Daily Dash: US Agencies Issue Fintech Risk Assessment Guide

June 9, 2023
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US federal regulators have unveiled their final guidance for managing risks associated with third parties, including payment processors, the Bank of Lithuania has suggested amendments to the country’s payments laws, and Austria has convicted a Porsche board member of money laundering.

US Agencies Publish Long-Awaited Fintech Risk Assessment Guide

US federal banking regulators have issued final guidance on managing risks associated with third-party relationships, including fintech companies such as merchant payment processors.

The guide acknowledges that the use of third parties can offer banks significant benefits, but may introduce new risks or increase existing risks, such as operational, compliance and strategic risks.

It advises that banks analyse the risks associated with each third-party relationship and tailor risk management practices “commensurate with the banking organization’s size, complexity, and risk profile and with the nature of the third party relationship”.

The guidance provides examples of considerations in the planning, due diligence, contract negotiation, ongoing monitoring and termination stages of managing third-party relationships.

The document replaces existing guidance by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency (OCC) on the topic.

Bank Of Lithuania Proposes Amendments To Payments Law

Lithuania’s central bank has submitted a draft of proposed amendments to the country’s payments framework, defining the conditions of a basic payment account service. 

The regulator believes that the amendments to the law will ensure sufficient payment services for residents at an affordable price and a lower administrative burden for credit institutions.

"The amendments to the Law on Payments are a timely and important step to meet the needs of the population,” said Gediminas Šimkus, board chair at the Bank of Lithuania.

According to Šimkus, changes will make it possible to increase the availability of payment services and ensure the protection of vulnerable citizens.

The central bank has proposed that the law should provide specific criteria for determining the scope of services that must be provided in a main payment account. 

This is intended to ensure that the offered services are suitable for the majority of the Lithuanian population.

"In order to achieve greater transparency, the draft law foresees a new obligation for payment service providers, and they will have to inform users about the possibility to choose the main payment account service or other offers,” said Šimkus. 

He continued that the requirement for additional information will encourage residents to evaluate different payment service packages more often and choose the most favourable one for them.

It has also been proposed that a rate comparison website is created for small businesses, providing the rates of relevant payment services in one place.

Porsche Board Member Charged With Money Laundering In Austria

Austrian authorities have charged Siegfried Wolf, a board member at Porsche, with money laundering.

Wolf has been indicted by the authorities on charges relating to a case over two decades ago. This regarded the purchase of Eurofighter jets. 

It is thought that suspected hidden assets in the case are worth €6.8m. 

Wolf, alongside one other unnamed suspect, will now stand trial. 

Check Out Time Approaches For Cheques In Australia

Under its latest Strategic Plan for Australia’s payment system, the Treasury has confirmed that it aims to achieve a “full wind-down” of cheque use by 2030.

In the years ahead, the Treasury said it will aim to remove legislative and other barriers that have allowed cheques to become “entrenched” in Australia’s economy, and will aim to phase out government cheque use by 2028.

Anna Bligh, CEO of the Australian Banking Association (ABA), welcomed the move, noting that in the last ten years, cheque use has fallen 90 percent in Australia.

“With cheques now in steady decline and accounting for only 0.2 percent of all payments, it’s time to have a smooth and well-planned process to phase out this form of payment,” she said. 

“Australian banks will work with the government to ensure that customers and businesses are ready for a gradual and orderly phase out.”

Every Third American Has Used Bank Chatbot And They Are Not Happy

The Consumer Financial Protection Bureau (CFPB) has warned that the use of chatbots in banking may result in non-compliance with federal consumer financial protection laws, reduced customer service and trust, and even harm to consumers.

The CFPB’s notice comes as 37 percent of the United States population is estimated to have interacted with a bank’s chatbot in 2022. 

Among the top ten commercial banks in the country, all use chatbots of varying complexity to engage with customers.

The CFPB said it has received numerous complaints from frustrated customers trying to receive timely, straightforward answers from their financial institutions or raise a concern or dispute.

“To reduce costs, many financial institutions are integrating artificial intelligence technologies to steer people toward chatbots,” said CFPB director Rohit Chopra. 

“A poorly deployed chatbot can lead to customer frustration, reduced trust, and even violations of the law.”

The agency warned officials are actively monitoring the market and urged consumers to report any complaints to the agency.

The so-called "issue spotlight" follows a statement in April which cautioned that artificial intelligence may lead to discrimination, in breach of US laws.

CBDC Not A 'Compelling Priority', Says Kenyan Central Bank

After receiving feedback from industry on a central bank digital currency (CBDC) discussion paper published last February, the Central Bank of Kenya (CBK) is taking a cautious stance on CBDC.

The CBK said its discussion paper received more than 100 responses, and respondents highlighted the main risks of CBDC as bank disintermediation, high implementation costs, technology and cyber risk, and financial exclusion.

“Against this backdrop, implementation of a CBDC in Kenya may not be a compelling priority in the short to medium term,” said the CBK.

“Significantly, Kenya’s pain points in payments could potentially continue to be addressed by other innovative solutions around the existing ecosystem.”

On the plus side, respondents also highlighted that CBDC could increase efficiency and transparency in payments and reduce acceptance costs.

UK Treasury Select Committee Presses PSR On Card Fee Reviews

Chris Hemsley, managing director of the Payment Systems Regulator (PSR), has defended his agency’s work on card fees in response to a UK Treasury Select Committee request.

The request for progress update was sent in relation to the PSR’s ongoing market reviews into cross-border interchange fees and scheme and processing fees set by card giants Visa and Mastercard.

“It was our intention that by May 2023 this data gathering would have been concluded [in the scheme and processing fees market review] and we would have been consulting on working papers with a view to completing the further analysis required before issuing an interim report,” Hemsley wrote.

“This was always an ambitious goal,” he told the cross-party committee. 

According to the PSR chief, it was “incredibly challenging” to gather the full evidence it needed from the card schemes which “may ultimately impact our ability to meet our published timetable”.

For instance, personnel changes at Visa and Mastercard delayed the agency’s work, as well as the lack of UK specific financial information and the fact that the card networks could not retrieve all the data in the timescales originally asked for.

Hemsley said these challenges have also affected the regulator’s work on cross-border interchange fees, which were looking at sudden interchange fee hikes for cross-border transactions following Brexit.

As reported by VIXIO, Mastercard and Visa increased UK-EEA cross-border interchange fees for card-not-present (CNP) transactions using consumer debit and credit cards from 0.2 percent and 0.3 percent to 1.15 percent and 1.5 percent respectively. 

Sanctions Enforcement Good, But Needs Improving, Says Dutch Regulator

De Nederlandsche Bank (DNB), the Dutch central bank, has provided feedback on the findings of a cross-sectoral study that looks at compliance with sanctions regulations, as well as the effectiveness of sanction screening systems. 

Among its findings, the DNB said that compliance with EU and UN sanctions is “generally good”, but compliance with sanctions specific to the Netherlands itself requires improvement. 

The DNB also warns that some firms are paying “too little attention” to sanctions circumvention; for example, when sanctioned goods are imported via a third country. 

Meanwhile, the regulator confirmed that it has raised the issue of minority shareholders with the European Commission, requesting more clarity on the matter. 

According to the DNB, some institutions do not apply sanctions screening to their clients' minority shareholders, as is supposed to be the case in local law. 

The regulator believes that this is necessary to be able to detect sanctioned shareholders in Dutch companies. 

India's Central Bank Opens New Consultation On Cyber Resilience, Digital Payment Security

The Reserve Bank of India (RBI) has invited comments on its draft Master Directions on Cyber Resilience and Digital Payment Security Controls for Payment System Operators (PSOs).

The draft directions apply to non-bank PSOs of all sizes and cover a wide range of areas, including governance practices, monitoring and management of cybersecurity risks, and measures for ensuring safe and secure digital transactions.

PSOs are asked to ensure that specific controls are implemented to mitigate risks such as inventory management, ID and access management, incident response, business continuity and vendor risk.

The introduction of new Master Directions was announced in the RBI’s Statement on Developmental and Regulatory Policies in April last year.

Last month, as covered by VIXIO, the RBI revealed in its annual report that it is working on a new “lightweight” payment system that could be rolled out during wars, natural disasters and other major outages.

No Greenwashing In Payments Yet, Says EBA

A new report by the European Banking Authority (EBA) says the number of potential greenwashing cases involving EU banks are growing but there have been no greenwashing cases identified in payment services or crypto-assets yet. 

Looking at the progress on greenwashing in the financial sector, the EBA acknowledges it is still unclear how greenwashing could affect payment service providers (PSPs).

More than one-quarter (26.6 percent) of the competent authorities said they believe greenwashing could pose a reputational risk to PSPs, followed by operational risk (16.7 percent), with the least impact perceived to be on credit, market and liquidity risks (3.3 percent each).

By comparison, 80 percent of competent authorities considered greenwashing to be a relevant risk for credit institutions.

Examples of greenwashing for payment firms may include a misleading commitment by a PSP to compensate carbon emissions produced by crypto transactions, or a crypto-assets provider making a public statement to move to an eco-friendlier method despite the technology not yet being there to support the transition.

Deadline Extension For UK CBDC Consultation

HM Treasury and the Bank of England have given extra time to those who wish to respond to their joint consultation on a UK central bank digital currency (CBDC), also known as the digital pound.

The consultation paper makes the case for a UK CBDC and sets out the key features of various potential models.

The original deadline to respond was set at June 7, but this has now been extended to June 30, due to the omission of a question regarding whether non-UK residents should have access to a UK CBDC.

If necessary, those who have already submitted responses to the consultation will be able to add additional comments.

Former World Leaders Group Calls For Global Cooperation On AI Regulation

A group that includes former heads of state and former secretary-generals of the UN has called for international cooperation to balance the risks and benefits of artificial intelligence (AI).

Founded by Nelson Mandela in 2007, the group known as The Elders said that states must “urgently” work together to develop regulation that takes advantage of the benefits of AI while limiting its downsides.

“A new global architecture is needed to manage these powerful technologies within robust safety protocols, drawing on the model of the Nuclear Non-Proliferation Treaty and the International Atomic Energy Agency (IAEA),” they said.

“These guardrails must ensure AI is used in ways consistent with international law and human rights treaties. AI’s benefits must also be shared with poorer countries.”

Chaired by former Irish president Mary Robinson, the group also includes former UN secretary-general Ban Ki Moon and former Colombian president Juan Manuel Santos.

Dutch Finance Minister To Take Action On Cash 

Fees should not be charged at ATMs and the accessibility of ATMs should be guaranteed, according to Sigrid Kaag, the Netherlands’ minister of finance. 

"Access to cash is crucial. Not everyone finds their way in digital payments. Cash must remain available, accessible and affordable for them,” said Kaag. “In addition, cash is an important fallback option in the event of failures in electronic payment traffic."

Now, legislation is in the works, Kaag confirmed. 

Together with De Nederlandsche Bank, the Dutch central bank, the minister has urged banks to take their social responsibility and to jointly ensure that access to cash services and their affordability for consumers and retailers does not decrease further until the announced legislation has become applicable.

Congressional Republicans Probe FTC Chair

The Oversight and Accountability Committee of the Republican-controlled House has opened an investigation into Lina Khan, chairwoman of the US Federal Trade Commission (FTC).

Khan, a fierce bigtech critic, has been pushing for strong regulatory actions since taking over the leadership of the consumer protection agency. 

She has placed a particular emphasis on consumer data privacy and security, issued statements on what constitutes unfair and deceptive practices in buy now, pay later (BNPL) products and recurring payments, and concluded enforcement actions against several financial services firms, including Mastercard and Chargebacks911.

The agency has been running under sole Democratic control since February when Republican commissioner Christine Wilson resigned, accusing Khan of abusing her power and disregarding the rule of law.

This move left the FTC board with three Democrats and two vacant Republican seats.

The Oversight Committee is now saying it will investigate whether the FTC has become “a rogue agency” and whether Khan “bulldozes procedural safeguards,” “consolidates agency power”, “unilaterally asserts and expands regulatory authority” and “abandons bipartisan and open processes”.

The inquiry also looks at potential White House influence on Khan’s actions.

Cash To Cashless Behaviour Slows In Switzerland

The shift from cash to cashless payment methods is continuing, albeit at a slower pace than in previous years, according to the Swiss National Bank’s (SNB) latest payments survey

Some 96 percent of respondents to the SNB stated that they keep cash in their wallets or at home to cover day-to-day expenses. 

Cash use for everyday payments is now at 36 percent, in comparison with 43 percent in 2020 and 70 percent in 2017. 

Meanwhile, the SNB has found that mobile app payments are becoming more frequent, at 11 percent. Depending on the area of application, the central bank said that mobile payment apps are replacing both cash and cashless payment instruments.

Debt cards, in comparison, make up 33 percent of everyday transactions, while credit cards account for 13 percent, according to the SNB. 

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