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Making Tax Digital (MTD) is the Government's ambitious plan to transform the way taxpayers interact with HMRC. With only a few exemptions, VAT-registered businesses trading over the VAT threshold of £85,000 are required to keep records in a digital format, ensure that the transfer or exchange of VAT information is digitally linked and submit their VAT return information to HMRC using MTD compatible software.

HMRC estimates that 1.2 million businesses are subject to the MTD rules, which became law for VAT periods starting on or after 1 April 2019 (or 1 October 2019 for organisations which are deemed to be more complex). Depending on their VAT return stagger, a significant number of these will be required to submit their first quarterly VAT return to HMRC using software by the 7 August this year.

Yet figures just released by HMRC show that the financial sector has been one of the slowest to sign up, with 75% of firms yet to register.

Commenting on the new figures, John Forth, the head of RSM's financial services indirect tax practice said: “While it's not clear why financial firms have been so slow to sign up, these figures are pretty shocking.

“It is possible that HMRC have overestimated the size of the problem due to the complexity of the VAT regime. Alternatively, they may have failed to recognise that many financial services organisations will be regarded as complex and will therefore be subject to the 1 October deadline. As a result, we may see this figure come down rapidly over the next few months.

“While HMRC have stated that they won't issue filing or record keeping penalties during the first year, financial firms should not see this as a reason not to register. MTD represents a major change to the way businesses report and pay their VAT, and businesses need to make sure they are ready.

“Currently, HMRC are dealing with 10,000 registrations every day. Clearly there are tens of thousands of VAT-registered financial businesses that need to get their skates on and register at the earliest opportunity.”

(Source: RSM)

Less well known, however, is another more imminent deadline. The PSD2 regulation requires banks to implement facilities for these third parties to test their functionality against a simulated bank environment six months prior to the September deadline, which means that these environments must be in place by 14th March. Below Nick Caley, VP of Financial Services and Regulatory at ForgeRock,  explains that despite the importance of this fast-approaching deadline, many of the thousands of eligible banks are significantly challenged in meeting either deadline. And, while there are no formal penalties for not complying with it, there will certainly be consequences that could have long lasting commercial, technical and reputational effects.

Consequences of non-compliance

Banks which fail to meet the March deadline will need to implement fallback ‘screen-scraping’ - where customers essentially share their security credentials so third parties can access their banking information via the customer interface and collect the data for their own services - as a contingency mechanism at the same time as implementing their PSD2 API by the September deadline, something that would not be in the interests of banks, or their customers, and could lead to graver problems further down the line.

There are multiple problems associated with screen-scraping. Firstly, there are the significant security risks it poses. Screen-scraping involves customers sharing their banking security credentials with third parties, which is an outright, bad security practice. No-one should ever feel comfortable sharing a password to a system, let alone one that provides access to a bank account. Such credentials, whilst clearly able to provide access to banking data, also unlock numerous other account functionalities that should only be available to the account owner. Any increase in the risk that banking credentials could be compromised will not build the confidence of consumers.

Alongside security considerations, there are also cost implications since maintaining more than one interface increases the resources required. Each interface will require strict and ongoing monitoring and reporting to the National Competent Authority. While larger tier one banks might be able to absorb this extra cost, for smaller banks this will further compound the already serious burden of compliance with the regulatory technical standard (RTS).

Beyond these very practical concerns, failing to comply with the March deadline will mean banks are left playing catch up on the developments set to be made as PSD2 comes into effect. Avoiding such pitfalls would mean banks can significantly boost their long-term prospects, giving themselves a strong foundation to stay on top of PSD2, meeting regulatory deadlines whilst crucially increasing their ability to compete in the new era of customer-centric financial services.

Despite the clear importance of the March deadline, many banks are still largely focused on developing their production APIs ahead of the September deadline, rather than their testing facilities. For those banks who haven’t yet found a solution, having development teams put a testing facility live in such a short space of time might seem like an impossible task. The good news is that there are ready-made developer sandboxes that banks can deploy in a short space of time to stay on top of the requirement for a testing facility. These sandboxes are essentially turnkey solutions that are fully compliant with the defined API standards, making the March 14th deadline much easier to digest. Banks should look to these ready-made sandboxes if they haven’t already found a solution.

Looking further ahead

As the trusted holders of customer banking information, PSD2 gives banks an unrivalled opportunity to add value for their customers. Through development of new interfaces, modernization of authentication methods and the redesign of customer journeys, banks can achieve the new holy grail for any business; delivering intuitive, secure digital services and experiences that are personalised to the customer offering far greater insights and advice.

With the focus on complying with deadlines, it’s also important for banks to keep an eye on the competition. The promise of PSD2 is to provide a level playing field to encourage competition and innovation. There are certainly plenty of new competitors: Account Info Service Providers (AISPs), and Payment Initiation Service Providers (PISPs), retailers and internet giants, all have the opportunity to introduce their own payment and financial management products and services that integrate directly with the established banks.

At the same time, the challenger banks built from the very beginning to be ‘digital natives’ have been leading the way with innovative customer-first experiences and third-party marketplaces that go beyond what is currently on offer from traditional players. This means banks will need to provide better digital services to stay competitive, giving people more freedom and choice in the way they interact with financial services.

The March deadline is the first litmus test for which banks are keeping up with PSD2, and which are falling behind. However, as we have seen, the far-reaching changes that PSD2 heralds means this upcoming deadline won’t just be a test of a bank’s ability to meet technical regulations - it will be a strong indication as to how well each bank will be prepared to stay competitive in our increasingly digital future.

 

Lawyers have claimed the recent ruling between Christopher & Joanne Doran and Paragon Personal Finance is a new precedent that could mean that banks are liable for another £18bn in payouts.

This could mean huge changes to the way firms operate in this sphere, although there are many parts of the puzzle that remain unclear, namely in regard to commission, premiums and compensation. At this point, banks are on high alert for impending changes to the PPI deadline.

This week Finance Monthly reached out to a number of experts in the legal/banking sector to hear Your Thoughts on the potential for further PPI payouts.

Elis Gomer, Commercial Barrister, St John’s Buildings:

There doesn’t appear to be any basis for the FCA’s statement that there is a fixed tipping point at which a particular level of undisclosed commission becomes unfair. According to the FCA, only those people who unwittingly paid over 50 per cent of their total premium in commission are entitled to compensation. The regulator’s argument that the only appropriate remedy in these instances is to repay the excess compensation over and above that notional 50 per cent level is inconsistent with recent court rulings, and the legal principles around mis-sold PPI.”

Mrs Doran gave evidence that she would not have taken out the policy at all had she known about the commission level. Accordingly, the judge ruled she should be awarded the full amount of the premium in damages. This judgment - whilst not binding on other courts - is likely to have far-reaching significance, showing not only that the faulty FCA guidance is not legally binding, but also that it is a castle built on sand. If claimants challenge it, they could be repaid in full – at a potential total cost of up to £18bn to the banks.

Glyn Taylor, Solicitor, Anthony Philip James & Co:

This judgement is extremely important as the Defendant, Paragon Personal Finance, tried to persuade the Court that the unfairness related to matters that took place at the time of entering into the agreement and that the court should hold that the limitation to bring a claim should start to run from when the allegations of unfairness happened.

The Defendant also invited the Court to follow the FCA calculation, and only award relief amounting to the commission paid above 50%.

The judge wasn’t persuaded by these arguments and held that you cannot make a judgement on the fairness of the relationship without looking over the full course of the relationship, and therefore limitation doesn’t start to run until the end of the relationship.

The court also held that appropriate redress that should be awarded is the full amount of the PPI policy and the interest paid.

The current rule states that customers can claim back money if more than 50% of their PPI payments went through as commission and this information was not disclosed upon taking the policy.

The average commission banks were paid was 67%, which means millions of people who were sold PPI are entitled to compensation.

This decision is welcomed and shows the Courts are prepared to reject the tipping point approach that has been expressed by the FCA and also allows individuals access to justice through the Court.

The case opens space for a renewed claims frenzy as it suggests that even if the PPI policy was not mis-sold, customers could still reclaim due to excessively high commissions that were paid out.

Tim Dimond-Brown, VP Sales and Operations at Quadient:

The news that those with mis-sold PPI policies may be able to claim billions of pounds more in compensation, following a court ruling in Manchester, will no doubt alarm banks across the UK.

It is estimated that only 1.2 million claims have been made out of 13 million potential PPI pay-outs. The large number of outstanding claims may seem overwhelming for banks, but they can successfully deal with this huge number of potential claims by ensuring they communicate using the Three P’s: Process, Proactivity and Proof. Specifically, this means placing a firm focus on internal processes, acting proactively when reaching out to customers and being able to prove compliance will make it far easier for the industry to ride out the storm. Failing to follow this process means do this means financial services companies will run the risk of facing the FCA’s wrath, while damaging valuable customer relationships.

The real winners to emerge from this saga will be the ones who realise it is a wake-up call. We live in turbulent political and economic times – every stakeholder within the Financial Services sector must be confident they are laying the groundwork for full compliance and traceability, so they will be able to ride out future storms of a similar nature.

Stuart Murdoch, Partner, Burness Paull LLP:

With the 29 August 2019 deadline for new PPI claims approaching, we have started to see and will continue to see claims management companies try to drum up new complaint angles in the lucrative PPI compensation arena.

Traditionally, PPI claims were made on the basis of mis-selling. However, a new ground for complaint was established with the Supreme Court’s judgment in Plevin v Paragon Personal Finance. The Supreme Court ruled that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair, under section 140A of the Consumer Credit Act 1974.

The Supreme Court’s view was that anything above 50% commission was excessive and automatically unfair. The consensus was that anything which was paid above 50% should be returned to the Customer. That threshold was endorsed by the FCA and is now reflected in the FCA rules. It was quite common for a large portion of the sum which a customer paid for in PPI to in fact be paid to the intermediary as commission.

Christopher & Joanne Doran v Paragon Personal Finance follows on from the Plevin case. It seems as though the County Court judge has decided that customers should get back the whole commission value (ie. 75% in this case), as opposed to the residual percentage above the 50% threshold (i.e. 25%).

The impact of this judgment remains to be seen; however, the court’s decision has not yet been made public and it was issued by a County Court (4th tier). The FCA has already confirmed that it will not be changing its guidance. Plevin was a Supreme Court judgement (top tier), before five Supreme Court justices, and is binding on all UK courts and beyond. By comparison, the County Court has no binding authority on any court in the UK. Even if the case is appealed, it will not have the status of Plevin, which remains the leading authority in this area.

The Supreme Court’s judgement, paired with the FCA’s guidance, will continue to be the guiding lights on this issue.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

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