17 October 2005

Speech by the Economic Secretary, Ivan Lewis at the Global Money Transfers Conference

Opening comments

1. Let me thank Olga for inviting me to say a few words today – it’s a pleasure to be here at the Institute of Directors for this conference on such a hugely important matter.

2. Money transfers are in many ways the life blood of our society. From remittances that can mean the difference between abject poverty and survival, through to the electronic world of payments that accompanies today’s world of multinational, multilateral economic activity.

3. From buying oddities from eBay, through to sending money to relatives abroad, we have grown accustomed to global money transfers – and I know this conference has already talked a fair bit about how to make that work better in future.

4. What I want to do is give a Treasury perspective on this, and flag up the areas that most concern us today.

Money transfers

5. Now, lets be honest about the state of play. Improvements in technology over the last 50 years mean that an ever-greater proportion of transactions are made electronically.

6. Financial intermediaries also play a key role in facilitating these activities, which are essential to the smooth and efficient functioning of the wider economy.

7. Efficiency, as I believe Lord Lamont said earlier, is crucial in this area. By lowering transactions costs, efficient payments systems encourage a greater volume of transactions and raise economic activity and productivity at the same time. A win-win situation.

8. What’s more, at a global level, efficient payment systems can support greater flows of trade, investment and finance, serving to increase integration and enhance resource allocation. As you might expect – as a Treasury minister, this is something that I wholeheartedly seek to make happen.

Payments from a UK perspective

9. An efficient system is vital. But from our perspective, there is also a clear tension between the different objectives of money transfers. Between on the one hand promoting remittances and avoiding unjustified prudential regulation. And on the other in ensuring that money laundering and the risk of terrorist financing is tackled.

10. Don’t get me wrong on this – we strongly want to see competitive, efficient and innovative payment systems. Systems that respond to the 21st century economic challenges that have already arisen.

11. And that’s why we’re taking forward relevant work domestically, and it’s why we’re engaging with international partners to help ensure success.

Remittances

12. Remittances are a key source of global development finance. These transfers totalled $160 billion to developing countries in 2004. From the UK alone, remittances to developing countries are estimated to be around £2.3 billion annually.

13. Remittances can play a significant role in both development and poverty reduction. Remittance flows to the poor help to reduce poverty and equalise opportunity and incomes. They can also help smooth macroeconomic shocks and underpin international borrowing.

14. At the Sea Island Summit in 2004, G8 leaders committed to an Action Plan to enhance the flow of remittances. As a result work is being taken forward both domestically and internationally.

15. International guidelines are being drawn up for payment system access and oversight, which will enhance competition by eliminating excessive regulatory barriers that hinder the provision of remittance services. In addition, work to improve remittance statistics will provide valuable information for both the authorities and money transfer operators.

16. In the UK, the Government has undertaken a number of initiatives, including developing remittance partnerships with key recipient countries, producing a survey to provide information on costs, transparency, access and choice; working with the private sector to improve remittance services, and increasing domestic financial inclusion.

Payments directive

12. This is important stuff – especially because it can change an entire family’s circumstances at the click of a button. And that’s why we must ensure the regulatory framework that supports this is both robust and fair.

13. And that means adopting reform when needed. Of course, one of the key changes on the horizon in terms of the regulation of money transfer companies is the European Commission’s planned payments directive.

14. One of the main aims of the Directive is to create an EU-wide internal market in payments. This will allow money transfer companies to obtain a license to offer their services EU wide.

15. At the moment, providing payment services is not a financially regulated activity in the UK so the Directive will mean a slightly higher level of regulation here – but given those tensions I mentioned earlier, it also means significant deregulation in many other EU Member States.

16. The Directive will have two main sections. First, it will introduce a new licensing regime for ‘Payments Institutions.’ Put simply, that means forming a third tier of financially regulated institutions – after banks and e-money issuers – and subject to a lower level of regulation.

19. Second, it will bring in conduct of business rules for all payment service providers – so for banks, e-money issuers and payments institutions.

Anti-money laundering & counter terrorist finance

20. Yet that is only one part of what must be done to maintain a cutting edge system. We must also address the other tension of terrorist financing and take further action against money laundering, about which I know you’ve already from several speakers today.

21. The 3rd Money Laundering Directive, which the UK supports, includes a requirement for all owners of money service businesses to be subject to a fit and proper test

22. In addition, the forthcoming Regulation on Information on the Payer Accompanying Transfers of Funds will assist in combating terrorist financing, and money laundering, by implementing the Financial Action Task Force recommendation for originator information accompanying all wire transfers.

23. What this will do is simple – it will help law enforcement authorities and intelligence services to fight criminal activity by putting in place global standards.

24. And these will make it more difficult for terrorists to transfer or receive funds and for criminals to launder money. It should also help in identifying suspicious transfers and by preventing such funds being used for criminal purposes.

25. The UK Presidency of the EU has progressed negotiations on this Regulation in such a way that I believe it will introduce protocols for the collection, verification and transmission of information on the payer that will effectively assist law enforcement and at the same time preserve the efficiency of the payments system.

MSB review

26. Given this situation, I want to also mention the MSB Review, which is likely to be published at the end of the year. We certainly seek extensive consultation, but I can assure you now that this will follow the Treasury’s core principles for regulation – engagement, proportionality, and effectiveness.

27. Now, the current regulatory regime for MSBs has indeed met the original aims set at its introduction – but it has not really had a significant impact in dissuading criminal operators from entering the market.

28. Nor has it had a significant impact on the number of criminal prosecutions or the value of criminal assets recovered.

29. That’s why we need further significant reforms to keep the UK approach to regulation of the MSB sector fully effective, both domestically and in the face of wider, especially European, developments.

30. In particular, the regulatory regime should become much more rigorous. The sector’s potential for financial abuse needs to be, and seen to be, more aggressively confronted and countered.

Closing remarks

31. Let me end by reiterating that we want competitive, innovative, efficient payments. We want proportionate regulation of money transfers that effectively address issues around money laundering and the risk of terrorist finance.

32. And we do not want to impose unnecessary prudential controls on money remitters.

33. There will always be a tension between these matters, but I know that together, industry, government and those involved in making this work can forge a partnership that delivers real results on global money transfers.

34. Thank you.