#RedTape Redline - Mark-up Your Laws!

During any respectable contract negotiation, the party 'holding the pen' produces a mark-up or "redline" of each draft of the contract showing the changes it has accepted so far from the previous version. In fact, it's considered offensive and sneaky not to show those changes. It's as if you're hiding something and don't want to make it easy for the other side to understand the deal they're being asked to sign up to. 

Not so for the people drafting our laws and regulations. No. While they have their own internal mark-up of how a piece of legislation is being amended from time to time, they keep it to themselves and only use it for the purpose of writing up an amending 'statutory instrument' that shows only the change and where it is supposed to be plugged into the original. Nuts, unless of course you're still writing with a goose feather, or you're the one proposing the changes and you want to slow your opponents down by making them reverse-engineer what the changes looks like in context. Or you're one of the legal publishers everyone is forced to pay in order to get an up-to-date version showing all the changes once they are passed, since not even the government's own legal publishing unit has the resources to keep up-to-date with how all our laws have changed.

I am not the first to complain about this, as I pointed out in 2009 in the context of the Free Legal Web initiative, which you can now see is defunct. Dragged under the waves by the combined weight of institutional inertia, investor scepticism and despair... but I'll leave it to Nick Holmes to tell that story.

And yet, in true Terminator fashion, this won't die. Yesterday, we were treated to a presentation on the new OpenLaws initiative to "make legislation, case law and legal literature more accessible" (please,  take the survey).

It's thought that OpenLaws might benefit from including European law. Certainly it brings European cash, which is smart. But if there's one institution committed to less transparency than the UK Parliament, it's the European Union. You'll see that I've previously considered launching a quest to find the source of European law, but abandoned the idea immediately. Anyone who's tried to keep track of the European Commission amendments to draft directives and regulations as they ooze their way through the European "ordinary legislative procedure" quagmire will understand the true value of the lobbyist. I can't imagine sunlight ever falling on that process.

But I may be wrong. And it could well be that the OpenLaws' social media tools concentrate enough rage against the EU machine that transparency will be introduced. In the meantime, we'll have access to case law, articles, commentary and unofficial redlines of legislative amendments, even if we can't shake the uneasy feeling that only a few officials fully understand what our Parliaments are churning out.

 

Timetable And Forms For Full Authorisation - #ConsumerCredit #P2PLending

The FCA has published the application 'windows' during which various types of consumer credit and P2P lending firms can apply for full authorisation. 

The dates are in Table on page 9. They vary by type of firm and may also vary by region for some types.

The FCA will write to all firms with interim permission by 1 May 2014 to confirm their application period. You should contact the FCA if you have not heard by 15 May 2014. In the meantime, you should register for an online account with the FCA.

In my experience it takes at least 3 months to prepare an application for authorisation, as there is a lot of information to gather and/or summarise at the same time as running a business. The FCA has published an authorisation application checklist, some sample forms and guidance on the supporting documentation required. Note that if you a P2P lending platform or your are offering high cost short term credit (payday loans) or a credit reference service, you will also need to complete a detailed description of your IT controls, which you can download here. There are a few FAQs here. 

Top tip: make your application for authorisation a proper project and start the process of completing all forms and supporting documents on Day One - especially the application form, regulatory business plan and IT controls forms. Complete the forms in parallel, not one after another, as you may be waiting 3 months before each form is complete. I recommend nominating one person to oversee completion of the application documents and a separate person to gather and provide data.

Please note that the FCA has also published the relevant information sheets that must be sent to a consumer with any notice that they are in arrears or default (under section 86A of the Consumer Credit Act 1974). 

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.

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?

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.

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".