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What happened?

In a short consultation issued on 22 May, the FCA proposed additional temporary guidance on strengthening payment firms’ Prudential Risk Management and their arrangements for safeguarding customers’ funds. The proposed guidance comes in response to the exceptional circumstances imposed by the coronavirus pandemic.

Topics considered in the consultation include:

Safeguarding

• • Recordkeeping, accounts and reconciliations
  • Safeguarding accounts and acknowledgement letters
  • Selecting, appointing and reviewing third parties
  • When the safeguarding obligation starts
  • Unallocated funds
  • Annual audit of compliance with the safeguarding requirements
  • Small Payment Institutions
  • Disclosure on the treatment of funds to customers on insolvency

Prudential Risk Management

• • Governance and controls
  • Capital adequacy
  • Liquidity and capital stress testing
  • Risk management arrangements
  • Wind-down plans

Our response

Payment services firms may be interested to know that we’ve responded to the four questions within the consultation as follows:

Q Do you agree that we should provide additional guidance on safeguarding, managing prudential risk, and wind-down plans? If not, please explain why.

Yes, it would be very beneficial for firms to have additional guidance explaining the FCA’s expectations, including examples of good and bad practice where possible.

Q Do you agree with our proposed guidance on safeguarding? If not, please explain why.

On balance, we welcome the proposed guidance. Our main concern relates to Small Payment Institutions (SPIs). It is still notoriously difficult to open a safeguarded bank account with an EU credit institution, with evidence of a minimum 12 months’ trading often required. Allowing firms to process the SPI application without evidencing a designated safeguarded account allows them to start processing transactions, gaining knowledge and experience in the process. This, in turn, enables them to grow business ideas into profitable companies, and ultimately approach banks to request safeguarded accounts.

For this reason, we do not support requiring SPIs to have a safeguarded account in place on registration. They can still, however, be required to follow the principles of safeguarding (identifying relevant funds, not co-mingling, undertaking reconciliations, etc.), thus ensuring that they are well versed in safeguarding procedures (particularly relevant if they need to become APIs in future). We would welcome further guidance for SPIs on the requirement to inform clients about the risks involved in undertaking business where their funds are not safeguarded.

Considering the difficulties firms face applying for – let alone opening – safeguarding accounts, it would be difficult to implement the ‘review of third parties’ guidance in practice. It seems sensible that firms be required to document their relationship with banks and to follow existing EBA guidance. But, without a change in the market’s current appetite for offering safeguarding accounts, it could be hard to implement the proposed guidance.

In relation to the FCA’s expectation that firms should not give misleading impressions to Payment Service Users about the extent of protection they will get from safeguarding requirements, it would be helpful to have examples of wording which the FCA would not consider misleading.

Q Do you agree with our proposed guidance on managing prudential risk? If not, please explain why.

It would be helpful to have clarification on any impact this guidance has on SPIs, RAISPs, and, in particular, SEMIs. Although SPIs and AISPs have no capital requirements, do they still need to consider the liquidity requirements outlined in this guidance? SEMIs do have capital adequacy requirements, so would the guidance apply in its entirety to these firms?

Q Do you agree with our proposed guidance on wind-down plans? If not, please explain why.’

We welcome the additional guidance on wind-down planning. We would suggest, however, that the FCA consider a rules-based approach to wind-down planning. This would ensure that firms implement specific controls, rather than interpreting guidance. As above, clarification would be welcome on which firms this applies to.

How can we help you?

If you’d like to know more about safeguarding arrangements for payment services, or any other aspect of FCA compliance, our expert team is here to help. Contact us on 0207 436 0630 or email info@thistleinitiatives.co.uk.