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By Bob Lyddon – 3 minute read

THINGS HAVE MOVED quickly since the breaking of the scandal over the de-banking of Nigel Farage. Dame Alison Rose, CEO of Natwest, has resigned along with the CEO of its private banking subsidiary Coutts & Co.  The Chancellor of the Exchequer, Jeremy Hunt, has written to the Financial Conduct Authority (FCA) to demand it finds out how widespread de-banking is, and quickly.

To that end the FCA has written to 30 or so institutions – banks and non-bank payment service providers – with a series of open questions and required a quick response. These indicators are promising but cannot obscure that the FCA itself has ‘form’ in enabling de-banking in the past.

This was in the de-banking of smaller non-bank payment service providers within the timeframe 2014-2018, these firms trading under either the regime for Electronic Money Institutions (eMIs) or Payment Institutions (PIs). With PIs being allowed to commence business with lower capital, it was amongst PIs that the effect of de-banking was felt most.

The author acted as a consultant for this sector’s trade body on de-banking and latterly as its chair. Salvation was promised in the form of Article 105 of the 2017 Payment Services Regulations, the UK’s transposition of the EU’s 2nd Payment Services Directive of 2015. Article 105 was specific in requiring that banks provide accounts and payment services to non-bank payment service providers on a basis that was proportionate, objective and non-discriminatory.

All appeared to be on track until at the last minute the FCA – through its department the Payment Systems Regulator (PSR)[1] – issued its ‘Approach to monitoring and enforcing PSD2’. The FCA and PSR were nominated in the 2017 Payment Services Regulations as joint ‘competent authority’ for policing the new legislation.

The FCA/PSR pulled the rug, effectively overturning applicable law and providing the banks with a pre-written excuse to dismiss each application because both accepting a new customer and continuing a relationship with an existing one were a ‘commercial decision’. The document also accepted the concept of the banks adopting a risk-based approach, permitting a refusal or withdrawal statement of ‘the returns do not justify the risks’ without further explanation.

The FCA/PSR did not require the banks to produce a statement of expected or current returns, or to qualify the risks involved, or to state the costs of managing and mitigating those risks. Despite the FCA/PSR document laying out measures of transparency that banks needed to meet, the banks did not do so – and the FCA/PSR did not force them to.

The outcomes were various but none of them good for customers or for competition – the reasons that the regimes for eMIs and PIs were established.

Some firms closed down. Others, to continue trading, became agents of larger ones. Others limited their volume of payments in the works to the amount of their own capital, such that they ceased to need to put any customer money into what is known as ‘safeguarding’ – the alternative for the customer to having coverage for their money through the Financial Services Compensation Scheme. For these firms the customer’s money, once received through the elephantine payment systems of the UK, belonged to the firm itself, because the firm had met its liabilities to the payer and payee with its own money.

The final set of firms, unable to obtain a ‘safeguarding account’ at a UK bank and unwilling to limit their payment volume to their own capital, obtained ‘safeguarding accounts’ for customers’ money in banks in Malta, Cyprus, Lithuania and Estonia. The FCA regards that money as ‘safeguarded’ because the deposit bank is in the European Economic Area, is thus regulated by an organization viewed by the EU as having equivalence to the European Banking Authority or an EU member state regulator, and must perforce be solid. It is an Article of Faith that there can be no rocky banks in the EU, notwithstanding the ample evidence to the contrary.

Since 2017 the focus of the FCA/PSR has been on the workings of the ‘safeguarding’ regime in the UK should the firm itself go bankrupt. We have the ludicrous case of iPagoo where the FCA/PSR joined legal action to determine the extent to which other creditors of the firm could get part of the money belonging to the firm’s customers. The FCA or its predecessor (the FSA? Andrew Bailey?) should have had complete certainty on this matter before the very first eMI or PI was established.

No attention has been paid to the risk of foreign ‘safeguarding’ banks going bankrupt. Untold money belonging to UK customers is lodged in rocky banks around the world, including banks in ‘sunny places with shady people’ – offshore banking locations like Cyprus and Malta. Of course, because Cyprus and Malta are in the EU they do not make it onto the EU list of countries with a weak regime for combatting money laundering and the financing of terrorism, and are considered Persil White.

The FCA/PSR enabled de-banking of smaller non-bank payment service providers, and turned a blind eye to its consequences, preferring to distract attention from the amount of UK customers’ money at risk abroad, by focusing – as if it was a new subject – on iPagoo. The initial signs are promising that in the current case the Chancellor – and HMTreasury – will not just sit back and let the FCA/PSR do their own thing as they have in the past, including substantively overturning applicable law.

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Bob Lyddon is an independent financial analyst specialising in international and central banking.

[1] The heading of this approach paper shows the relationship between the FCA and PSR as it gives both names with the name of the PSR being subsidiary to that of the FCA

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