Greg Kilminster
Head of Product - Content
PSR consults on FPS APP scams compliance and monitoring
The Payment Systems Regulator (PSR) has released a consultation paper (CP) 24/3 regarding compliance and monitoring of the Faster Payments System (FPS) authorised push payments (APP) scams reimbursement requirement.
Some context
In 2023, the PSR published Policy Statements (PS) PS23/3 and PS23/4, which provided detailed guidelines for the FPS APP scams reimbursement requirement, effective from 7 October 2024.
The main goals of this policy are to:
- Incentivise the payment industry to invest more in end-to-end fraud prevention.
- Ensure swift reimbursement for most victims of APP fraud.
- Enhance confidence in the UK payment ecosystem.
- Support the PSR in its long-term ambition for Pay.UK to have a broader role in improving the rules governing Faster Payments and combating fraud as the payment system operator.
Key takeaways
In the consultation, the PSR suggests the following measures:
- Requiring all PSPs subject to the reimbursement requirement policy to report data and information to Pay.UK, enabling effective monitoring and compliance with the FPS reimbursement rules.
- Establishing requirements for data provision and management, including the proposal to mandate the use of Pay. UK’s reimbursement claim management system (RCMS) by PSPs for collating, retaining, and providing data.
- Requiring all PSPs to use the RCMS to facilitate effective communication regarding claims.
- Implementing a streamlined approach and phased reporting from the start of the policy.
- Imposing limits on what Pay.UK can do with the monitoring data and information received from PSPs, including disclosure.
It is important to note that these new requirements do not trigger changes to the powers exercised or the requirements already outlined in the specific directions concerning Faster Payments APP scam reimbursement.
Next steps
The deadline for responses is 28 May 2024.
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BIS speech on managing AI in banking
In a speech at the Institute of International Finance Global Outlook Forum, Pablo Hernández de Cos Chair of the Basel Committee on Banking Supervision (the committee) and Governor of the Bank of Spain, discussed the role of artificial intelligence and machine learning (AI/ML) in the banking sector.
Hernández de Cos began by asking a fundamental question: is the use of AI/ML in banking a net positive or negative to global financial stability, and perhaps society more generally? Whilst not promising to answer this, his main message is that the use of AI in banking raises important prudential and financial stability challenges.
The good...
Noting that AI/ML can enhance banks' operational efficiency, risk management, and product offerings, he outlined some good aspects of AI/ML:
- Enhanced pattern recognition and predictive capabilities, improving investment performance and credit access.
- Cost efficiencies, enabling multi-channel customer access and increased self-service without performance reduction.
- Improved accuracy and consistency in processing, reducing "operator error" in tasks like anti-money laundering monitoring.
- Streamlined customer interactions by eliminating manual steps, enhancing the client experience.
- Superior ability to handle large and unstructured datasets, allowing for more insightful customer understanding and tailored services.
He noted Project Aurora as a positive example of the above - developed by the BIS Innovation Hub, it uses AI to enhance money laundering transaction monitoring by identifying anomalies in transaction data that traditional methods cannot detect.
...and not so good
He also outlined questions and concerns, identifying three.
I/ Increased volume and diversity of data can pose challenges in data governance, affecting quality, security, and confidentiality. Users may lack knowledge of source details, and financial institutions may have limited oversight of the data being used. Addressing governance and ethical questions is essential before relying extensively on these models. Current models have increasingly relied on expanding data sets for accuracy improvement. However, the availability of unused high-quality data may soon be depleted. This suggests a growing need to explore alternative techniques to enhance these models and increase their utility in banking.
II/ AI/ML models can inherit biases and inaccuracies from their training data. While termed "hallucinations," these flaws can produce convincing yet erroneous outputs. Often, these models lack explainability, making it unclear why specific outputs are generated. This complexity raises questions about their reliability compared to traditional models. Banks and supervisors must assess the robustness and risk tolerance for using these models in critical banking services.
Key considerations include:
- evaluating the trade-offs between model accuracy and potential errors,
- understanding the need for mitigating risks from biased or incorrect outputs, and
- addressing the importance of explainability in model results.
III/ The AI/ML landscape increases banks' third-party dependency and concentration risks due to limited providers and cloud-based deployments. This reliance challenges banks' operational resilience. To mitigate these risks, third-party service providers should meet equivalent governance, risk management, and resilience standards as banks.
Questions of neutrality
Hernández de Cos also asked the question: are AI systems genuinely ‘neutral’ or do they simply magnify human behaviour and hence could a bank’s reliance on AI/ML models exacerbate the self-reinforcing features of the financial cycle, including most notably the procyclical evolution and amplification of risks at an aggregate level? He added that the very speed and ubiquity of AI/ML models could even “aggravate future financial stress episodes by exacerbating amplification mechanisms such as fire sales, runs and deleveraging”.
He also noted a potential indirect structural risk to banks from AI/ML models noting that AI/ML could reshape labour markets, possibly increasing income inequality and unemployment, which may affect banks' risk exposures. Monitoring these trends is crucial for effective risk management. For
Hernández de Cos then, “human judgment must remain a core part of banking, with banks’ own risk management and governance arrangements at the heart of it... The “A” in AI will always remain artificial [...] banking without banks, bankers or supervisors would be a brave new world.”
He concluded by noting that digital innovation will intensify financial interconnections across borders and sectors, requiring collaborative efforts to maintain global financial stability. Effective oversight of AI/ML in banking requires a broad collaboration involving various authorities, extending beyond central banks and bank supervisors.
Banks must, he said, proactively address AI/ML risks in their risk management and governance, but he emphasised the importance of human judgment. He finished by noting that the Committee has already issued guidance on AI/ML and will soon release a comprehensive report on digital finance implications for regulation and supervision.
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FSB consults on liquidity preparedness for margin and collateral calls
The Financial Stability Board (FSB) has released a consultation report on market participants’ liquidity preparedness for margin and collateral calls.
Some context
In 2022, the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) conducted a comprehensive review of margining practices in both centrally and non-centrally cleared markets.
The review revealed the need for further improvement in various areas, including the enhancement of liquidity preparedness among market participants and the identification of data gaps in regulatory reporting.
Consequently, the BCBS-CPMI-IOSCO recommended that the FSB carry out additional work to assist authorities in better monitoring these areas.
Key takeaways
The FSB’s consultation report presents eight policy recommendations to improve the liquidity preparedness of non-bank financial intermediation during times of stress, focusing on those with substantial exposures to spikes in margin and collateral calls.
The recommendations focus on:
- Non-bank market participants’ liquidity risk management practices and governance with respect to managing and mitigating exposures to spikes in margin and collateral calls
- Liquidity stress testing and scenario design for margin and collateral calls during normal market conditions, as well as in extreme but plausible stressed market conditions
- Ensuring sufficient collateral is available, as and when required.
Next steps
The FSB is inviting comments on this consultation report by 18 June 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform
FINRA experts share insights on the move to T+1 settlement
In a recent episode of the Financial Industry Regulatory Authority (FINRA) Unscripted podcast, James Barry, Director of Credit Regulation with FINRA’s Office of Financial and Operational Risk Policy, Bobby Gomez, a Senior Director with Market Regulation and Transparency Services’ Strategic Initiatives team, Mike MacPherson, a Senior Advisor in Member Supervision’s Risk Monitoring group, and John Nachmann, Associate General Counsel with the Office of General Counsel’s Regulatory Practice discussed the move to T+1. They talked about what all market participants need to be thinking about and testing ahead of the transition.
Some context
On 15 February 2023, the US Securities and Exchange Commission (SEC) adopted final requirements for the move to T+1 settlement for transactions in US cash equities, corporate debt, and unit investment trusts. FINRA then amended its rules to align with the new requirements. The rules come into effect on 28 May 2024.
The shift to T+1 settlement has significant implications for firms, investors, and regulators, and the interviewees in the podcast discussed various aspects of this change.
This summary will focus on their commentaries regarding firms’ main concerns, best practices, and implementation resources.
What are firms’ key concerns?
The affirmation and allocation process is the main concern for firms. Other concerns include client education and the impact of the change on international settlements, which will be on T+2, while domestic settlements will be on T+1.
What are the best practices for firms?
Engagement with firms has shown that they are doing everything possible to comply with T+1 settlement before 28 May. They are following the SIFMA playbook, forming governance and working groups, and working with internal and external stakeholders, including different clearing organisations.
According to MacPherson, firms should also engage in any available testing window and engage with the Depository Trust Company (DTC), making sure that testing is going as planned. They should explore other avenues, perhaps automated clearing house (ACH) payments.
Introducing firms should ensure their preparedness and understand their relationship with clearing firms, including clarifying responsibilities and communication regarding affirmation and timely settlement in case of insufficient funds in the account.
Firms should also use resources provided by regulators.
What actions has FINRA taken to facilitate implementation?
Besides ongoing outreach efforts, FINRA has expanded testing until the effective date; therefore, firms may test the extension system for T+1 until the 28th.
FINRA has also changed the time extensions allowed for DVP transactions related to DKs. Historically, FINRA only allowed two-day extensions, and only one of each extension was allowed. FINRA now allows two extensions for DVP DKs. This will give firms more time to manage the DK and settle the trade.
Finally, FINRA’s website has an investor-focused education piece about the transition to T+1. Firms can utilise this resource to educate their clients.
Thoughts on T+0
The podcast concluded with a discussion on T+0. The overall agreement was that the pace of everything is accelerating, and technically speaking, adopting T+0 might not be overly complex. However, transitioning to T+0 would necessitate a series of complex market structure changes across multiple financial markets, which would take some time.
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HKMA issues report on transaction monitoring systems and use of artificial intelligence
The Hong Kong Monetary Authority (HKMA) has published a report outlining key findings from a thematic review of Authorised Institutions’ (AIs) Transaction Monitoring (TM) systems. The objective was to enhance the efficiency and effectiveness of these systems within the AML/CFT (Anti-Money Laundering and Counter Financing of Terrorism) framework.
The review focused on the end-to-end process of designing, implementing, and optimising AI’s TM systems, with a particular emphasis on governance, data quality, detection scenarios, threshold setting, and periodic reviews. Furthermore, the review explored how AIs use artificial intelligence to improve the performance of TM systems and offers AML/CFT-specific guidance based on industry best practices.
The report summarises the key findings from the review, including various case studies, and offers insights to assist AIs in strengthening the design, implementation, and optimisation of their TM systems, which may involve adopting more advanced technologies. Additionally, the report shares examples of successful Regtech adoption cases that have demonstrated improved outcomes in relation to TM systems. These cases complement the use cases provided in recent technology publications by the HKMA.
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Key insights from MAS speech at FAST conference
Introduction
In a speech at the Financing Asia’s Transition (FAST) Conference 2024, Chia Der Jiun, Managing Director of the Monetary Authority of Singapore (MAS), highlighted critical aspects for bridging global climate ambitions with regional actions in Asia. The conference, co-organised by MAS, Temasek, and BlackRock, focused on the imperative need for collective action to address climate change in the Asia-Pacific region.
The urgency of climate action in Asia
The Asia-Pacific region accounts for half of global emissions, emphasising its pivotal role in global climate mitigation efforts. Despite the progress at COP28, global climate action remains insufficient to limit temperature rise to 1.5°C or below 2°C. The need for collective action is more pressing than ever, but it faces challenges due to economic slowdowns, inflation, and high debt levels.
Bridging action to address climate challenges
Chia highlighted three key areas to bridge action and meet the financing gaps for Asia's climate transition:
1. Sustaining collective commitment and action
Chia summarised local activity noting that individual and collective commitment is essential for effective climate action. More than 90 intergovernmental and 160 industry initiatives globally are mobilising support and fostering partnerships. Singapore is playing its part by hosting the GFANZ Asia-Pacific Network Central Office and launching the Singapore Sustainable Finance Association. These platforms facilitate dialogue, promote exchange of solutions, and forge collaborations for sustainable development, said Chia.
2. Strengthening disclosures
Accountability is crucial for sustaining commitment and momentum in climate action. Enhancing data and disclosures across public and private sectors will sharpen accountability to shareholders, stakeholders, and the public.
Chia noted that Singapore supports the adoption of International Sustainability Standards Board (ISSB) disclosure standards, aiming to introduce mandatory climate reporting in 2025 aligned with ISSB standards. The development of platforms like Gprnt, an integrated digital platform that aims to automate and simplify businesses’ reporting of basic environmental, social and governance (ESG) data, should facilitate the building of good data infrastructure.
3. Supporting de-risking and viability of transition financing
Private sector involvement is crucial to bridge the financing gap for climate transition, said Chia. Multilateral Development Banks play a vital role in de-risking projects, with the World Bank streamlining guarantee solutions to improve access and execution. Public-private partnerships, such as ALTÉRRA, a climate-focused fund with USD 30 billion in catalytic capital, focus on mobilising capital for climate change action. MAS is exploring region-contextualised sectoral pathways with entities like the International Energy Agency (IEA) to guide financial institutions in supporting the region's transition.
Conclusion
Chia concluded by emphasising the importance of strengthening collective commitment, enhancing climate disclosures, and supporting transition financing to bridge global ambitions with regional actions. Collaborative efforts involving governments, financial institutions, and businesses are essential to address these challenges effectively and accelerate the region's climate transition.
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