On 22 May, the Financial Conduct Authority (FCA) took action to strengthen protections for customers using payments firms, launching a consultation on additional guidance for these firms.
The consultation ‘proposes additional temporary guidance to strengthen payment firms’ prudential risk management and arrangements for safeguarding customers’ funds in light of the exceptional circumstances of the coronavirus pandemic (Covid-19)’.
What does the FCA mean by ‘payments firms’?
The announcement describes them as firms that ‘bring financial parties together to deliver a simple payment experience for business and their customers by processing payments quickly and efficiently, and offer services including money remittance’.
It’s a rapidly-developing sector, with a growing number of firms entering the market.
This rapid development sees some payments firms being unprofitable in their early days as they grow their customer base and market share. Many rely on investor funds to remain solvent in the short-term. The coronavirus may be exacerbating the challenges firms face, with decreased revenues and a reduced ability to operate and grow.
The FCA’s approach to payments firms
The new announcement reiterates that the payments sector ‘is a priority area for the FCA’, with this consultation following previous work designed to ensure that payments firms are adequately protecting customer funds.
‘Making payments safe and accessible’ was one of the priorities outlined in the regulator’s Business Plan in April 2020, and this guidance is part of a broader programme of work the FCA was planning to consult on later in the year. The consultation has been brought forward ‘due to pressures the coronavirus pandemic is placing on firms’ finances’.
What does the proposed guidance cover?
The guidance provides additional direction for firms on meeting their requirements around safeguarding customers’ funds. It also outlines the FCA’s expectations of firms around their winding down plans, to help ensure that customer funds are returned in a timely manner should the firm wind down.
How are firms currently failing to meet FCA expectations?
Although there is already guidance on safeguarding and managing prudential risk, the FCA has found evidence that ‘some firms have not implemented the Electronic Money Regulations 2011 or Payment Services Regulations 2017 as we expect’.
Compliance breaches have included:
- Commingling of customer and firm funds
- Firms keeping inaccurate records and accounts
- Not having sufficiently effective risk management procedures
The proposed new guidance aims to:
- Help strengthen firms’ prudential risk management and their arrangements for safeguarding customers’ funds to help them meet authorisation and supervisory expectations in these areas
- Outline how firms can put in place more robust plans for winding down
- Help firms prevent harm to their customers if firms fail, by making the wind-down process as orderly as possible and facilitating the return of customer funds in a timely manner
You can read the full details of the proposed guidance on the FCA website.
What information should payments firms provide to customers?
If you work in marketing compliance, of particular interest will be the additional guidance around the information firms give to customers. The consultation document says that ‘In particular, firms will need to be careful to avoid giving customers misleading impressions about how much protection they will get from safeguarding requirements’ – in terms of both the services to which the safeguarding requirements apply or any suggestion that customers’ claims would be paid in priority to the costs of distributing the safeguarded funds.
Firms should also avoid suggesting that funds are protected by the Financial Services Compensation Scheme where this is not the case.
These expectations are in line with wider FCA guidance and rules around ensuring communications and financial promotions are clear, fair and not misleading; the regulator has the power to ban misleading promotions and/or impose fines if communications fall short of their standards.
Customers have the right to expect that firms, and the payment methods they use – including payments firms – are compliant with FCA regulations. You can help to ensure that your approaches and communications meet the regulator’s expectations by familiarising yourself with its consultation and proposed new guidance as well as the FCA’s financial promotions rules and Treating Customers Fairly guidance.
What happens next?
In its consultation, the regulator asks firms:
- ‘Do you agree that we should provide additional guidance on safeguarding, managing prudential risk, and wind-down plans? If not, please explain why.’
- ‘Do you agree with our proposed guidance on safeguarding? If not, please explain why.’
- ‘Do you agree with our proposed guidance on managing prudential risk? If not, please explain why.’
- ‘Do you agree with our proposed guidance on wind-down plans? If not, please explain why.’
Anyone wishing to respond should send comments by 5 June 2020 to CPSafeguarding@fca.org.uk.
Following the consultation, the FCA plans to publish a letter to CEOs of payment service providers, to include the proposed guidance with any amendments following the consultation responses.
A full consultation will be carried out later this year on changes to the FCA’s payment services approach document, which provides guidance for firms on safeguarding and managing prudential risk. The regulator’s expectation is that the temporary guidance will remain in place until the Approach Document is updated following the full consultation later in the year.
If you want to read more about how you can ensure your firm is treating customers fairly, you can download a copy of our free TCF FAQs. The FAQs are free and you can find them in our resource library.
How can we help firms?
At LS Consultancy, we offer a number of distinct products and services which can be deployed individually or combined to form a broader solution including copy advice.
We work both within individual teams and across many departments to offer a complete solution, with a range of cost effective, compliance and marketing solutions which are uniquely suited to supporting firms.