Final notice: Premier FX case study - part 2

Mar 16, 2021 12:00:00 AM

We are publishing a series of five short case studies based on the final notice published on 23 February 2021 by the FCA in relation to Premier FX’s misconduct, false advertising, and unethical business practices between the years 2006 – 2018. The final notice details the actions taken by Premier FX which ultimately led to the firm entering liquidation.

Case Study Part 2: Misunderstanding of regulatory permissions or deliberate misuse

What happened?

Premier FX was approved to undertake solely money remittance activity, which, according to the PSRs, means transmitting funds on behalf of a payer, without a payment account being created in the name of the payer or payee. Funds must be received solely for remitting a corresponding amount and should be made available to the payee. Premier FX, however, breached the regulations by acting outside its permissions – by holding funds indefinitely, without accepting a payment order for an onward transfer, and by creating accounts in the names of their customers, allowing them to withdraw funds.

Staff might have been kept in the dark regarding the apparent wrongdoing, and probably did not understand the activities that the firm was permitted to conduct as they: 1. failed to report the breach of permissions to the FCA 2. also used the firm’s services on their own behalf – perhaps not realising that the firm was not authorised to undertake certain activities and believing that their money would be segregated and covered by FSCS (which was not the case).

Why firms must understand their permitted activities

Regulation 21 of PSR 2017 confirms that APIs carrying out payment service activity, other than what was authorised, means they have breached the regulations. The FCA may cancel an authorisation if a firm has provided payment services other than what it was authorised to do. Additionally, the FCA may impose a penalty on a firm that has contravened a requirement imposed on it under the Regulations. It is therefore in the firm’s best interest to ensure it undertakes only its permitted activities.

Money remitters need to understand their activities, ensuring they always operate within the scope of their permissions. These firms should never accept funds from customers without receiving instructions to remit them immediately, or at a future date, nor should they create an account in the name of the customer. Such an account will allow customers to hold funds and decide later how they wish to use the funds. This activity is entering the realm of other permissions.

Firms undertaking foreign exchange activity must understand the limitations of a forward contract. Forward contracts entered for commercial purposes are exempted from the regulations; however, those for investments reasons are not. FX firms must therefore ensure that such contracts are made for commercial purposes rather than investment. Contracts entered for investment purposes instead of commercial purposes can lead to the firm offering futures, which are regulated under FSMA. As such, a firm would commit a contravention of FSMA since it would be acting without the authorisation required to deal in futures.

It is imperative that firms understand and apply the relevant regulations and their permissions. This understanding and application both play key roles in not only ensuring regulatory compliance but preventing/reducing any detriment to customers and other stakeholders, and this may help to protect a firm’s reputation.

What firms should consider, to stay on track

Firms should regularly review their permissions, alongside their current activities, to ensure that there is effective oversight over the business, that their permissions are up to date (to prevent a breach) and that they are providing accurate information to their customers. They should also ensure that staff are knowledgeable about their regulatory permissions and requirements, which can help quickly identify any internal failings or malpractice.

The FCA requires firms to notify them of any significant changes to the business, which includes any activity that could have a significant impact on the firm’s risk profile.

If the regulations and/or permissions prove to be complex or confusing, firms should seek external help i.e. consultancy services specialising in the relevant sector.

Look out for part 3 of our blog series focusing on Premier FX’s inability to safeguard correctly, and how this led to millions of pounds of customers’ funds being unaccounted for.

How can we help you?

If you’d like to know more about how we can help you with your internal governance arrangements, or with any other aspect of payment services compliance, our expert team is here to help.

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