Out-Law News | 28 May 2020 | 12:08 pm | 2 min. read
The UK’s Financial Conduct Authority (FCA) has issued draft guidance for payment and e-money firms to help strengthen their prudential risk management and arrangements for safeguarding customers’ funds.
The guidance is aimed at supporting the sector and its customers during the uncertainty caused by the coronavirus pandemic and will be followed later in the year by a full consultation on changes to the FCA payment services approach document.
The temporary guidance covers safeguarding, managing prudential risk and wind-down plans and acknowledges that many payment services firms are unprofitable in the early stages. The FCA said it was also concerned that the pandemic could affect payment firms’ financial strength and the availability of their external funding.
Financial services regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the FCA had signalled to payment services and e-money firms in a Dear CEO letter in 2019 and its 2020/21 business plan that more needed to be done on safeguarding and other aspects of their business.
“While the timing might be a surprise the content of this guidance consultation shouldn’t be – firms have been on notice for a while now about these issues. Payment service and e-money firms need to consider this proposed guidance carefully and take the opportunity to feedback on anything that they disagree with or identify where further clarity is needed,” Barber said.
“With the guidance due to be finalised by the end of June it is important for firms to carefully consider it and ensure that they are ready to follow it. We will undoubtedly see further work from the FCA in the second half of 2020 to ensure that payment service and e-money firms are following the guidance and risks around safeguarding, capital adequacy and liquidity and wind down plans have all been addressed,” Barber said.
In the draft guidance, the FCA highlights safeguarding issues covered by the payment services approach document that was first published in 2017. It clarifies that it expects firms to clearly document client fund reconciliation procedures and provide a rationale for the way funds are reconciled, in order to help with the distribution of money if the firm becomes insolvent.
It points to the need for firms to notify the FCA in writing if they are unable to comply with safeguarding requirements, clarifying that the types of non-compliance it wants to be notified about include not keeping up to date records of relevant funds and safeguarding accounts, or where a firm is unable to comply due to the decision by a safeguarding credit institution to close a safeguarding account.
Other safeguarding clarifications include the protection of unallocated funds, which should be placed in a separate account. The FCA said firms should try to identify the customer to whom unallocated funds relate, and either return the money or treat it as relevant funds and safeguard it accordingly.
The FCA went on to clarify that it expects firms which are required to be audited to arrange specific annual audits of their compliance with safeguarding requirements under the Payment Services Regulations and the Electronic Money Regulations. Firms need to exercise due skill, care and diligence in selecting and appointing auditors and take account of whether their proposed auditor has sufficient skills, resources and expertise in auditing compliance with the safeguarding requirements under the regulations.
The temporary guidance expands on prudential risk management guidance in the approach document, reminding firms they should have robust governance arrangements, effective procedures, and adequate internal control mechanisms in place and regularly review these.
The FCA clarified that it requires firms to have a wind-down plan to manage their liquidity and resolution risks. The wind-down plan should consider the winding-down of the firm’s business under different scenarios, including a solvent and insolvent scenario.
The FCA is asking for feedback on the guidance by 5 June.
15 Apr 2020
08 Jul 2019