With feet firmly on both sides of the English Channel, payments infrastructure provider Banking Circle is taking a leading role in promoting and defending the interests of the payments industry across the EU. Its UK Head of Compliance and Money Laundering Reporting Officer, Mitch Trehan, explores the regulatory options.
With Brexit negotiations rocked off course in 2020 and the option still on the table to extend the transition period for up to two years – locking the UK and EU into the single market until 2022 – financial services seem doomed to perpetual uncertainty. But one thing is for sure: whatever the time scale, leave the United Kingdom will.
And so, the question remains: what will happen to passporting, the process that allows financial services firms authorised in an European Economic Area (EEA) state to conduct business within other EEA states based on their ‘home’ member state authorisation? What will happen to the free trade agreement? What will the terms be between the UK and other trading partners across the globe, notably the US?
All players are agreed that Brexit is a game-changer but it is also a game in which the rules are yet to be agreed. Complicated? You bet. Financial services chiefs on both sides of the Channel, like the captains of all other industries impacted by the divorce, know the stakes have seldom been higher.
Among the fintechs on the front line of this changing world is Banking Circle, a financial services utility for banks and the payments industry, which was formed in 2015.
The group is itself in a period of transition after receiving its banking licence from the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg (where it is now headquartered) at the end of 2019. Enjoying an increasingly influential position in the world’s financial markets, it processes about €130billion in payments per year for credit institutions, card companies and payment gateways and its newly-acquired banking licence will enable it to offer global accounts. That enables its mission to transform the payments infrastructure, with a particular focus on providing loans and payment solutions to SMEs, of which there are 24 million in the EU. They make up 99 per cent of all privately-owned businesses, collectively employing 60 per cent of the entire workforce and contributing to more than half of all business turnover.
Banking Circle’s co-founder and chief executive Anders la Cour was also recently appointed chairman of the Emerging Payments Association EU, the new-born sibling to the UK-based Emerging Payments Association (EPA), already representing 150 organisations in the payments industry. EPA EU, which is also based in Luxembourg, has been created to ‘promote and defend’ the interests of the payments industry across the European Union.
Banking Circle was a founding member and it has attracted industry heavyweights Visa and Mastercard to its ranks. La Cour is under no illusions about the impact of Brexit, and the fact that a collaborative approach is needed across the industry. At the launch of the EPA EU early in March, he said: “Businesses across the EU are in the midst of big market changes, with many challenges and opportunities to come.
“The EPA EU will play a vital role in supporting payments businesses as they negotiate the changing landscape and we all work together to find the best way to support industry and consumers across the region and the rest of the world.”
But in an important move, Banking Circle has affirmed its recognition of London’s continuing status as a global financial centre post-Brexit, by keeping its City business there, now as a bank. And it has called in the help of specialist consultancy FSCom to negotiate the dual minefields of not only the changing regulations post-Brexit but also the extra scrutiny of fintechs by UK regulators.
The Prudential Regulation Authority (PRA) sent a letter to chief executives of challenger banks last summer which outlined the regulator’s concerns about risk management. Subsequently, fintech firms were ordered by the Bank of England to tighten up compliance and ensure ‘overly optimistic’ risk projections were accurate. Both the PRA and FCA currently have consultations out on UK financial services’ operational resilience.
Treading a fine line
Mitch Trehan, Banking Circle’s UK head of compliance and money laundering reporting officer, says the group is working closely with FSCom to enhance its own compliance with the raft of expected regulatory changes.
“In the UK we are a UK branch of a Luxembourg entity so [as far as regulation goes] the biggest thing for us is going to be Brexit,” says Trehan. “The UK entity is becoming a third-country branch, because of the changes to passporting. So FSCom helps us because we were a UK branch of a Danish entity, under an authorised payment institution, and now we are a UK bank branch of a Luxembourg entity, but, with Brexit, it’s a third-country branch, requiring so much more locally in the UK.
“Under passporting, there’s a certain extent to which the local ‘host’ regulators can rely on your parent within the EEA. After Brexit that reliance changes. The regulators expect there to be much more local activity, and local people, and local risk management, and it’s that risk management piece, the regulatory compliance piece, and the new UK laws that will come out of it, where FSCom has been working with us.”
One significant UK law change from 2021, relates to where banks and payment service providers (PSPs) have hitherto not needed to provide the payer name and address when making intra-EEA payments.
As things stand, this will be required for payments between the UK and the EEA after the transition period. The Financial Conduct Authority is already warning banks and payment service providers to take steps to ensure they are ready to provide the relevant customer information from 2021. But that is only one of an expected myriad of financial legislation changes, hence the need for groups like Banking Circle to call in expert help.
FSCom has established a reputation as being among the leaders in the field of compliance experts and counts former regulators and bankers among its ranks. Trehan praises the working relationship that has been forged between them, highlighting FSCom’s approachability and expertise.
“Looking at what they’ve done across the fintech space, they know payments inside and out, they know the regulations inside and out, both on the regulatory compliance side and on the financial crime compliance side,” he says.
“It’s then the practical application of that knowledge, having been there, having done that – and that’s something we see every time we work with them. They are telling us not just what the law says and their interpretation of it, but they also draw on live experience in that scenario with other clients. Of course, they don’t tell us who those clients are, but we know they’ve learned through those experiences. If we had done it before, we wouldn’t need them, but they have, so they help us.”
Trehan sums up the post-Brexit dilemma within the financial services industry as: look to the future or keep to the past.
“The UK can go down one of two roads,” he says. “We can either stick with what the EU is doing and have that equivalency, or take this as an opportunity to look at what worked, what didn’t work, what we are shackled to, what we can redesign to be a lot more effective and efficient, maybe tear up some of the old regulatory pieces and design them in another way – to be future-looking rather than potentially reacting to what has happened in the past. The future-proofing part could be really interesting, to try to increase business while still maintaining a governance and compliant culture.
“But then the other part of this is that our closest trading partners are, of course, the EU, and how do we ensure that we keep that relationship alive, keep that equivalence, keep everything comfortable? That’s all going to come out of the trade talks that happen.”
Notwithstanding recent world-changing events, the British government has confirmed the UK’s transition period still ends on 31 December 2020: “This is enshrined in UK law.”
The clock is still ticking…