After the UK left the European Union, a range of payment providers reported so-called IBAN discrimination as a number of companies across Europe began to refuse Euro account bank details if they contained the country code ‘GB’.
As a result of Brexit, sending a payment to Eurozone countries resulted in additional charges. Whilst the fee is nominal, it means that payments can be short of the required full amount being sent.
In an exclusive interview with City A.M., rising City star Anastasia Demetriou, a former Howard Kennedy solicitor and currently general counsel at IFX Payments in London, warns that without much-needed regulation post-Brexit, the cross border payments industry is a potential “breeding ground for financial crime”.
In a bid to tackle the risk of financial crime, there has been an industry wide focus on regulation, with the EU’s 5th Anti-Money Laundering Directive being probably the best example.
“Key elements of 5AMLD seek to prevent the movement of illicit funds across international borders with enhanced due diligence measures for high-risk third countries as well as ensuring beneficial ownership transparency,” Demetriou said.
“Of course, implementing effective governance within the financial services arena is difficult, but the complexities of cross border payments pose “a particular challenge,” Demetriou said.
Having regulatory structures in place is a “crucial piece of the industry puzzle”.
“There is no global consensus; different jurisdictions have varying outlooks on consumer risk, consumer protection and the role ‘top-down’ governance should take in mitigating risk.”Anastasia Demetriou, general counsel at IFX Payments
“A good regulatory framework will have two primary roles. The first is protection; by ensuring that customer funds are safe, and that sensitive data is secured. The second is facilitation; maintaining the sector’s reputation and taking an active role in the prevention of financial crime, which will in turn build consumer confidence,” Demetriou said.
Demetriou highlighted that, within the global payments sphere, a key barrier to the effective implementation of global regulation is the lack of a standardised set of rules across the board.
Double edged sword
Demetriou stressed how a lack of standardised regulation in the payments industry “could allow a ’Wild West’ culture to grow.”
She added that the sector “needs to retain its legitimacy but also be given the tools and freedom to innovate. Finding that delicate balance on a global scale is ambitious but necessary.”
The role of regulation within a jurisdiction is largely attributed to its cultural norms or even political inclination.
Demetriou provided the example of the EU and the UK where the payments regulatory framework is “derived from the same directives; each jurisdiction is tasked with accomplishing a set of goals but the directive doesn’t dictate the means to achieve the desired outcomes.”
“Although rules and principles are outlined, adherents are given flexibility and liberty in implementation,” she explained.
Whilst certain standards need to be met, participants will have different interpretations, Demetriou stressed “some local regulators take a more ‘light touch’ approach and others may take a more prescriptive stance.”
Whilst the EU passporting system for financial services companies is no longer applicable to the UK post-Brexit, in Demetriou’s view, this arrangement “brings to light the challenge of having one set of rules which, once adopted at a national level, result in inconsistencies in implementation.”
The UK has long been a leading financial services centre which Demetriou suggests is “evidenced in its largely competitive and proportionate approach to sector supervision given that regulators have had the opportunity to assess and refine their interventions.”
In contrast, Demetriou points to the US which, she argues, has the most complex regulatory scheme as “financial services are regulated at both the state and federal level, with a vast network of rules implemented and enforced with varying and overlapping scopes of authority.”
Ultimately, “without formal coordination amongst supervisory authorities businesses can find themselves in a regulatory minefield.”
“The potential for divergence across jurisdictions leaves global businesses in the sector grappling with inconsistent standards and requirements which is exacerbated by the fact that regions are at varying stages of advancement.”Anastasia Demetriou
So if we are aware of these problems and inconsistencies, what opportunities are there to conquer them?
Demetriou pointed out that, in the UK, the sector is anticipating “a post-Brexit radical overhaul of financial services regulation, primarily with the intention of retaining the UK’s competitive edge in the sector and ensuring that we continue to be attractive to overseas markets”.
“The FCA has a clear mission for the industry to retain its legitimacy but to also still have the freedom to innovate. There is always a risk of the regulatory framework becoming a mere ’tick box’ exercise’,” she said.
“The challenge is finding the ‘sweet spot’ between fostering good industry practice without stifling the industry players with over-regulation and unnecessary bureaucracy,” Demetriou added.
What’s next for Regulation?
In the short-term, Demetriou expects to see a real emphasis on fraud prevention and Anti-Money Laundering.
“Financial crime, unfortunately, continues to become more sophisticated and this, coupled with further technological advances, means that businesses need to invest time and money in tackling such a pervasive threat.”
“That being said, with the rise of e-money/digital cash and cryptocurrency it is increasingly important for companies to remain agile and responsive to compliance risk,” she continued.
Ultimately, ‘fixing’ the complexities of regulation in the payments industry is not necessarily about adding more measures into the mix.
Rather, “the focus should be on polishing and where appropriate, standardising the systems we have across jurisdictions, to increase efficiency and allow the continued flourishing of the payments sector,” Demetriou concluded.