European Regulators all share a strong will to address de-risking practices in the European Union as they can leave customers without access to the financial system.
Back in September 2020, the European Commission (EC) published a Retail Payment Strategy in which it set its objectives to improve cross-border payments involving non-EU countries, including remittances, to become faster, more affordable, more accessible, more transparent and more convenient. In this groundbreaking strategy, the EC proposed a mix of actions to facilitate remittances:

• Improve linkages between European systems such as TARGET Instant Payment System (TIPS) and instant payment systems of third countries,
• Adoption of ISO 20022 to facilitate inclusion of richer data in payment systems,
• Use of GPI of SWIFT as it facilitates the tracking of cross-border payments in real time,
• And the introduction of a possible maximum execution time for remittances.

The European Banking Authority (EBA)² referred to de-risking back in 2016 to mitigate risks of financial exclusion of asylum seekers in situations where they were unable to provide the standard Customer Due diligence document. Despite this initial action, it became clear that more comprehensive action was needed to address unwarranted de-risking, given its impact on consumers. In May 2020, the EBA consulted the public at large to better understand the drivers, scale and the impact on de-risking. Payments in Europe (PIE) sent extensive comments back to the EBA.

In March 2021, the EBA issued three regulatory instruments to address de-risking practices based on the evidence gathered from the market:
First, the EBA published an Opinion in which it concluded that de-risking is a continuing trend that has substantial implications from a ML/TF risk, consumer protection and financial stability point of view.

Second, the EBA published its revised ML/Risk Factor Guidelines which clarify that the application of a risk-based approach To AML/CFT does not require financial institutions to “refuse or terminate business relationships with entire categories of customers that are considered to present higher ML/TF risk”. Instead, the Guidelines provide clear guidance on the actions financial institutions should take to properly manage their risks.

The EBA also launched a public consultation on potential changes to its existing guidelines on risk-based AML/CFT supervision to request European competent authorities (in each Member State) to address de-risking in their own risk assessments. Of particular interest is that the EBA requires these competent authorities to pay particular attention to the way financial institutions manage ML/TF risks and encourages them to make sure the financial institutions they supervise have a good understanding of the regulatory expectations.

As part of its monitoring activities, Payment in Europe (PIE) follows these developments very closely to support its clients’ activities in the EU.

Pascale-Marie Brien
Nina Huelsken

¹ The European Commission is the executive body of the European Union, responsible for initiating and enforcing the laws of the EU.
² The EBA is an independent EU authority which ensures effective and consistent prudential regulation and supervision across the European banking sector.

Excerpt from an interview done by IMTC in 2021 to Pascale-Marie Brien and Nina Huelsken:

Q: The phenomenon of de risking is a very big problem for several industries – the remittance industry is especially strongly affected. How come?

Banks find themselves in the position to re-evaluate their ” risk appetite”. With some of the bigger ML scandals of the near past, they need to protect their brand and reputation more. Not only remitters are being de- risked but many other financial services as well.
One might ask if banks want to keep their competition under control.

Q: How do the institutions in Brussels react to the topic?

EBA asked for a consultation in June 2020 to understand the impact of de risking and act in favour of financial services and their clients. Their results were made public in March 2021.
A hearing was organized on 22 April to gather stakeholders’ views on the issue (comments on the results of the hearing).
Next to EBA, the European Commission has made remittances one of its priorities in its Retail Payments Strategy. The European Commission objective is for “cross-border payments involving non-EU countries, including remittances, to become faster, more affordable, more accessible, transparent and convenient”.

What is the Commission proposing?

• A direct access of non-bank payment service providers to payment systems, hence bringing an end to their dependencies vis a vis the banking industry. Today’s indirect access can create operational challenges, notably in terms of compliance with AML/CTF requirements. In more detail: e-money institutions and payment institutions are not currently deemed eligible participants at EU level. This does not prevent some Member States from having authorized a direct access. The Commission intends to harmonize a direct access to payment systems at a pan-European level. On 12 February, the EC launched a public consultation on the review of the Settlement Finality Directive (SFD). The Commission will report by 28 June 2021 sent a report to the other European institutions and propose measures to amend the SFD and provide concrete solutions to the problems currently faced by remitters. This consultation was open until 7 June 2O21.
• In order to facilitating the tracking of cross-border transactions, PSPs should use the Global Payment Initiative of SWIFT. With that, the originating PSP can better estimate and disclose the maximum execution time for a CB payment.
• The Commission could extend the maximum execution time for intra-European transactions to the so-called “one leg” transactions, with a possible standardization in the messaging.
• Last but not least, the Commission will actively support any initiative that will facilitate the digitalization of remittances, especially in low- and middle-income countries. The EC want to play a key role along national regulators and multilateral institutions to lower the cost of international remittances.

Q: What are the main results?

Competent authorities should remind the financial institutions under their supervision that EBA’s Risk Factors Guidelines are clear that the application of a risk-based approach does not require financial institutions to refuse or terminate business relationships with entire categories of customers that are considered to present high ML/TF risk, as the risk associated with individual business relationships may vary, even within one category. The guidelines set out factors that financial institutions should consider when assessing the ML/TF risk associated with a business relationship and explain the need to carefully balance financial inclusion with the need to mitigate ML/TF risk. As de-risking of certain sectors is often caused by the lack of trust in the quality of AML/CFT systems and controls implemented by the financial institutions in that sector, the EBA proposes that competent authorities should consider how the level of control could be improved. This may include increased supervisory activities in the sector or additional guidance to the sector.

Q: What else have they done?

The EBA issued its revised ML/TF Risk Factors Guidelines, in which it introduced three new guidelines relating to financial institutions and de-risking. Below we summarise the key points of these three new guidelines:
The application of a risk-based approach does not require financial institutions to refuse, or terminate, business relationships with entire categories of customers that are considered to present higher ML/TF risk.
Financial institutions should put in place appropriate and risk-sensitive policies and procedures to ensure that their approach to applying customer due diligence measures does not result in unduly denying legitimate customers access to financial services. Where a customer has legitimate reasons for being unable to provide traditional forms of identity documentation, financial institutions should consider mitigating ML/TF risk in other ways, including by:
1. adjusting the level and intensity of monitoring in a way that is proportionate to the ML/TF risk associated with the customer;
2. offering only basic financial products and services, which restrict the ability of users to abuse these products and services for financial crime purposes.

Q: What do firms need to know when considering to enter the EU markets?

Besides the normal procedures of market entry steps and analysis they are highly recommended to have someone managing the stakeholder relations and can provide insights to certain topics such as de risking/ AML and the regulatory backgrounds to avoid negative experiences in a territory that is unknown to the company.