This article was first published on Lexis®PSL Financial Services on 13 August 2018. Click for a free trial of Lexis®PSL.
On 1 August 2018, the FCA published consultation paper CP 18/21 (Consultation) on extending the FCA’s Principles for Business and communication rules to payment service providers (PSPs) and e-money institutions (EMIs). In this article we look at the background to the proposed changes, the key proposals and what firms should do next.
Background
In contrast with the vast majority of regulated businesses, which are authorised under the Financial Services and Markets Act 2000 (FSMA), payment services and e-money firms have generally been authorised or registered under their own separate legislation. This was borne out of a desire to create a lighter-touch regime for PSPs and EMIs.
The issue with this, however, was that FSMA contained provisions granting the FCA power to make rules over FSMA-authorised firms (FSMA firms), but it did not generally allow for the FCA to make rules in respect of PSPs or EMIs. This situation is then complicated by the fact that payment services and issuance of e-money can be conducted by certain FSMA-authorised firms (for example banks), which meant that certain firms in the payment services and e-money markets were subject to a higher standard of requirement, supervision and enforcement than others providing the same service, but who were not FSMA-authorised.
So the current framework means that even relatively small FSMA firms (such as consumer credit firms and claims management companies) are required to follow the FCA’s Principles for Business, but PSPs and EMIs are not. Furthermore, even within the payment services and e-money markets, there is a disparity in treatment between FSMA firms on the one hand, and PSPs and EMIs on the other, even when providing the same services.
The FCA have also expressed concern about misleading communication practices arising from these markets. Certain FSMA firms are subject to the requirements in BCOBs (the Banking Conduct of Business sourcebook which is part of the FCA Handbook), however these rules are not applicable to communications with payment services and e-money customers, which can result in firms promoting and advertising their products in a way which is not clear fair and not misleading, the general FCA communications standard. The FCA have also expressed concern about the way that certain PSPs and EMIs communicate and market currency exchange transfer services.
The introduction of the Payment Services Regulations 2017 amended the regimes for PSPs and EMIs to extend the FCA’s general rule-making powers to cover these firms. The FCA now want to use these new powers to level the playing field as between FSMA firms and EMIs and PSPs in respect of the Principles for Business, and to address its concerns in relation to customer communications.
Key changes
The proposed changes under the Consultation fall under three main headings.
The first is extending the FCA’s Principles for Business to the provision of payment services and issuance of e-money (where not already regulated), as well as other connected activities. The FCA’s twelve principles of business are high level requirements and deal with matters such as integrity, skill, care and diligence, management and control, financial prudence, customer interests, communications with clients, conflicts of interest and relations with regulators. The FCA can take enforcement action for a breach of the Principles, as well as for any breach of the FCA Handbook rules.
The second is to extend the application of its BCOBs communications rules and guidance to communications with payment service and e-money customers. This will require firms to present their promotions in a way that is clear, fair and not misleading, and will equip the FCA with its full arsenal of powers to discipline firms who breach the requirements, which it hopes can be used for enforcement purposes and as a deterrent.
Finally, the Consultation looks at introducing new rules and guidance into BCOBs to deal with currency exchange transfer services. These will apply to payment services and the issuance of e-money that involve a currency conversion.
What should affected firms do?
First and foremost, firms should read the Consultation. The deadline for comment is 1 November 2018, so if firms have issues with the rules as proposed, they can either respond to the Consultation directly or make representations to their relevant trade body.
The second would be to understand what effect such rules would have on their firm. Whilst there may be some amendment to the final rules from those consulted on, the earlier the business understands its own systems and can identify areas which may need updating, the swifter and easier the process will be once the FCA publish their final rules (expected before 31 January 2019). As the saying goes: fail to prepare, prepare to fail.
Next Steps
Our experience is that waiting until the policy statement is published before taking any action can often make implementing compliance procedures very time pressed when the final rules do eventually get published. Firms might wish consider how they might change their business practices if such measures are brought in.
Lawyers can be an invaluable tool in this: looking at existing compliance policies and suggesting relevant amendments, reviewing existing communications with customers or sharing their experiences working with FSMA-regulated firms about the scope of the existing requirements.
The Consultation closes for comments on 1 November 2011, with a policy statement expected in January 2019.
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