The FCA has published the results of its coronavirus financial resilience survey1 revealing that up to 4,000 financial services firms are at a ‘heightened risk of failure’ because of the pandemic. The sector breakdown also reveals that payments and e-money institutions reported the lowest levels of liquidity.
It is in this context that the FCA has turned the regulatory spotlight on the payments and e-money sector. Firms are increasingly providing a wider range of services and reaching a scale where a failure could have severe consequences in the wider markets. Approximately £17 billion is believed to be held by payments and e-money institutions. The failure of any payment or e-money firm where consumers were left out of pocket has potential to both cause market harm and be damaging to individual customers.
The regulator has adopted a three-way approach to support the sector with a more robust regulatory framework.
Payments and e-money institutions are required to have a wind-down plan in place to assist with an orderly wind-down. In December, I set out guidance on this requirement with tips for wind-down planning in How PSPs can meet FCA requirements for a wind-down plan.
A new insolvency regime for the payment and e-money sector is being introduced. The rules of the regime have been published2 by HM Treasury and were subject to consultation until 28 January.
In its financial resilience report published in January, the FCA recognises that its role "isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way. By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed, and consumers are adequately protected."3
All payment firms have had to have a wind-down plan in place since July 2020. But, according to the FCA, the sector has a way to go in satisfying the regulator that they would be prepared for an orderly wind-down. There are significant concerns that poor planning would raise costs, eroding customer funds in any wind-down scenario.
The FCA requested access to, and has reviewed, wind-down plans from payments and e-money institutions. In a recent webinar4 the key message from the FCA was that many of these are falling short of expectations. Of a sample of 14 wind-down plans, not a single one was judged to meet expected standards. As an example, the following omissions were noted:
Our team has reviewed and advised on a number of wind-down plans across the sector and the FCA's comments resonate with what we see in the wider market. Payment and e-money institutions should take time ensure their wind-down plans address where plans are likely to fall short.
Management information should be at an appropriate level of granularity, with regularly tested thresholds which can give management real-time insight into the health of the business.
By considering early warning indicators that would trigger a wind-down, firms can recognise the point where an orderly wind-down could be achieved. This will help avoid an insolvent scenario where consumers are likely to be further out of pocket. These indicators can also improve a firm’s ability to implement recovery options and spot areas where a new approach could improve existing operations or financial processes.
The FCA has become aware that existing insolvency processes for payments and e-money institutions are ‘sub-optimal’ from the consumer's perspective. When armed with only standard insolvency rules, the large number of creditors in these cases has meant that insolvency practitioners have had difficulties efficiently winding down firms, and returning money to consumers and other creditors. Administration cases involving payments and e-money firms have taken years to resolve, with consumers receiving reduced monies after the cost of distribution. As an example, the FCA highlights that in six recent cases of payments and e-money institutions in insolvency proceedings (of which three started in 2018), only one has so far returned funds to customers2.
Therefore the FCA is introducing a bespoke special administration regime for payments and e-money institutions (pSAR). The pSAR will give IPs an expanded toolkit, which will allow an IP to prioritise the return of client assets.
The FCA's focus on payments and e-money regulation is clearly not going to go away and compliance requirements for firms are only going to increase. Management should take the time now to prepare for this.
4 Payments & E-Money: safeguarding & wind-down webinar for compliance consultants, FCA, 21 January 2021