Uncertainty over UK implementation of PSD2 is stifling innovation, businesses warn

The Financial Conduct Authority (FCA) referenced the warning (23-page / 195KB PDF) in a document that summarises the responses it received from businesses to a request it made to businesses for details of the regulations they believe are acting as barriers to innovation across digital and mobile services.

"A lack of clarity on the UK’s eventual interpretation of the Directive, and the uncertainty around its related costs and potential outcomes, is stalling their willingness to innovate," the FCA said in its paper.

The FCA said it will publish "more useful updates" about the work being done to implement PSD2 into UK law on its website and assured businesses that it was working to ensure its work on PSD2 was "as joined up as possible" with other initiatives being undertaken in relation to the payments market, such as the government-backed push for open banking APIs.

The regulator also reported that businesses had flagged their concerns that new EU data protection laws on the horizon could "prevent the development of emerging digital and mobile solutions" in the financial services market. The FCA said it had shared the concerns of businesses with the UK's data protection watchdog, the Information Commissioner's Office (ICO), and that the ICO said it is "ready to assist firms" in interpreting the new data protection rules.

Financial firms can also expect new guidance in relation to using third party cloud computing services in the summer, the FCA confirmed.

Other concerns that businesses raised were in relation to the ease with which firms could use digital and mobile channels to innovate in the financial advice market. They said a "lack of clarity over regulatory definitions of advice, guidance and personal recommendations were a barrier to the use of digital and mobile solutions", the FCA said.

The regulator's Financial Advice Market Review (FAMR) will "explore the issues raised", it said. An update on the FAMR is due to be published later this spring.

The FCA also vowed to help financial firms communicate more innovatively with consumers after reporting that businesses believe regulatory barriers are preventing them from doing so.

Firms said that consumers expect them to offer products via digital and mobile channels but there was "significant agreement" among the 45 respondents to the regulator's consultation "that regulatory requirements can inhibit firms from using a more innovative approach in how they communicate information to consumers", the FCA said.

"Detailed comments were made on aspects of the regulatory regime, including: specific rules on what constitutes a ‘durable medium’ for providing information to consumers; risk warning prominence for financial promotions, and; our recent guidance on the use of social media and how this applies to the ‘click-through approach’," the FCA said. "Most feedback urged a review of our rules and guidance on these matters."

The FCA said it plans to "address the issues" when it publishes a 'feedback statement' later this spring in response to a discussion paper it published last summer on smarter consumer communications.

In its latest paper the FCA also revealed that firms had highlighted issues around how to meet anti-money laundering (AML) obligations when engaging with customers via digital and mobile channels. Some firms said that existing guidelines on customer due diligence (CDD) checking for AML purposes "is not compatible with modern means of digital verification and may be inherently biased against digital solutions in general", the FCA said.

Firms also said there is a "perceived lack of clarity over the use of digital verification" within AML guidance and that this was "one of the main reasons" why firms have been "reluctant to utilise the many digital CDD solutions available" to-date, it said.

Financial services and technology law expert Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said that AML and know your customer checks are among the most challenging aspects financial firms face when operating in a mobile environment.

"With an increasing number of firms operating a mobile first channel strategy, improvements around this would help greatly," McFadyen said.

The FCA said it would work with the Treasury and the Joint Money Laundering Steering Group to ensure that the UK's implementation of new EU AML rules enables firms to use "digital solutions to meet AML requirements". The regulator also encouraged firms to work with the Government Digital Service as it considers how identity authentication tools, like the Verify system of digital identity, could be used "within the financial sector".

"We see the creation of high assurance digital identity as a significant step towards more modern, secure methods of verification," the FCA said. 

The FCA also confirmed that it is looking into whether distributed ledger technologies could be used to "aid firms in meeting their AML requirements".

Some firms also called on the FCA to "create a more ‘digitally conducive’ regulatory environment". The regulator said its new business plan will set out its priorities in relation to innovation but said it believes the existing regulatory regime already offers flexibility to firms to make use of new technology.

"We are keen to address, where possible, any areas of regulation that depend on the use of a particular technology and could therefore inhibit new innovation," the FCA said. "However, we believe that the use of principles and broad rules in our Handbook provides flexibility for the emergence of new technology. It also offers greater durability than technology-specific guidance, which risks becoming outdated as innovation continues."