Regulators - Are they helping?

Welcome back to Bitesize Payments, where we delve into the world of payments, exploring their history, how they work, and the key players involved.

Today, we're tackling a crucial topic: regulators. Love them or hate them, they play a vital role in shaping the payments landscape. From ensuring fair competition to protecting consumers, their influence is undeniable.

But navigating the complexworld of regulations can be tricky. That's why I'm thrilled to be joined by Monica Monaco, the rockstar of European regulatory work in Brussels and CEO of TrustEuAffairs. Together, we'll unpack the role of regulators in the EU payments
industry, using it as a springboard to explore broader regulatory trends.

So buckle up, payments enthusiasts, as we shed light on these essential players in the financial system.

Let's talk about Regulators.

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_01: 0:00

Welcome back to Bite Size Payments, where we look into the history, how they work, and of course, who does what. Today we're going to discuss one of the key stakeholders in the payments industry, regulators, and of course, by extension, regulations. Love them or hate them, frankly, they make change happen, and quite often the payment industry needs change. It's a complex world for regulators where, frankly, nearly everybody thinks that the regulations that the regulators bring to market are either wrong or inappropriate for their part of the business. So they're kind of always wrong, right? So let's buckle up. Let's talk about regulators. They're a key stakeholder. We need to understand them. Here we go. Today, I'm joined by the rock star of European regulatory work in Brussels. That is Monica Monaco, CEO of Trust EU Affairs. Welcome, Monica.

SPEAKER_00: 1:12

Oh, thank you, Paul. I'm very happy to be here today. So for the public, my name is Monica. I work here in Brussels since 20 years now. I've been a lobbyist for financial services companies for over 11 years, and I started my own company, Trust You Affairs, 10 years ago. And what I do, me and my team, we follow European regulation so that we can explain to our clients what the European Commission is regulating upon as far as as financial services and payments in particular are concerned.

SPEAKER_01: 1:48

Thanks, Monica. And from my personal point of view, it's been an absolute pleasure working with you over the years. And you are indeed a

SPEAKER_00: 1:56

rock star here. Thank you so much.

SPEAKER_01: 1:58

You're more than welcome. As we're about to get going, I really wanted to just start by saying, really for the sake of balance, that I have been lucky enough to serve on the advisory board of the UK regulator, the PSR, for six years and have worked with the EU regulator, DG FISMA, to shape and promote some of their regulations. Of course, I've not always been happy with everything that the regulators say and do, but frankly, that's the very nature of their work. And if I had been happy with everything that they had said and done, then I guess there would be something wrong and there'd be nothing to balance and shape. Anyway, let's dive into a brief history of regulations and regulators. The concept of regulation, meaning a law or rule prescribed by an authority to regulate conduct, has been around since the beginning of human societies. The Code of Hapa Murabi is one of the oldest deciphered writings of significant length in the world, dating back to 1754 BC. It is one of the earliest and most complete written legal codes from ancient times. It sets out to regulate a variety of matters, including commerce, marriage, theft, debts and agriculture. The code consists of 282 laws and it's where we get the concept of an eye for an eye. Later we have Roman law circa 450 BC onwards codifying numerous regulations again on debt, properties and financial transactions. In more modern times as we have previously discussed we had the Swedish Reichsbank, established in 1668, and the Bank of England, established in 1694, where regulations were issued regarding payments and, of course, currency. In the United States, the National Bank Act of 1863 can be considered as one of the first modern regulatory frameworks for payments. So as you can see, and probably expect, regulation in payments has had a very long history. And while the roles and the scope of regulators differ around the world, it's hard to imagine a payment world without them. Effectively, there are two different types, and we'll discuss that later. Monaco, can you help us expand on what they do here in Europe?

SPEAKER_00: 4:33

Sure. So in Europe, the primary regulatory bodies that we have in the European Union are the European Parliament, the Council of the European Union, and the European Commission. So when it comes to the Commission, it helps to shape the overall strategy of Europe. It also proposes new law and policies and monitors their implementation and also manages the EU budget. The EU institutions and bodies also cooperate extensively with the network of European agencies and organizations across the European Union. Now, the primary function of these bodies and agencies is to translate policies into realities on the ground in the member states. In terms of European legislative procedure, as a result of a public consultation process and of some other technical assessments or studies, the European Commission may commission to external entities, there will be a draft legislative proposal. Once the legislative proposal is published, the legislative procedures will start. And the length of it, of the legislative procedures is on average 18 months. The European Commission then submits the proposal to the Council and the Parliament. And the Council and the Parliament adopt the legislative proposal either at the first reading or at the second reading. If the two institutions do not reach an agreement after the second reading, then there is a conciliation committee, as it's called, that is convened. So this is the procedure we use in Europe for new law. Now, the co-decision procedure was first introduced in 1992, and its use extended in 1999. With the adoption then of the Lisbon Treaty, The co-decision was renamed the Ordinary Legislative Procedure and it became the main decision-making procedure used for adopting EU legislation. It applies to around 85 policy areas.

SPEAKER_01: 6:37

The way that they're set up around the world, in the UK for example, through the government and the Bank of England, which appoints the FCA and the PSR, the Financial Conduct and the Payment Services Regulator, is all frankly very similar. And we discussed this a little bit in the central bodies episodes. But how is it actually set up in the EU?

SPEAKER_00: 7:00

Well, in the EU, Paul, what we have is the EU treaties. So we have the Treaty of the European Union and the Treaty on the Functioning of the European Union. And these two treaties together provide the broad operational framework for the EU main institutions. And they also indicate that representative democracy is the form of government on which Europe is based. Now, the treaty on European Union makes clear it's clear that citizens are directly represented at EU level in the European Parliament. And also the European countries are represented in two different ways. They are represented in the European Council, where their heads of state or government sit, and they are represented in the Council of the EU by their governments, which of course are accountable either to the national parliaments or directly to their citizens, depending on the member state. Now, the Lisbon Treaty in 2007 introduced several notable amendments, including, for example, creating a permanent full-time president for the European Council and strengthening the European Parliament's role and powers. So there was some change made in 2007. Now, The European Parliament, the European Council and the Council of the EU are composed, respectively, of elected representatives and members of government from every European country.

SPEAKER_01: 8:21

So then we have the European Parliament itself. That's a big beast. Can you help us outline that a little bit?

SPEAKER_00: 8:29

Sure. So as far as the European Parliament is concerned, there are currently 705 members of the European Parliament that have been voted for directly by European citizens. according largely to national electoral laws and traditions which vary a bit in each European country. So the members of parliament may join political groups within the parliament based on their political affinities, but they can also be non-attached. So in case they do not join a European party, they will be non-attached members of parliament. Now, the parliamentary elections are held every five years and the most recent were in May 2019 and the next one we're going to take place in June this year. In terms of powers of the European Parliament, well, first of all, there is a power of appointment. So the Parliament votes for its own president and the president holds his post for two and a half years. So the term is two and a half year term and it's renewable once. Also, The parliament elects its own vice presidents, questors, committee and delegation chairs and vice chairs. Also, the members of parliament elect the president of the European Commission. So the parliament has to approve the new commission president that is proposed by the council by an absolute majority, which means half of the members of parliament plus one. Also, the parliament vets commissioners. So every time there is a designated commissioner, which next time we will have in October, the designated commissioners are proposed by the council in agreement with the president-elect of the European Commission, and they must appear before parliamentary committees in their fields of responsibilities. Example, a designated commissioner for financial services will have to appear in front of Econ, which is the parliament committee working on financial services. And if there is a negative evaluation of the committee then the commissioner designate may need to withdraw from the whole process. And then a new candidate for commissioner must then be put forward for scrutiny. So that's a very important part of the parliament. Also, the parliament approves the European Commission. So the commissioners, the president and the high representative for foreign affairs and security policy by a single vote of consent. So only once there is a single vote of consent from the parliament, then the commission is officially appointed. And then there is also then the official appointment by the European Council. Finally, The Parliament has supervisory and control powers over the other European institutions, and they hold them to account. It can, for instance, adopt a vote of no confidence to censor and ultimately dismiss the Commission if they think there is any wrongdoing.

SPEAKER_01: 11:11

You've talked about the European Commission there, and that in its own right is a huge topic we could go into, but could you just outline... how the Council actually works.

SPEAKER_00: 11:22

Sure, so the Council is composed by the heads of state or government of EU member states, and then the President of the European Council and the President of the European Commission. And it's supported, of course, by its own administration, which is composed of civil servants. Now, which is the function of the European Council? It defines the European overall political direction and priorities. The European Council also appoints the European Commission, so the commissioners and the president, and of course also the High Representative for Foreign Affairs and Security Policy, by qualified majority. Also, the European Council appoints the Executive Board of the European Central Bank, which comprises six members, and this appointment is made following a recommendation by the Council to the European Council, which is reached after consulting the Parliament and the European Central Bank Governing Council. This appointment is approved by a qualified majority in the Council. Then there is the Council of the European Union, and the Council of the European Union is composed by periodic meetings of government ministers from each European country, depending, of course, on the policy area under discussion. For example, for financial services, the meetings are attended by each country individually. Economic Affairs Minister or Finance Minister. Now, the Council of the European Union is also supported by the Council Administration, which is, of course, composed of civil servants. And which is its function? Well, the ministers voice the views of the EU member governments and meet to negotiate and adopt EU law and coordinate EU policies. So each of the member states is using the Council of the European Union to voice their position on a file. In terms of leadership, The Council of the EU does not have an individual president. Instead, it's chaired by what we call here a presidency, which rotates among members of the countries every six months. Currently, we are under the Belgian presidency that started on the 1st of January. And before that, we had the Spanish presidency that started on the 1st of June and ended on the 31st of December, 2023. Now, in terms of configurations, The EU country holding the presidency works closely with the two countries that will succeed in the chair. So these groups of three countries, known as trios, draw up a common agenda that will cover the main issues to be addressed by the Council of the EU over an 18-month period, which is, of course, composed of three presidencies. Based on these agendas, each country determines its own more detailed six-month program to implement when it assumes the presidency. Also, the European Council and the Council of the European Union are supported by the General Secretary of the Council.

SPEAKER_01: 14:02

Wow, there's a lot of material to go through here. But the key thing is, while this is the EU-specific, it's very similar in many ways around the world. We're giving you a flavour of how this works. But there's one more big body we need to talk about.

UNKNOWN: 14:16

Thank you.

SPEAKER_01: 14:29

The next big body, of course, is the European Commission. And that's a huge body of work just in its own right.

SPEAKER_00: 14:36

Absolutely, yes. And so when it comes to the Commission, that is the legislator. So the European Commission is composed of 26 commissioners, one per each country. It's led by a president and supported in its business by a civil service. So which is the function of the Commission? forces European law in the different member states. In terms of leadership, the European Commission is led by its president and the 26 commissioners. As far as the president is concerned, the Commission president is elected for a five-year term by the European Parliament, following, of course, the European elections. So here we have the European elections for the Parliament in June, and we will have in October the new Commission. The European Council proposes a president candidate for the Commission to the the parliament. And because the choice of candidates must take into account the European elections results, the proposed candidate generally comes from the largest political group in the parliament. Example, if in the elections here in June, we will have, for example, the EPP or the Socialist as the first group, that's where the proposed commissioner should be coming from. The parliament has also to approve the new commission president by an absolute majority. So half of the members of parliament plus one. And once approved, the European Council officially appoints the new President of the Commission. If the candidate fails to secure the approval in the Parliament, as we just saw when we were discussing the Parliament part, the European Council then must propose a new candidate within one month. In terms of the commissioners, well, the President-elect allocates policy portfolios to the candidate commissioners, which are of course one per each of the countries. Commissioners carry out their duties for the Commission independently of the national governments of the countries they come from, because they have to represent all the Count on that very file. The commissioners' designate must then appear before the parliamentary committee that are responsible for their portfolio to be evaluated on whether they are suitable or not for the position. Again, example, the new commissioner for financial services will have to appear in front of Econ Committee, which is the committee of the parliament that works on financial and economic and financial laws. Once all 25 commissioners' designates have been approved, they, along with the president-elect, have to be approved in a single vote of consent by the European Parliament. And then the European Council formally appoints all the commissioners to their respective position, acting by qualified majority. Then, On top of the commission, to really finish all the other institutions we have, we have the European Central Bank. And for the European Central Bank, what I wanted to describe is the European Central Bank Executive Board. This consists of the bank's president and vice president and four other members. And the board is appointed by the European Council, again, by qualified majority voting. Now, the Council makes this decision following a Council recommendation and having consulted also the European Parliament and the Bank's Governing Council, so the six members of the European Central Bank Executive Board, plus, of course, Central Bank governors from the 19 euro areas, so the eurozone countries. So, between the Parliament, Council, Commission and the European Central Bank, we have indeed all the institutions working on financial services. Now, when we go to this, this is the macro level. When we go to the micro level, then what we have is Digifisma. So what is Digifisma of the Commission? Digifisma is the Director General for... Yes, Paul?

SPEAKER_01: 18:23

No, no. I just think Digifisma, it's one of the great names. It's kind of... because you've talked to me so much and we've worked so much about DG FISMA. It's great to get to DG FISMA. In fact, it's a really important piece, but just make me smile.

SPEAKER_00: 18:38

Yes. So when you take the 26th commissioner, one commissioner is responsible for financial services and this commissioner is is in charge of the work of Digifisma. So Digifisma is the Director General for Financial Stability, Financial Services and Capital Markets Union. And Digifisma is then responsible for EU policy on banking, capital markets and financial services. So everything concerning payments comes from Digifisma work. And DG FISMA is led, of course, by Director General, as any other DG. And this Director General is appointed by the Commission and operates under the guidance of the Commissioner for Financial Stability, Financial Services and Capital Markets Union. And that's what we can say about the composition of the European institutions.

SPEAKER_01: 19:21

Wow. I mean, it's great to get it all down. It is quite complicated in detail, but the truth of the matter is that's about as short and as succinct as we could possibly get all of that If we were to look at it from outside of the EU, we look at the US. The US, frankly, is a little more complex. And it's basically based around the Fed, the office of the controller of the currency, the OCC. The Fed chair is appointed by the US president. Perhaps we can dive into that type of what's going on in the US in a little more detail in another podcast. But it is in theory, or at a high level, very similar, just perhaps a little bit more complex. We discussed with Mark Halban the role of the Treasury and the central banks that are key here, but the regulators do have to be independent to be able to act, and they are looking after all of the needs of the stakeholders, whether they're citizens, they're corporates, or what have you. The key point here is that These roles are key to the country they operate in and are put in place at the very highest level of any government's executive. I think it would be really easy just to think that the regulators come up with these wonderful ideas and then say, okay, Let's just go and do it. And to be fair, in some countries, that frankly does happen. But even then, it's much more nuanced. But generally, there is a lot, and I mean a lot of consultation. As an example, because we've both worked there together, let's talk a little bit about how it actually goes on in the EU.

SPEAKER_00: 21:13

Sure. So what we have in EU is called the right of initiative. And so what happens is that the Commission is the only European institution which is in power to initiate EU legal acts. So it has the right of initiative. It submits proposals for EU legal acts on its own initiative at the request of other institutions or following a citizen's initiative. The Council then, by a simple majority of its members, may request the Commission to carry out studies and submit any appropriate legislative proposals. The Parliament also, by majority, may ask the Commission to submit legislative proposals. In specific cases defined by the Treaties, the ordinary legislative procedure can be launched also, for example, on the initiative of a quarter of the Member States, On some matters, for example, if the proposal concerns judicial cooperation in criminal matters or police cooperation, it can also, the ordinary legislative procedure can also be launched on a recommendation from the European Central Bank, for example, about proposals concerning the statute of the European system of central banks. and can also be launched by the request of Court of Justice of the EU on matters, for example, about the statute of the court or the establishment of specific courts attached to the general court, and also at the request of the European Investment Bank. But most of the time, most of the time, the Commission starts a new initiative at the request of the Parliament and Council or following a citizen's initiative.

SPEAKER_01: 22:43

In terms of the... length of the process. It is a relatively long period of time. However, despite what people may believe, it is extraordinarily well signposted. There are a couple of phases. Typically, there is an initial consultative phase where all the interested parties are typically asked for the input. Typically, this is 18 to 24 months or so, and this is really the formative stage of what will be the regulation. Then there is a legislative process, a more technical piece of work, where those ideas will be written down and drafted and redrafted, and eventually they will be approved. So now that Parliament has approved the law, there is typically a period of time, somewhere between 18 and 24 months, for you to comply with this law. Of course, depending upon Your point of view, this whole process may be way too short or in fact way too long. It's also fair to assume that various stakeholders, community, lobbyist groups, etc. will try and put their point of view forward at all stages to get the best for their stokeholders and various alliances are therefore made.

SPEAKER_00: 24:05

Yeah, it is absolutely true. So the lobbyists in town, so everyone is working on GR and regulatory affairs, we all provide input to the European institutions at each stage of the legislative process. So how we do that, either we do position papers or we have ad hoc meetings or a combination of the two.

SPEAKER_01: 24:24

Monica, you're a rock star in this. I've seen the things that you've written and helped move things forward immensely.

SPEAKER_00: 24:30

Thank you very much.

SPEAKER_01: 24:31

Once this cycle of regulation approval has been approved, Effectively, the process starts all over again. So now that we have the regulation, we effectively have the what and the when. And to comply within the regulation by a certain period of time, November 25, for instance. But to be clear, it's not for the regulator to say how. And this has caused issues in the past. For instance, a classic example would be SCA, Strong Customer Authentication. And we talked to Paul when we talked about merchants about what happened there. But SCA, the where and the what was decided, but not the how to get it done. And that then needed a industry set of changes. In the end, the industry had to pull together and provide a framework for the solution, the how. But typically, This is done by individual banks, individual fintechs to implement their own solution. Generally, there is not a how. It's generally up to the individual stakeholder to comply. But there's another point here that we need to clarify that is often overlooked. We have regulation and we have directives. What's all that about?

SPEAKER_00: 25:54

Yes, so these are two different instruments for regulation. So I'm happy to explain the difference between a regulation and a directive. So a regulation has legal binding force throughout every member state and enters into force on a set date for all member states in the same way. Directives lay down certain results that then have to be achieved by each member state and each member state is free to decide how to transpose directive into national law. So let's say regulations are less flexible as an instrument than directives. So a regulation is a binding legislative act. It must be applied in its entirety across the EU. For example, when you wanted to make sure that the caps on interchange were set via the multilateral interchange fee regulation, the council adopted the regulation. which was indeed the Interchange Fee Regulation. A directive is a legislative act that sets out a goal for all European countries for them to achieve it. However, it then is up to the individual countries to devise their own laws on how to reach these goals. Examples were the PSD1 and PSD2 or also the Consumer Credit Directive.

SPEAKER_01: 26:59

So, simplistically put, something like the Immediate Payment Separate Inst is a regulation, whereas you say PSD1 one two and of course now three is a directive and that directive allows the local supervisor to implement it in the way that they think fit i've said earlier that it's in my opinion there are different styles of of of regulator and It's always interesting to compare and contrast countries' different ways of doing things. I would say that the UK and the EU are more interventionalist, whereas the US tends to be more a technical regulator, allowing the market to drive its actual direction. That is to say that the EU and UK actively engage in what is to be regulated and push changes forward whereas the US has, as I say, a more technical role, mostly confining themselves to making sure that things work correctly. Any new regulation moves us forward, and generally not everyone is happy, but that in some ways is probably the most important thing too. I often hear that regulation is a surprise or a shock, but in fact, they take quite a long time to bake, and I hope, as we've explained, It is, in fact, extraordinarily well signposted. I suspect it's often down to the complex language. And to quote Churchill, the regulations tend to defend themselves from being read by their size. And some of these files can be very long and, in my opinion, extraordinarily complex. And Monica is smiling because I know that she knows that they're not in her view. But for me, frankly, they are.

SPEAKER_00: 28:46

Well, they have a logic. The text of law has a logic. So in order to understand the European piece of law, you have to have been reading the previous ones so that you understand the logic in which they are. And the same goes for the definitions. It's, of course, a very technical language. Now, in terms of the length, when you do my job, the average length of the document is 32 pages, and we find this fine. And if a piece of regulation is very long, it's going to be over 100 pages. So when I talk to my clients or to their marketing department or communications department some of them think 32 pages document is extremely long for us in fact when when a piece of law is 32 30 35 pages long for us it's a very simple and and easy to read one

SPEAKER_01: 29:30

indeed hey look monica um it's great to have walked through all of this stuff i know i know it sounds complicated but actually when you actually split it up the way you have it's it's much easier to try and try and understand have you got any other things you'd like to comment on

SPEAKER_00: 29:47

No, just wanted to say that, yeah, I'm very happy to explain European law in detail. And I try to really make it as simple as possible. But it's indeed a complex machine. I like this very much. I've been doing this 20 years. So, yeah, I was very happy to participate in this. And I wanted to thank you, Paul, for inviting me to this podcast.

SPEAKER_01: 30:09

Marek, it's... As ever, thank you for being such a rock star. And genuinely, you made my life extraordinarily easy in the past by explaining these 32 pages or 100 pages into something that I can comprehend and understand. So as ever, Monica, thank you so very much.

SPEAKER_00: 30:26

My pleasure. Thank you very much, Paul.

SPEAKER_01: 30:39

Well, there you go. Regulation as bite-sized as we could possibly get it. I have to say that it's an intriguing and fascinating world. But in reality, what I've seen mostly is regulators trying to do the right thing for our society. Of course, there are lobbyist groups and people with vested interests trying to push it as well. But the truth of the matter is, I think the regulators do a pretty good job. Now, I know not everyone thinks like that, depending if you've got a lot of change to do. And typically, major banks have an awful lot of change to do, especially when they have to deal with regulation in different countries, and frankly, some of them all around the world. In my opinion, though, you do get a lot of signposting. You just have to look and be aware. And I think people like Monica are the real rock stars of this industry who really understand how it works. and what needs to get done. So I hope this has been useful for you. I hope it's, as I say, as bite-sized as we can get it. So cheers for now. Oh, and you know what to do. Tell a friend, right?