Failings on client funds safeguarding jeopardise fintech growth

Out-Law News | 10 Oct 2019 | 4:34 pm | 1 min. read

Growth in fintech companies is at risk if fledgling businesses in the industry fail to meet client funds safeguarding requirements, a specialist in payments law has said.

Andrew Barber of Pinsent Masons, the law firm behind Out-Law, was commenting after a senior official at the Financial Conduct Authority (FCA) said non-bank payment service providers face enforcement action if they do not meet the requirements.

Maha el Dimachki, head of payments and retail banking at the FCA, issued the warning at a conference in London on Tuesday, according to legal news service M-Lex.

The requirements for safeguarding service users’ funds in the Payment Services Regulations 2017 and Electronic Money Regulations 2011 seek to ensure that payment service providers (PSPs) and electronic money institutions (EMIs) protect customer money by creating a segregated asset pool of relevant funds from which to pay the claims of electronic money holders or payment service users in priority to other creditors if the PSP or EMI becomes insolvent.

Earlier this year the FCA carried out a review of 11 non-bank payment service providers (PSPs) to assess how well they meet the requirements. The review found that some firms were non-compliant in a variety of areas, and the FCA told firms they should review safeguarding arrangements and the rationale for decisions made, and take "prompt remedial action" if inadequacies were identified.

Barber said: "The requirement to safeguard client money and keep it separate from firm funds has been a requirement of payment service providers since the introduction of the Payment Services Regulations 2009. There were not material changes to the safeguarding requirements in the Payment Services Regulations 2017, but the implication of the FCA’s comments is that some firms still haven’t got to grips with a requirement that has been in place for 10 years."

"The failure of one or more non-bank payment service providers to comply with safeguarding requirements could potentially affect millions of UK consumers and it is good to see the FCA focusing on this core requirement for payment firms. Growth across fintech industry will suffer if users are worried about the security of their funds and do not trust payment service providers to hold their funds in accordance with the regulations," he said.

At the same time it published its review, the FCA issued guidance on meeting the safeguarding requirements. It subsequently invited authorised payment institutions to confirm that they had either carried out a review of its safeguarding procedures in light of the guidance and complied with the requirements or no longer carried out payment services and were taking steps to cancel their authorisation.

The FCA's attestation form was aimed at ensuring "there is clear accountability and senior management focus on those specific issues where we would like to see change within firms".