunding

I've just spent a fascinating few days at the ECN Crowdfunding convention in Paris this week discussing the development of crowdfunding across the EU. The main focus was on regulation, since that is perceived as being the key difference from country to country. But of course there are other factors involved and these were also covered in the presentations. In particular, crowdfunding is a huge marketing challenge, given the vast advertising budgets of mainstream financial services providers and customer inertia. There are also many perverse incentives and implicit subsidies favouring the traditional financial models. I helped explain such problems in a recent submission The Finance Innovation Lab to the Competition and Markets Authority on retail/SME banking, for example.

A European twist on the scale and nature of the competitive problems was emphasised by an early presentation from our hosts, BpiFrance, a state financial institution targeting traditional funding at SMEs. It has 2000 staff in 37 offices and arranged funding of €10bn for 3500 French SMEs in 2012 alone. So not only do French crowdfunding platforms face a banking monopoly, but they must also compete against direct public programmes. With that kind of competition, it's little wonder the French crowdfunding market is only a twentieth the size of the UK! Thankfully, Bpi appears to have switched to supporting the development of many new private platforms, rather than trying fund plug the French SME funding gap all by itself - rather like the strategy adopted by the British Business Bank.

Of course, the SME funding gap is not exclusive to France. Christian Katz, CEO of SIX, the Swiss stock exchange, explained that the EU's 23 million companies face a funding gap of 2 trillion over the next 5 years. Yet only 11500 have access to the public markets. Currently, SMEs are creating 1 job for every 5 that big companies are eliminating. In other words, the companies that create the jobs are starved of access to working capital.

This kind of problem is not simply financial, and Joachim Schwerin, Policy Officer, DG Industry & Enterprise gave an excellent presentation on Friday explained how Crowdfunding features in five of the EC's key policies for stimulating economic growth:

• Improving access to finance, especially for SMEs;
• Financing projects that have found it hard to obtain traditional finance
• Boosting the digital economy
• Increasing the level of entrepreneurship, which is completely lacking in many EU countries; and
• Enhancing democracy, by enabling people to mobilise their savings to produce financial returns, rather than always having to trust their funds to banks and other traditional intermediaries that may not actually have their interests at heart.

Joachim outlined plans for extensive guidance to SMEs on types of crowdfunding via the EC's "Access to finance for SMEs" portal, highlighting the opportunities for SMEs rather than just focusing on the risks to investors. So watch that space during early 2015.

Many delegates were pressing Joachim to outline an EU regulatory timetable, but he was right to point out that this is premature. He confirmed that the EC is still in listening mode, which is as refreshing to hear now as it was in October. Regulation does not create markets, as the EC has discovered in its regulation of consumer credit and contract law. Indeed, it is plain from the recent French law and German proposals that regulating without an understanding of the market could kill them altogether.

For instance, the French authorities have limited participation in P2P lending to individuals who may only lend up to €1,000 per project/borrower. The authorities say this is necessary to ensure that lenders diversify the total amount they lend. This seems harmless enough until you realise the marketing challenge faced by someone starting a brand new P2P platform who cannot rely on a few large lenders to fund the bulk of early loans, or to step in where liquidity is scarce from time to time. Yet in more developed markets there is no evidence that lenders fail to diversify. In the latest UK market study Nesta has found that 88% of lenders say they engage in P2P business lending because they think diversification is important, which is supported by the figures:

"The average P2P business lending loan size is £73,222 and it takes approximately 796 transactions from individual lenders to the business borrower to fund a listed loan, with the average loan being just £91.95. P2P business lenders have, on average, a sizeable lending portfolio of £8,137 spread over a median of 52 business loans."

As a result, project-by-project caps are not a feature of the regulation of P2P lending in the UK, nor the rules allowing wider retail participation in crowd-investment. These regulations only took effect in April 2014, well after these markets were firmly established, well understood, and were able to benefit from the credibility that proportionate regulation can bring without being strangled by red tape.

Finally, it was interesting to hear Christian Katz's recommendations to help ensure the success of crowdfunding in the EU, based on how stock exchanges have developed:

• Clear, common terminology;
• Code of conduct - especially promoting transparency - e.g. disclose the details underpinning credit ratings;
• Platform stability/availability;
• Fund recovery - safeguarding customer funds and how to get money out;
• Cross-border - don't ignore potential that the Internet brings;
• Positioning crowdfunding - e.g. as a source of pre-IPO funding (under €5m).

Each of these points merits a post in its own right, but an EU code of conduct would seem to be a good way to focus market participants on achieving them. The team at ECN presented some early thoughts. Clearly the code will need to be consistent with applicable national laws and accommodate all the different types of crowdfunding. It should also be negotiated by the CEOs of platforms, as they understand the development plans for their own businesses better than the lawyers and the policy staff. Such codes have already been agreed by the leading participants in more developed markets. For example, the Peer-2-Peer Finance Association (P2PFA) has developed Operating Principles specific to P2P lending, and the UK CrowdFunding Association (UKCFA) has produced its own code of practice to accommodate donation-based and investment-based crowdfunding.

While it is possible that specific enabling regulation may be necessary in some countries to initiate the ability to establish dedicated crowdfunding platforms (e.g. allowing normal loans to be concluded on such platforms, rather than only participation loans, or lifting the €100,000 limit on equity crowd-investment in Germany, for example), the EC's approach of allowing platforms to develop in line with self-regulation seems the wiser than rushing to regulate in detail.