This is a transcript of the podcast Ben Arram, Payments Practice Lead, Bovill between GRIP Senior Report Carmen Cracknell and Ben Arram, who provides specialist advice and support at Bovill.
[INTRO]
Carmen Cracknell: Welcome back to the GRIP Podcast. Today I’m joined by Ben Arram Practice Lead for Payments at Financial Services Regulatory Consultancy, Bovill Ben, could you just start by telling us a bit about yourself and how you found yourself at Bovill?
Ben Arram: Yes, absolutely. So I actually started out, believe it or not, as an electronic systems engineer. Many, many years ago I’m going to betray my age a little bit with some of the narrative I’m going to run through of my background. And I was actually working for a large but niche research and development firm and very heavily involved in the development of the framework for what we now would know as smartphones, but were very conceptual back then, which we’d been tasked to do as part of a big group for the European Commission. So little did I know back then when I was working very much in technology space that that would perhaps be the precursor for my path into regulation and standards in a more financial services oriented bent. And from there, there was a bit of a tumultuous time in the mobile technology sector. And I thought maybe I should get myself a professional qualification and ended up partly by accident, as it so happens, becoming a chartered accountant.
And like many chartered accountants decided that audit was perhaps not my future, as great a qualification as it was. And so it seemed like a great opportunity to then move into financial services. And I entered the banking sector where I spent more than 10 years working for a number of UK and overseas global banks in roles ranging from regulatory finance through to strategic capital management, risk, prudential regulation. And I saw some really interesting things over that time. I was at RBS during the 2007, during the global financial crisis, and I was had a front row seat for the whole ABN acquisition and everything that followed.
I was at a South African bank when they launched this concept following that of recovery and resolution planning and was actually building out from almost a blank sheet of paper that what should a firm, what should a bank do when the wheels do fall off as the rules were pretty much being written. And then from there, I moved across from a wholesale space into a retail space, spent several years in prudential and capital management at a very large UK retail bank, and then moved from there. I thought that actually, it’s great being involved in it in the in-house world. But actually, I want to be able to really sort of branch out and see what other opportunities there are in the financial services in the regulatory space. And I moved to Bovill and it was a great move. Bovill is a fantastic place to be. We have a real breadth of expertise.
I learned something new every day from my colleagues, from what’s happening in the industry. And I moved across a few areas. So I started off in a banking space, and not surprisingly, spent a little bit of time in Prudential, again that played to some of my background. And I actually spent a number of years in capital markets at Bovill And during that time, I was in the unique position of being able to work firsthand with some financial market infrastructures, and have continued to do that since then in certain areas. But what was really striking me, and what Bovill was really great at being able to also identify and maneuver around, was that there was this real growth area in the payments sector. Payments and E-Money firms were really coming into their own. And there was lots of technology that was driving innovation in a few areas, peer-to-peer payments, for example. But payments was one that really stood out. And we were established, and we were doing some great things. But we really wanted to provide the same breadth and depth of services that we can to all of our sectors by building out even more of a proposition. So we’ve been in the area for a while. We’ve been servicing clients ranging from small startups right the way through to some global EMI applications. And last year, we launched our payments practice, which I lead. But we’re still involved in financial market infrastructures and the overlap across the sector. And increasingly, as we’ll talk about, I think, today, some of the regulatory innovations that we’re seeing in developments are becoming, to an extent, less sector agnostic. And so that understanding and being able to have a hands-on view and have some, you know, be able to rely on some great colleagues to really service all the financial services requirements, everything that regulators are looking at, I think, is just really exciting place to be now.
Carmen Cracknell: Well, it’s great to have you here. And that is such a broad range of experience in tech. So it’s going to be really interesting to chat. I’ll start by talking about this latest letter from the FCA, the Priorities for Payments Firms. What prompted this letter? I believe it came out in March. Why now?
Ben Arram: Well, I think that the FCA have been citing the payments sector, payments and E-Money as an area where it is a real area for positive disruption. It plays to one of the FCA’s own focus areas in terms of what they’re trying to drive. This idea of banking as a service and enabling consumers, perhaps the unbanked consumers who need to have access to this evolving technology-driven financial market to enable these people to actually get the services they need. And that’s great. But with development, with growth, with some really very, very clever, smart people that I couldn’t even try to understand what they’re doing in terms of the technology they’re developing comes risk. And when you have risk, and when you have, particularly, for example, vulnerable customers, when you have the evolving crypto markets that also need themselves to have access to a fiat infrastructure, then it’s about looking at how that is managed and effectively grown and supported. And so I think what we’ve seen over the last few years, starting with COVID, in fact, is we’ve seen a real focus on supporting and enabling that growth in the payments and the money space, whilst also really ensuring that firms understand both new entrants and incumbents what does it mean to be a regulated firm? And moreover, where are the risks that are starting to perhaps feel maybe a little less comfortable for the regulators? And so they’ve gone back and they’ve doubled down, perhaps, on a few areas. So operational resilience is not new, it came in over a year ago, that’s been reinforced. Yeah, we’ve seen some ever evolving fraud strategies and some unintended consequences of firms perhaps trying to manage their fraud risk and ending up with perhaps not being able to service their customers properly. And of course, we can’t forget consumer duty. We know there’s been a lot of talk around that. It’s going to continue to be a hot topic for a while. So that’s been woven through. And I think the other thing which the FCA have really identified now with a lot of this exciting developments is there’s always the potential for having people running these firms, maybe because they’ve grown, maybe because they started off in a great place, but they’ve expanded slightly faster than people might have thought. Have you got people actually running the show in these firms who really get it, who really understand what the regulators are looking for? So I think all of that’s woven through this portfolio letter to set out some clearer expectations that firms need to be striving towards.
Carmen Cracknell: And is it to some extent, do you think triggered by some high profile cases like FTX, Silicon Valley Bank, does that have anything to do with it as well?
Ben Arram: I think it’s no coincidence that we saw the portfolio letter come out a week after the FCA also published a report on fast growing firms, which included the payment sector. And there will always be no regulatory regime can be perfect. There are always going to be things that either either where bad actors find ways to manipulate and find their way through or indeed just market moves. We’ve seen who would have predicted if we go back three or four years that we would go through a global pandemic followed by then a European war. And people talk about these black swan events and how firms need to look at their severe yet plausible scenarios. And I dare say that if we go back to 2019 and somebody said, well, I’m going to plan in my risk management framework, I’m going to plan for a global pandemic, European war. And then let’s factor in all the impacts of Brexit and food shortages. You would probably have quite reasonably had a board turn around and say to the chief risk officer, do you think you need to tone it down a little bit? Yet here we are.
Carmen Cracknell: Absolutely. You did mention crypto, and I just wanted to ask you how much of what you focus on is related to crypto?
Ben Arram: Well, we’re increasingly seeing crypto come into play. And actually, one of the things that I see as really encouraging in the UK is that the FCA are one of the regulatory authorities, one of probably only a couple that really come to mind that have been embracing ways of moving this forward. So we now have the concept of an e-token, which is a stable coin based e-money representation. And we’re seeing obviously in Europe, we’re seeing MiCA and the evolution there. But there are some challenges that we’re also observing in terms of how firms then need to align the various regulations, the how they can set up an EMI, for example, on the PSD2 still aligns with MiCA In the UK, we’re seeing a little bit more forward thinking perhaps in the regulation approach.
Maybe a corollary to that, of course, is we, as I’m sure you’re aware, the recent launch of the new finprom rules, financial promotion rules for crypto firms. And that we know presents a whole different set of challenges. It’s a very, very tight timeline. There’s a four month implementation window that’s been set by Treasury to do for firms to get themselves ready. And so we’re now seeing this interesting space where you have firms that either are not even authorized in their own right, but registered for the money laundering rules as crypto firms. Maybe some of these firms are looking to work with or enter into the payment space. So there’s a lot of overlap and a lot of challenge that goes around that. I think quite interestingly, some of the messaging that we’ve had firsthand and very clearly from the FCA around this is this is where firms need to actually bring in that external support. There’s a very strong message of having the right knowledge and experience to support building up firms’ credentials because the rules aren’t going away. They’re not going to die down. I don’t think they should. I’m not saying that simply because I’m a regulatory consultant, but we’re all trying to get the markets to work in the best way for everybody. And as you quite rightly pointed out, there have been a few unfortunate events over the last even few months that can have a catastrophic event for the markets. But also consumers, users and consumers, it snowballs very quickly. So real overlap with the payment space, the FinTech side of things is really prominent.
But I think we’re yet to see exactly how that expansion of crypto and payments together with this EMI crypto concept can really take off, and I’m sure it will.
Carmen Cracknell: And the FCA has also emphasized ESG and how important it is for companies to work on that. How does that apply to payments companies? What standards do they need to meet? And are those standards clear enough, do you think?
Ben Arram: So you’re absolutely right. And actually, that was also drawn out in the portfolio letter. One could look at it and feel that it was slightly more of a throwaway comment at the end. So we haven’t yet seen absolute clarity in terms of what does that look like? But ultimately, I think there’s no mystery about the fact that we all need to be behaving in an appropriate way. It comes down to that sort of behavioral aspect. Now with the crypto, we’re looking at with the payment space, I should say with payments and the e-money space, these often are tech firms, a lot of them are able to be quite agile and leading edge. That means that they can move away from some of the traditional, if we’re looking at the environmental side of traditional carbon consuming practices of lots of paperwork, things that we’re running virtually. But then the flip side of that is that then there is less of an ability to have that face to face customer contact. And so an example would be purely app based setup. And actually, this is something that’s been drawn out by the FCA’s portfolio letter for consumer duty for payments, where they’re saying, look, it’s great that you can be efficient and you can run your firms within this very, very virtual setup and I can, although it’s not mentioned, you could draw a parallel with the environmental benefits, you reduce your unnecessary costs and carbon usage. And you can even play it through and saying, and that’s socially more inclusive, because you can reach more people, you can make it more accessible. But equally, you can make it less accessible, because you may be shutting out sectors in the market, you may not be able to, your product may not be accessible to more vulnerable customers or to particular segments of the market that aren’t familiar or comfortable with using technology. So again, how do you bridge that gap? And these are all the challenges I think are playing through. And then when we get to the governance side, I think that loops back very much so as well to a big drive again in the portfolio letter. And this is not a new concept of how are you making sure that your firm, if you’re a payment’s firm, or e-money firm, how are you making sure that you really are running things the right way? Is your governance structure where it should be? What’s falling through the cracks? Are you doing the basics? And it’s very, very, so easy to get into the run of things. And small startup directors are talking to each other, they’re having coffee every morning, they know what’s going on. And then in the blink of an eye, they’ve expanded, they’ve gone from being perhaps a small payment institution, now they’re authorized, now they’ve got safeguarding obligations. Now, are they really, are they documenting their board minutes? Are they actually having, they’ve got proper terms of reference in place? Where’s the governance around all this coming through? And I think this is one of the other risks that we’re seeing with such a fast growing area, that these things can perhaps be glossed over, as important as they may be in the earlier days of a firm getting themselves up and running.
Carmen Cracknell: And I like to ask this, do you think that acronym maybe should be split up? A lot of people criticize it for being too kind of wide ranging, what do you think?
Ben Arram: I think that with, I think it’s a fair, it’s a fair challenge. I think that what I tend to see with a lot of these acronyms, certainly from clients that I’m talking to is, is then it becomes more of a concept. So people get less into the breakdown of what the E, the S and the G stand for and think more holistically, and what does it mean for them and how can they play it through? So I think actually I would go back more to your earlier point around is there clarity over what it really means and what’s expected? And I think that’s where I would suggest that the, so perhaps the priority should be in terms of firms understanding what’s expected of them, and arguably regulators being able to set out their agenda and say, this is what it really does mean for you, this, rather than getting into acronyms. And we have lots of acronyms that fly around in all sectors and lots of terms that can be used for so many different things.
And actually, I think the agenda is less about the acronym and more about what do you really mean?
Carmen Cracknell: Yeah, definitely. Going back to consumer duty, the FCA mentions harm to consumers, in particular, customer support is mentioned. What is the harm and what do good consumer outcomes look like?
Ben Arram: So that’s a really good question. So I think that there is a really interesting point when you look at what is meant by harm. And I’d like to perhaps give some examples of some of the unintended consequences as well as the good outcomes that the regulator is seeking. And these are inevitable when you have something like this, the consumer duty at launch. So the harm we’re talking about is people not being able to consumers and indeed for a number of sectors, including payments, new money, we’re talking not just about individuals, you and I were talking about micro enterprises, small charities as well. So it’s quite a broad remit. And we’re talking about harms such as people not being able to access their funds. We’re talking about how people not having the right products and services and being perhaps introduced or migrating from a legacy product from maybe there has been a merger, a takeover. And all of a sudden, they’ve got a card in their pocket, which they’re used to using it may be a card that they use for daily spending. And it’s not the most cost effective card for them. And so a couple of examples around that may be, let’s say that you’re you’ve got a card that now has evolved in the target market is for higher earners, higher people who can afford to load up with a big wad of cash.
Every so often, the charging structure is designed around that. Now, you may maybe have had this card for a long time. It may be a time where your vulnerable customers are said to pay a bit of cash or unbanked, and you don’t qualify for credit. So you’re struggling to find somebody that will give you a prepaid card. And you don’t have the funds to load up on a regular basis. And so and this this ties back to an example of the FCA themselves have alluded to. So each time you load your cards you’re getting charged disproportionately more than that higher earner So now what’s the right thing to do here? So clearly, there’s harm being caused. Somebody’s got a product, it’s not the right product for them. And the vulnerable customers who perhaps aren’t able to access other products are now being penalized for their vulnerability. Now, if you took consumer duty, you know, to in the purest raw sense, and didn’t apply a bit more broader thinking around it, you could say, well, we need to move these customers off, they’re not we’re not serving those customers, they’ve got the wrong product. And the right thing is to say our product is not designed for you. So off you go, we’re not going to bind you to any contractual terms, you’re free to go and find another provider. But now you’ve potentially got somebody who they can’t afford to pay for the bus fare to get to work to pay the charges they’ve got on this card that they can’t really afford to keep. And around it goes. So customer harm, I think is quite a complex idea. And I think it’s, it’s quite, it is quite a challenge for firms to really understand what that looks like.
Particularly, as I mentioned before, if you’ve got, let’s say an EMI with lots of distributors, now distributors, in the concept of e money, and the electronic money regulations, these are firms that are not themselves regulated, they’re a bit like a front door to an EMI. So they can provide the door to let somebody else access the EMI services. It’s a really nice way for many startups to perhaps test the market. And so the responsibility rests with the EMI. But indeed, they’ve got lots of distributors, they maybe have lots of agents. So very, very quickly, one EMI could be servicing a huge array of customers. And so start making these decisions in even though there has been an implementation window. These are quite difficult things to conceptualize. Yeah, and to do the right thing.
Carmen Cracknell: Yeah, and I, I’ve been speaking to a lot of different people recently, who’ve, who’ve been critical of the consumer duty, it’s coming really soon. And they’ve said there’s a lack of clarity, asking firms to set their own standards. Like you say, with with some EMI’s, they’re distributors who are not regulated. How are you helping firms to navigate the consumer duty?
Ben Arram: So within that, there are a few ways of looking at this. So how we are helping firms is we are, we’re in a very, very good position to look across all sectors, not just the payments and e-money sector. So we currently and have been since the the new rules were just a mere twinkle in the FCA’s eye we’ve been working with clients to help them build out appropriate frameworks, consumer duty frameworks. And what that means is we can see what the the industry standards are, we can see what the challenges are. And then we can play that back to clients to help them understand where they, they perhaps could be benchmarking themselves to hit that industry standard to understand what what good looks like. And there are some challenges, you’re right, the the lack of clarity is playing through.
So the the idea of asking firms that have manufacturers to to gather information from the manufacturers, but then there’s no standard or guidance as to what that information looks like. So there’s a real unlevel playing field in terms of the information flow that people are working with. And we perhaps it’s worth going back a step to how the regulators are operating now. And it’s there’s been a real move over quite some number of years now with the UK regulators. And this is the FCA, PRA and Bank of England’s obviously working very closely on all this sort of principles based approach. And when you’re working on a principle based regulatory approach, then that tends to shy away from giving very, very defined step by step painting by numbers regulation. And there are pros and cons of this, of course, and the industry regularly, when things come out like consumer duty, we saw the same result resilient, operational resilience, the industry quite rightly push back and say, tell us what to do? What what should we be? You know, which numbers should we be slotting in? You know, what information should we be sharing? What, what aspects of our distribution chain should we be looking through?
And I think it’s also looking at it, sympathetically from the regulators point of view, it’s quite difficult then when you’ve already got an existing framework, and don’t forget, we’ve got some number of regulatory protections, if you like, in place for consumers to then play something across that works for every sector of the financial services industry. And what we tend to find, and we’ve seen this before, it is not a new concept, I certainly saw it with recovery and revolution planning, as everyone I was working on that many years ago, is the regulators use the the industry feedback, if you like, to calibrate. And I think there is a recognition and quite a humble one, if you could, in fact, as a regulator saying, look, we want to do something that conceptually makes a lot of sense, we want good outcomes for consumers. And we think that we know what that should look like. But arguably, until we see it used in anger, and until we see what’s coming back from the industry, we see how firms are implementing this, we may not have quite hit the nail on the head. And I think there is an understanding of that. And you then see that if there is a mismatch between what the industry is doing and what the regulators expect, in certain areas, then there will be some adjustments, there’ll be further guidance.
Arguably, and also a clear premise, I think, from our UK regulators that firms are given these principles, and they should have got the right knowledge and experience, understand how it plays through. So it’s, it works both ways.
Carmen Cracknell: Yeah, just moving on to AI, generative AI and this newest wave of innovation. How is it influencing financial services regulation? And can regulation keep up with the technology?
Ben Arram: Yeah, I think it’s having a massive influence. I’m very pleased to say that so far, I’ve not found that CHAP GPT can actually outdo my own regulatory knowledge and … policies and procedures. So I’m quite pleased about that for now. But I think that it’s, I think it’s like anything, it’s a force for better or for worse, it depends on how it’s being used. And I think the other thing with AI, it’s like anything else that is using that sort of technology, to an extent, is only as good as what we put in and how you tell it to operate. And so I think that it is, there are some really great examples of firms using AI to watch spending patterns. Again, I’ve touched on vulnerable customers already, but an EMI that has AI watching people’s spending and usage of their pre-payment card, for example, maybe they can use that to send an alert back to certain customers to warn them that they may be entering into bad spending habits.
Maybe they are using their cards to develop poor habits in terms of maybe they’ve got some excess gambling that’s taking place and that’s ramping up and they can be alerts that are more difficult to monitor when you’re just running standards, transaction processing. Then the regulators can use it and are using it very much. So again, with the raft of data they’re collecting every single month from firms through the returns that are coming in through, and numbers are much easier to manage, of course. But when you’re looking at less tangible things, moving out of the payment space, if you’re getting iCaRAs coming in for firms, so these are the capital and risk assessments that are coming back for firms under the new prudential, it’s not some new prudential regime for other firms, non-payment firms. If you’re looking at firms submitting in the payment space wind-down plans, then being able to take more word-based documents and more theoretical conceptual piece of information that the regulators want to see and use technology to get under the skin of it and do the work that many humans would struggle to do and then pass it back to humans that can then use their own experience to play it through. That’s all really powerful and I think there’s always going to be a bit of a cat and mouse within anything that’s regulation, right? You have cat and mouse, you have people thinking of AI ways of trying to perhaps circumvent the rules in some way and the regulators will try to move around it.
But I think there’s a real positive story coming out, we saw the discussion paper not so long ago from the UK regulators saying that this is how we can see it playing through in the industry, it’s been adopted by a huge segment of financial services already. So where can it work well, where can we use it as regulators and what do we need to watch out for? And I think one of the things that’s also worth bearing in mind, I would suggest, is from a regulation point of view, you don’t necessarily need to have somebody that really understands every aspect of the code that’s being written by every financial services firm. What you need to do is you need to have an understanding of what is the AI there to do, how is it being used, what’s going in and what’s coming out and that perhaps is enough to then be able to take a view as to whether it’s working, whether it’s not and whether there’s more that needs to be done based on a regulatory perspective and also confirms to ensure that they don’t perhaps create their own catastrophic implosion which is, yeah, we’ve seen these things before, again, financial crisis was a good example of an element of that.
Carmen Cracknell: Yeah, it’s good to hear AI described in ways that it can be a force for good. Just to end, I guess, with a broader question, how has the financial regulatory landscape changed in the last 10 years? What are the biggest issues you’ve seen emerge?
Ben Arram: I think in terms of issues, I think it is about staying from the regulation landscape, it’s about staying ahead of that evolution across all sectors and understanding this big challenge, understanding what it is as a regulator, you’re being asked to regulate as a firm, understanding what as the landscape has changed, whether what you’re developing your new products, your new services, whether they fall into the regulatory perimeter and if they do, how? That’s very, very nuanced and something that we, almost on a daily basis, are talking to clients about and indeed are watching and involved in what we’re seeing from the regulator on that side. I think one of the other challenges, of course, is regulation, understandably, moves quite slowly. These are not knee-jerk reactions. It would be naive to think that something like consumer duty, we know that that’s not something that was thought up a year ago and suddenly launched on people. These things do take time to come about and, of course, things change. I can give a good example when I was working a few years ago on some work around CSDR which is a central securities depository regulation.
This was back in the, that was onshore in the pre-Brexit days and there was a requirement that certain financial market infrastructures had to look at their board composition and they had to increase the underrepresented gender on their board. Now, that then, when it was written, some years before, made perfect sense. If we look at the world we live in now and how things have changed, I would fully imagine there’d be quite a lot of challenge. Why are we looking just at gender? What other characteristics should we be thinking about? From the industry’s point of view, especially if we’re looking at financial market infrastructures where there are only very few of these entities around, rightly or wrongly, and I pass no judgment on this, but we know first-hand that the industry was saying, well, we’d love to change, in this case, our gender representation, but the pool of people with experience, because there are so few entities out there that do this, is very small.
Unfortunately, we don’t have the luxury of being able to pick from a wider gender pool, but if I do start changing my gender hiring policy, is the regulator going to tell me I’ve hired the wrong people? So, again, good intentions, but perhaps it’s almost like an oil tanker. It takes so long to get moving that by the time you’ve decided you want to change direction, it’s very, very hard to do, and then you end up with a wedge across the Suez Canal, perhaps. I think the industry is evolving, the technology and the regulation is evolving. I think there are lots of good people doing some really great things out there, and ultimately it’s about getting the right supporters, whether around it, understanding the nuances, and taking a very, very pragmatic and forward-looking approach to constantly stay ahead so you’re in the right place, you’ve got agility, and essentially so is you’re not getting caught out.
Carmen Cracknell: Awesome. Well, it was great to talk, Ben. Thanks so much for joining me. I think I’ve covered a lot of the, well, all my questions and a lot of the stuff you’re working on, but is there anything you wanted to add that I’ve missed?
Ben Arram: I think really the only thing I was going to just touch upon is that one of the things that we’re doing at Bovill at the moment is we are running various series of webinars at the moment, little mini bitesize webinars, if firms are interested in this, because we see the complexity, we see, for example, the portfolio letter throwing out a whole load of curveballs to certain firms that perhaps didn’t see it coming in quite the right way. Other firms that just see it really want to stay ahead. So we’re looking at a lot of the concepts we’ve talked about, governance, the gateway consumer duty. Over the next few months, we’re going to be running these on a regular basis. So please feel free to people listening want to have a look at the website and find out a bit more. And beyond that, really just don’t be afraid to ask questions and get the help that you need.
Carmen Cracknell: Awesome. Thanks very much for your time.
Ben Arram: Thank you very much. Thank you for having me on.
Carmen Cracknell: Take care.
Ben Arram: Thanks. Bye.
Carmen Cracknell: Cheers. Bye.