Deciphering the complex relationship between cross border payments & regulation

Anastasia Demetriou, Legal Counsel at IFX Payments

Anastasia Demetriou, Legal Counsel at IFX Payments

Cross border payments may be an enigma to many, but simply put, they concern financial transactions where the payer and the recipient are based in different countries. Without effective regulatory intervention, the cross border payments arena can act as a breeding ground for financial crime and in a bid to overcome this, there has been an industry wide focus on regulation. In particular, key elements of the EU’s 5th Anti-Money Laundering Directive seek to prevent the movement of illicit funds across international borders with enhanced due diligence measures for high-risk third countries and ensure beneficial ownership transparency. Implementing effective governance within the financial realm is difficult, but the complexities of the cross border payments arena pose a particular challenge.

Having regulatory structures in place is a crucial piece of the industry puzzle. 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 secure. 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.

Within the global payments sphere, a barrier to the effective implementation of global regulation is the lack of a standardised set of rules across the board. 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.

Double Edged Sword: Regulation & Cross Border Payments

It’s important that a lack of standardised regulation in the payments industry doesn’t allow a “Wild West” culture to grow. 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. For example, in the EU and the UK, 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. Whilst certain standards need to be met, participants will have different interpretations; 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, this arrangement highlights the challenge of having one set of rules with inconsistent implementation in the content and format of local compliance.

The potential for divergence across jurisdictions leaves global businesses in the sector grappling with inconsistent standards and requirements. This is exacerbated by the fact that regions are at varying stages of development. The UK has long been a leading financial services centre which is evidenced in its largely competitive and proportionate approach to sector supervision; regulators have had the opportunity to assess and refine their interventions. In contrast, the US for example, where arguably the regulatory scheme is the most complex, 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. Without formal coordination amongst supervisory authorities, businesses can find themselves in a regulatory minefield.

As we are aware of these problems and inconsistencies, what opportunities are there to conquer them? In the UK, we are 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 have the freedom to innovate. There is always a risk of any regulatory framework becoming a mere “tick box” exercise and the challenge is finding the “sweet spot” between fostering good industry practice without stifling the industry players with over-regulation and unnecessary bureaucracy.

On a practical level, at IFX, we are continually investing resources to ensure that our sales staff are compliance savvy. They are the first line of defence; the better educated they are, the better protected we and our customers will be. Businesses often fall into the trap of overfocusing on technical compliance rather than acting in the spirit of the regulations on a routine basis. Treated properly, regulation is not a hindrance; it’s an important and necessary industry facilitator.

What’s Next for Regulation?

In the short-term, I expect 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. With the rise of e-money/digital cash and cryptocurrency it is increasingly important to remain agile and responsive to compliance risk. This is something we are keen to support at IFX, with continued expansion and investment in our workforce, including by recently welcoming a highly experienced and innovative Head of Compliance.

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 flourishment of the payments sector.