The FCA is consulting with payment service providers to strengthen prudential risk management and safeguard customers’ funds. Steven Clews looks at what this means for your business.
On 22 May 2020, the FCA published a short consultation containing proposed guidance for payment services providers (PSPs), including both authorised payment institutions and emoney institutions. The consultation discussed additional temporary guidance with the objective of strengthening both prudential risk management and safeguarding customers’ funds during the COVID-19 lockdown, and had a consultation period of only two weeks.
This rapid consultation exemplifies the re-active and targeted response of the regulators in recent weeks. In this regard, the FCA’s focus on PSPs should not come as a surprise. Conventional customers of PSPs will inevitably be disproportionately impacted by the effects of coronavirus and the prolonged economic recession that is predicted. The proposed guidance underlines once more the FCA’s spotlight on vulnerability in the current climate and appears to be a direct response to issues identified in ongoing thematic work.
This short consultation builds on concerns around the potential for consumer harm, outlined in the FCA’s multi-firm review of PSPs published in July 2019, which highlighted, in particular, weaknesses in safeguarding arrangements for customers’ funds. This resulted in an accompanying Dear CEO letter, which required firms to review their safeguarding arrangements and to attest that they met the requirements set out in the Electronic Money Regulations 2011 (EMRs) or the Payment Services Regulations 2017 (PSRs), as well as the FCA’s Approach Document to Payment Services and emoney.
Concerns outlined in business plan
In its business plan for 2020/21, published near the start of lockdown, the FCA expressed concerns that the coronavirus emergency would impact PSP’s financial strength and the ability of customers of those firms to access cash and payment services. Indeed, the FCA stated in the business plan that they would act swiftly where firms failed to meet safeguarding and other regulatory requirements.
Clarification on requirements
The additional guidance published now provides welcome clarification to important requirements for safeguarding included in the PSRs, EMRs and the approach document. Firms will need to consider carefully whether these ‘clarifications’ are fully in line with their own interpretation of the requirements. Inevitably, there will be nuances in approach, for example, to the safeguarding of unallocated funds. As such, we recommend that firms undertake an assessment of the proposed guidance against their own specific arrangements and business model.
One specific section of the proposed guidance indicates that FCA expects firms to arrange specific annual audits of the safeguarding requirements under the PSRs/EMR, and to arrange an audit of their compliance with safeguarding arrangements whenever there is a change to their business model, which would materially affect those arrangements. While there is more detail to be provided on this area, it is clear now that the FCA is requiring an increased level of scrutiny from that needed currently to ensure that firms are meeting their expectations and therefore reducing the risk of customer harm.
In addition to further guidance and clarification to that set out in the approach document for prudential risk management, the FCA is now requiring PSPs to have a wind-down plan to manage liquidity and resolution risks, considering the winding-down of the firm’s business under different scenarios, both solvent and insolvent. This approach was also adopted for peer-to-peer lenders in 2019, following several notable firm failures. As is the case with peer-to-peer lenders, funds of customers held with PSPs would not be within the scope of the Financial Services Compensation Scheme in the event of a firm failure, which underlines the FCA’s focus on this sector.
Following the consultation, which closed on 5 June 2020, the FCA intends to include the guidance, as amended in another Dear CEO letter to PSPs. The FCA has also promised a full consultation later in the year on changes to the approach document, which would also reflect this guidance. Until that proposed consultation is complete, the temporary guidance will remain in place.
PSPs should be aware that the FCA has now set down clear expectations of firms. If PSPs do not act in line with the requirements once the Dear CEO letter has been published, they can expect little latitude to be shown by the regulator. Firms should therefore plan now to undertake appropriate reviews and a gap analysis of proposed requirements and be prepared to make the necessary changes.