De-risking dilemmas: The unintended consequences threatening UK-Iran personal remittances

De-risking endangers financial inclusion, driving MSBs out and boosting unregulated markets, calling for urgent reform.

As professionals deeply embedded in the payments industry, we are acutely aware of the delicate balance between risk management and financial inclusion. However, a pressing issue demands our collective attention: the de-risking practices that are inadvertently crippling legitimate money service businesses (MSBs) and empowering black-market alternatives. It’s crucial to understand the severity of de-risking’s impact on personal remittance services between the UK and Iran, a lifeline for many individuals, and reassess current market practices.

The regulatory landscape: FCA and PSR’s roles in de-risking

The Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) are pivotal in shaping the UK’s financial ecosystem. While emphasising the importance of robust anti-money laundering (AML) measures, the FCA has consistently advocated against indiscriminate de-risking. Their guidance urges banks to adopt a proportionate approach, assessing MSBs individually rather than applying blanket policies that exclude entire sectors.

The PSR, tasked with promoting competition and innovation, has a statutory responsibility to ensure fair access to payment systems. It recognises that denying MSBs access not only stifles competition but also undermines the integrity of the payment landscape by pushing transactions into less regulated channels.

Despite these regulatory positions, the reality is starkly different. Banks continue to sever ties with MSBs like PFS without individualised assessments, often citing AML concerns or geopolitical risks associated with countries like Iran. This disconnect between regulatory intent and market practice creates a systemic issue that warrants urgent attention.

MSB de-risking as a systemic risk: Insights from the UK National Risk Assessment

The UK National Risk Assessment (NRA) has identified the de-risking of MSBs as a systemic risk. The unintended consequence of this practice is the migration of financial activities to unregulated or underground channels. When legitimate businesses are driven out, customers seeking essential services have few options, often turning to black market operators who lack compliance oversight.

This shift increases financial crime risk and erodes the efficacy of the UK’s AML and counter-terrorist financing (CTF) frameworks. By undermining regulated channels, de-risking paradoxically amplifies the very threats it aims to mitigate.

The unintended empowerment of the black market

The black market thrives on gaps left by the formal financial system. As MSBs like PFS face operational challenges due to account closures, customers’ need for remittance services does not diminish. Instead, they are funnelled towards unregulated avenues where transparency and oversight are nonexistent.

This empowerment of the black market has severe implications:

• Increased financial crime: Unregulated channels are more susceptible to money laundering and terrorist financing activities.
• Consumer vulnerability: Without regulatory protection, consumers are exposed to fraud, unfair practices, and loss of funds.
• Regulatory blind spots: Transactions in the black market are invisible to regulators, undermining efforts to monitor and control illicit financial flows.

Personal remittances: An essential service under threat

For the Iranian diaspora in the UK, personal remittances are not mere transactions but essential lifelines supporting families, education, and healthcare. These remittances are often permissible under existing sanctions regimes when conducted through regulated channels for humanitarian purposes.

The de-risking practices jeopardise these vital connections. By pushing out compliant MSBs, we risk violating the fundamental right to familial support and exacerbating socio-economic challenges both domestically and abroad.

Impact on businesses like PFS

At Persici Financial Services Limited, we have firsthand experience of the operational disruptions caused by de-risking. Over our seven-year history, account closures have hindered our ability to access the UK payment system, threatening our existence despite our stringent compliance measures and regulatory approvals.

The challenges we face are emblematic of a broader industry issue:

• Operational instability: Frequent account closures create uncertainty, making it difficult to maintain consistent services.
• Increased costs: Navigating de-risking requires additional resources for compliance and legal consultations, disproportionately affecting smaller MSBs.
• Market exit: Prolonged de-risking pressures can force legitimate businesses to cease operations, reducing market competition and innovation.

Call to action: Rethinking de-risking practices

To address this escalating issue, a concerted effort is required from all stakeholders:

Regulatory enforcement of proportionality: The FCA and PSR must ensure that their guidance on proportionate risk management is not only issued but effectively enforced. Banks should be held accountable for unjustified blanket de-risking practices.

1. Enhanced industry dialogue: Establish forums for communication between banks, MSBs, regulators, and industry bodies like The Payments Association. Open dialogue can dispel misconceptions and build mutual understanding of risk management.
2. Risk-based approach implementation: Banks should adopt a nuanced, risk-based approach, leveraging technology and data analytics to assess MSBs individually. This aligns with global standards set by organisations like the Financial Action Task Force (FATF).
3. Innovation in compliance: MSBs must continue to invest in robust compliance infrastructures, demonstrating their commitment to AML/CTF obligations and making it easier for banks to justify maintaining relationships.
4. Policy advocacy and awareness: Industry professionals and associations should advocate for policy changes that mitigate unintended consequences of de-risking. Raising awareness among policymakers about the real-world impacts is crucial.

Conclusion: Upholding the integrity of the financial system

The payments industry stands at a critical juncture. De-risking, while rooted in legitimate concerns, has overstepped its bounds, endangering the very fabric of financial inclusion and security. By driving compliant MSBs out of business, we inadvertently facilitate the growth of unregulated markets that pose greater risks.

As regulators and industry professionals, we are responsible for addressing this issue. We uphold the financial system’s integrity and protect consumers by re-evaluating de-risking practices and fostering an environment where legitimate businesses can thrive.

The stakes are high. Our actions today will shape the future of personal remittance services and, by extension, the lives of countless individuals who rely on them. Let us work collaboratively to ensure that our financial system remains secure, inclusive, and reflective of the values we uphold.