Nevertheless, we want to put on record that, under the aegis of the Remittances Working Group (see below), the British Bankers Association has attempted to facilitate dialogue between our sector and the banks. To date, there has been one meeting with one (non high street) bank, which prefaced the discussion by stating that they were not interested in serving the cash remittances market or any firm transacting less than £300 million turnover. We understand, however, that, thanks to the BBA, meetings with a couple of high street banks are now in prospect.
Likewise, the banks continue to be evasive with individual firms who try to contact them about banking facilities. As well as enunciating clear policies for banking MSB, we believe banks should set up a designated contact point for prospective MSB clients. At least, this would indicate that the banks were open to dialogue, rather than entirely indifferent to the sector.
The regulators
HMRC are the designated regulators for MSB under the MLR. They have held this role for at least 10 years and we have no reason to doubt that in this time they have developed significant knowledge and expertise of the MSB sector, which they are regulating. Over the years, HMRC has become more open to dialogue with the industry, and we recognise that they have facilitated and encouraged the industry to contribute to the industry guidance, most recently the version published in summer 2014.
Notwithstanding this, the HMRC guidance remains in some key areas, specifically around customer identification obligations, so vague as to be operationally useless (we consider this issue in more detail below). The feedback we receive from our members leaves us concerned that regulations are not enforced consistently across large and small MSBs.
More broadly, HMRC has never recognised that it is not enough to be an effective regulator, if key stakeholders (including regulated firms and banks) remain in the dark about the exact nature and impact of the regulatory approach in place. HMRC justify their decision not to disclose their regulatory actions as an obligation arising out their parallel obligation as the UK’s tax collector.
But the net effect is that if there is no detail provided of any supervisory programme or regulatory actions, key stakeholders, including the banks, might reasonably conclude that no actions are taking place, leading them to profess to believe that MSB are effectively unregulated. This is obviously not the case but it may be the perception.
This remains an unfortunate and unhelpful state of affairs that HMRC have long stated that they aim to address. Nothing has changed in the 18 months since the banks closed so many bank accounts, and the lack of clarity on the regulatory regime has not helped MSBs re-establish relationships with the banks on the basis that adequate supervision of AML controls by the designated regulator are now in place.
In relation to regulation, reference also needs to be made to reluctance of FCA to become involved in the debate about bank account discontinuance to MSB and its negative consequences. The Association wrote to FCA in June 2013 pointing out that there were implications for competition (and a resulting lack of service for consumers) arising out of the general unwillingness of the banks to provide accounts to all PI’s that wanted them. We had assumed that because FCA has both been appointed as a regulator of PI’s under the UK Payment Services Regulations and is also one of the regulators looking at issues of competition, and in particular, for safeguarding the interests of consumers, that they would be interested to review what are the impacts of the campaign of bank account closures. However, they declined to get involved.
Furthermore, although both the AUKPI and the BBA wrote to FCA asking that they issue guidance to the banks on best practice for banking MSB, they have declined to do this, stating that the new JMLSG guidance on banking MSB published in summer 2014 was sufficient. Sadly, there is no evidence that this guidance, any more than the new HMRC guidance, has done anything to change the prevailing unwillingness of the banks to provide services to MSB.
We also wrote to the Office of Fair Trading (OFT) in June 2013 about the problem with banking and asked them to make an intervention. They declined to do this on the basis that they did not have sufficient powers under article 97 and 98 of the Payment Services Directive, since these sections related to access to payment systems, rather than access to a bank account. We understand that this issue will be addressed in the revised Payment Services Directive, but this is unlikely to be operationalised in the UK until autumn 2017 at the earliest. Our members need action on this issue now.
In relation to the influence of regulators in dealing with the present situation around bank account access for PI’s, we note that in the debate on international money transfer charges in Westminster Hall on 17th December 2014, the minister mentioned the role of the new Payment Systems Regulator, which will come into full powers on 1st April 2015. She confirmed that the PSR has statutory objectives to promote competition in the markets for payment systems, to promote the development of innovation, and to ensure that payment systems are operated and developed in a way that considers and promotes the interests of customers.
However, in our view, whilst it is clear that the PSR has been mandated to ensure improved access for non-bank players such as PI’s to major payment schemes, such as BACs, CHAPs and Faster Payments, the PSR is not being required as part of its task to look at the more fundamental issue of whether PI firms have fair and equal access in the first place to their own bank account, which would be a pre-condition to them being able to access directly the payment schemes mentioned. We believe that this should be a fundamental and stated objective of the PSR, if it is to adequately ensure that all end consumers have equal access to cost effect provision of money remittance services.
Law enforcement
Whilst we recognise that the National Crime Agency (NCA) continue to engage positively with our Association and other stakeholders, it is clear that in the past they have highlighted deficiencies in certain MSB to the banks, which has contributed to an apparent over-reaction, leading to a general withdrawal of banking facilities to the sector as a whole.
For the record, the most recent statement by NCA on financial crime risk through MSB (autumn 2014) is as follows:
“In common with all financial sectors, there are risks that customers abuse the MSB services to launder money. There are examples of MSBs whose systems require work to limit these risks, but the majority of the sector has complaint policies and procedures in place, and work hard to exclude risk. The supervisors of MSBs are committed to helping the sector to maintain systems that minimise the threat of compliant MSBs being exploited by their customers.”
It would be more helpful if NCA communicated on regular basis issues associated with any poorly controlled MSB so that all stakeholders could learn from the NCA’s expertise and experience. At the same time, we would expect that the NCA would be more proactive in communicating to the banks and others about the strong AML controls, which are in place in the majority of MSB. Given the present situation with bank accounts, we can only assume that this message is not yet reaching the banks.
The money transfer sector
Our Association recognises that one way forward to improve overall perceptions amongst all stakeholders of the level of AML/CTF compliance across the industry would be for all UK firms to agree and implement ‘best practice’ principals around AML/CTF, that is principals that would see all firms implement standards which are above what is required in law. We believe this might make it easier for smaller firms to obtain banking.
One particular problem, in our view, is the uncertainty that prevails in the UK cash remittances market around the monetary threshold at which private customers are required to provide ID as part of the customer identification and verification process. We believe that the law states that ID must be collected and verified at 1,000 Euros equivalent (according to the EU wire transfer regulation), but on occasion, HMRC have publicly dissented from this view, and stated that firms are entitled to take a ‘risk based’ approach concerning the level at which regularly take single transactions significantly larger than 1,000 Euros without requesting and verifying customer ID.
Our members have reported to us, that some firms (or more often their agents), regularly process single transactions significantly above 1,000 Euros without obtaining and verifying customer ID. Although we have discussed this problem with HMRC, we are not sure what, if any thing, HMRC is doing about it.
The problem becomes even more difficult to resolve when there is no apparent legal definition of a ‘linked’ transaction in the context of the EU wire transfer regulation. An example is, what process is required when two transactions, which are ‘linked’ in some way and cumulatively, pass the 1,000 Euros threshold.
We believe that firms should be obliged legally to put in place operational procedures (i.e. software and other systems) to link the individual transactions carried out by the same customer and then be able to verify when the same customer has sent one or more transactions which cumulatively total more than 1,000 Euros anywhere in their network, thereby triggering an obligation on the firm to take and verify customer ID.
But this does not happen in all firms at the moment, and HMRC seems to regard with equanimity business models which allow the same customer to send repeated transactions of less than 1,000 Euros through the same money transfer firm without this triggering any obligation on the firm’s agent to take and verify customer ID.
This is a source of significant frustration for many of our member firms (most of whom are community specialist and specific who, as NCA has confirmed, achieve a better standard of KYC and have a better knowledge of their customers and their reasons for transacting). This, however, is not apparently recognised by the banks, for some reason.
We have raised this matter repeatedly with HMRC, but it has not resulted in clearer guidance on these issues. In other words, many of our member firms consider they are being punished commercially for doing the right thing in terms of abiding by legal requirements to comply with their KYC obligations. Meanwhile, firms, which may lack compliance controls, are allowed to retain bank accounts and to prosper commercially.
Given the failure of the industry (despite best efforts of the AUKPI) to set voluntary ‘best practice’ principles around regulatory compliance (which would include an agreed monetary threshold for taking customer ID), we believe that the only way this matter could be resolved would be if the UK government was to pass a new UK law specifically to deal with the customer ID threshold, including a clear definition of what is a ‘linked’ transaction. This would give all firms a clear indicator as to the ID standard to which all should operate.
We believe this would raise the level of regulatory compliance across all UK firms, and, by extension, would encourage the banks to re-engage comprehensively with our sector once again.
Q3 To what extent have banks and regulators in the UK and overseas placed increased compliance demands on MSB?
In relation to the regulators, whilst the law itself has not changed, HMRC has clearly devoted more resources to regulating MSB, which can only have a beneficial effect on the standards in the industry. At the same time, it is becoming apparent that HMRC have not yet arrived at a comprehensive understanding of the effects of bank de-risking on the market, and how this has introduced new ML/TF risks. In our view, the market place has become much more risky because it is difficult sometimes for consumers to understand which firm is actually responsible for their transaction and its process throughout the payment chain.
In relation to banks, in the few instances where they have allowed accounts to remain open, they have put enormous requirements on to MSB. Apart from dramatic capital requirements mentioned above (but never justified), they have required firms to take on more compliance staff, to increase the level of scrutiny and on-going monitoring, and to introduce expensive third party compliance systems.
In our view, this is inconsistent with the risk based approach, because the bank is obliging the firm it provides services for to deliver compliance in the style of the bank, rather than allowing the MSB to define and mitigate their own risk profile. This does not take into account the differences in the size and cost structure between banks and MSB. It will inevitably lead to extra costs for the consumer.
In terms of the overseas perspective, we recognise that UK banks have been influenced in their policies by the significant fines (estimated at USD 34 billion) that they have received from the US regulators. However, we refer to the comments of FATF (above) in relation to the justification for these fines.
In effect, UK MSB which still have accounts have had to heavily invest in new compliance controls in a relatively short space of time due to the wilful failures of the banks to comply with ML and sanctions legislation in the US, and the resulting fines imposed on them. The majority of UK MSB have not even been given the chance to address any perceived deficiencies and thereby keep their bank accounts open.
Q4 To what extent have government interventions in this area, such as the Action Group on Cross Border remittances improved the situation?
We recognise that the government has acknowledged that there have been problems in the MSB sector in relation to cross border remittances and particularly in relation to remittance services provided through the SME sector. There have been four Westminster Hall debates on this issue in
2013 and 2014 – MP’s have appreciated the urgency of the problem in terms of the large negative consequences on the impacted communities. In autumn 2013, the government announced the launch of the Action Group on Cross Border Remittances, chaired by Sir Brian Pomeroy. This includes representatives from government departments, regulators, law enforcement, the money transfer industry, banking industry representatives and consumer groups.This group met throughout 2014, and has achieved partial success in achieving the goals set for it, in the sense that, under its aegis, new HMRC and JMLSG guidance has been issued, and the NCA has carried out some structured review of risk in the MSB sector (although, to date, we are still waiting for NCA to issue any kind of shared alert to stakeholders based on information gathered).
In parallel, the working group has monitored the work of DFID and the World Bank in developing a pilot ‘Safer Corridor’ route to Somalia, a country which, because of a lack of government controlled financial infrastructure, has been particularly badly hit by the withdrawal of banking facilities. It is too early to say if the pilot, due to be launched in spring 2015, will have any positive impact in helping legitimate flows of remittances to Somalia.
Money remittances to other fragile / post conflict states, such as Afghanistan and Iraq, which the government wants to support have not even been considered to date.
Notwithstanding the positive developments mentioned above, the Working Group, has so far failed to generate any kind of dialogue about the perceived issues with any UK clearing banks.
Government has failed to slow, stop and reverse the closure of MSB bank accounts. A few more have closed since autumn 2013, and, as far as we are aware, no accounts for cash remittance companies have been opened. This is particularly surprising since the government is now a large shareholder in some of the UK clearing banks.
However, beyond the working group, we recognise that the engagement of HM Treasury with US regulators was very useful because it promoted an honest exchange of views and was instrumental in encouraging FinCEN to issue the positive statement highlighted above.
We recognise that HMT has extended the lifespan of the Working Group. We also acknowledge that a new work stream of the Working Group will include a technical committee, to be chaired by a senior banker, which can look in detail at the problematic issues in AML controls where perhaps a lack of shared understanding between banks and MSB may be creating an environment where banks are unwilling to offer accounts to MSB.
Notwithstanding this, in our view, the working group will not be making progress unless its work persuades at least two UK high street clearing banks to start opening accounts for some (and preferably all) of the 150 authorised payment institutions/MSB specialising in cash remittance services which have had to try to operate without them for the last 18 months.
Q5 What areas remain?
We welcome the role of the Treasury select committee in scrutinising the important issue of access to MSB bank accounts. We believe that there are a range of areas where the committee could ask useful questions and get answers which might improve the present (poor) situation.
In relation to the high street clearing banks, we are certain that, if asked, they will respond that they remain open to new MSB business. However, we believe that, even if factually correct, it is a meaningless statement, as in reality, all of these banks are closed to any new money remittance business involving cash. The committee might like to enquire how many cash based MSB each bank is presently serving directly by way of providing a bank account (excluding any wholesale arrangements). The committee might like to enquire how many new cash based remittance firms each of the high street clearers has taken on in the last 18 months.
The problem is further compounded because, based on the anecdotal evidence we have seen, the high street clearers are also dictating to agency banks what kind of MSB clients they can provide accounts to if any. The committee might also like to ask both high street clearers and agency banks about this.
Inevitably, banks may plausibly argue that their risk appetite to the MSB sector is strongly influenced by the way in which the banks understand the sector is regulated and supervised day to day. The committee may like to enquire of HMRC what they are doing to communicate on an on- going basis about the positive impact of their regulatory approach to those who need to know (e.g. MSB, banks, government, law enforcement, etc). The banks include a lack of communication fromHMRC as a reason for their continuing disengagement from much of the MSB sector.
Similarly, whilst the NCA has the principal role of a law enforcement agency, it must appreciate that what it says, or does not say, in respect of the level of AML compliance by MSB will inevitably have an impact on their capacity to obtain banking. The NCA has repeatedly stated that it would be better if the MSB sector was banked – they might like to consider what more they could do to help achieve this through the messages and information which they disseminate.
Other regulators also have a role to play. Notwithstanding their best intentions, new guidance from HMRC and JMLSG has failed to change the business environment in any discernible way. The AUKPI and BBA have been jointly calling on FCA for the last six months to provide some guidance to the banks on what a good bank/MSB relationship looks like. The FCA have continued to decline to do so – we cannot see how there will be any progress on the availability of bank accounts to MSB in the continued absence of such guidance.
The committee may also like to enquire of FCA, what role, if any, they have in scrutinising the impact of bank account availability (or lack of availability) for MSB has in terms of competition in the broader remittances market – how are firms effected directly, and how does this impact on the services and prices which they are able to offer to end consumers?
What role do the OFT and the new Payment Systems Regulator have in ensuring that the remittances market (particularly the cash remittances market) works properly for the benefit of consumers?
Q6 What further improvements can be made?
The banks should recognise the particular role of regulated MSB within the overall UK financial sector. They should recognise that MSB provide services to consumers, which are not generally provided directly by the banking sector itself. As such, MSB provide a vital choice to consumers, who, in many cases, may otherwise have no way of access to the formal financial sector.
In our view, banks must have clearly defined requirements for MSB, including MSB dealing in cash, (which is by far the preferred transaction method of customers). The outlines of bank policies for banking MSB should be shared with relevant bank and MSB trade associations. The policies should be reasonable and proportionate, and take appropriate account of the risk based approach, (as specified in FATF guidance above).
Banks are in a privileged position and should recognise their responsibility to disseminate and share best practice principles in relation to AML, CTF and sanctions controls so that overall standards throughout the financial services sector improve.
UK money transfer firms offering remittance services are willing to adopt gold plated compliance standards to build confidence and obtain banking facilities. But any move by the industry to do more than what the law requires has to be done on the basis that all UK firms comply with agreed compliance procedures – and the banks should de-bank any firm, of whatever size, which can not demonstrate compliance to these standards.
The wholesale move to ‘de-risk’ whole sectors, such as the MSB sector, must be challenged and resisted. As NCA have repeatedly said, the MSB sector is ‘broadly compliant’ – banks should surely have an obligation to develop ML/TF risk assessment criteria which are sufficiently nuanced to allow them to distinguish properly between the vast majority of well run money transfer firms (which deserve banking facilities) and the small minority of non compliant firms, which must not have them.We hope the committee can make recommendations which will help regulated money transfer firms to once again obtain banking, so that, by extension, the firms are able to provide money transfer services to the consumers who would prefer to use their services.
Dominic Thorncroft (Chairman) Jawwad Riaz (Vice-Chairman) Association of UK Payment Institutions January 2015
Appendix
The Association of UK Payment Institutions (AUKPI) represents Payment Institutions regulated by the Financial Conduct Authority. All our member firms are also regulated as MSB under the Money Laundering Regulations.
The Association’s principal role is to provide a forum where member firms can come together to discuss and collectively respond to issues of common concern. We also offer services to members, including online AML training.
Additionally, we aim to represent the interests of our industry to law makers, regulators, banks and other financial institutions and consumers at both UK and European level.
Our member firms may offer any of the services allowed under the Payment Services Regulations
2009, this includes online foreign exchange and related payments business, money remittance and associated services, merchant acquiring, payment accounts, card processing, execution of payment transactions – direct debits, payment cards, credit transfers, standing orders, payment initiation services, etc. We also offer membership to others with an interest in the payments sector such as technology and professional services firms.