On 9 July 2020, the Financial Conduct Authority (FCA) published Feedback Statement 20/10 (FS 20/10), summarising and responding to feedback received from a previous consultation. On the same date, the FCA also released additional finalised guidance for payment and e-money firms.
The FCA hopes to conduct a further consultation later in 2020 or in early 2021 on changes to the FCA Approach Document on Payment Services and Electronic Money, which will likely include a proposal to incorporate the latest FCA guidance on safeguarding and prudential risk management.
FS 20/10 Feedback Statement
On 22 May 2020, the FCA had published a consultation paper on COVID-19 and safeguarding customers’ funds. In it, the FCA proposed additional temporary guidance to strengthen payment and electronic money firms’ risk management due to the circumstances of COVID-19. The consultation closed on 12 June 2020, with the FCA having received responses from over 60 organisations.
See below for a summary of the main comments received:
‘Do you agree that we should provide additional guidance on safeguarding, managing prudential risk, and wind-down plans? If not, please explain why.’
Most respondents supported the approach of providing additional guidance, although some raised concerns about timelines and the impact of the guidance. In response, the FCA aims to reduce the risk of harm to customers if firms fail by making the wind-down process as orderly as possible, and enabling customer funds to be returned in a timely manner. Additionally, the FCA noted that firms should familiarise themselves with FCA guidance as soon as possible, and take steps to ensure that their procedures and controls meet expectations.
‘Do you agree with our proposed guidance on safeguarding? If not, please explain why.’
Many respondents supported receiving more guidance on safeguarding. Some suggested changes to the proposed guidance and expressed concerns regarding the following:
- Concerns about the FCA template acknowledgement letter for safeguarding banks, and its reference to customer funds being held on trust;
- Uncertainty around safeguarding compliance audit reports, what due diligence questions firms should ask potential auditors, what types of non-compliance audit firms should report;
- Concerns about unallocated funds, and whether they should be treated as relevant funds;
- Uncertainty regarding the type of information which is disclosed by firms could be misleading to customers;
- Concerns about whether small payment institutions (SPIs) may be expected to safeguard; and
- Questions about safeguarding account names.
An important change to the guidance is that the form of the acknowledgement letter is now not mandatory – although firms must obtain a written acknowledgement from the holder of safeguarded accounts that it has no right over monies in the account opened.
More guidance on audit obligations has also been included in the final guidance.
FCA has also changed its views on unallocated funds – and now considers that those should be treated as “relevant funds” and given safeguarding protections pending allocation.
‘Do you agree with our proposed guidance on managing prudential risk? If not, please explain why.’
Some respondents suggested changes to the proposed guidance. Responses included:
- Concerns about capital adequacy and the potential impact of deducting intra-group receivables from capital, to reduce intra-group risk, including potential disadvantage to UK firms;
- Uncertainty about FCA expectations of the types of stress testing firms should carry out; and
- Uncertainty about which firms the FCA liquidity risk management guidance applies to.
The FCA has clarified that the following types of firms should carry out liquidity and capital stress testing:
- authorised payment institutions (APIs);
- authorised electronic money institutions (AEMIs); and
- small electronic money institutions (SEMIs).
Regarding liquidity risk management guidance, the FCA has clarified that this applies to APIs, AEMIs, and SEMIs.
‘Do you agree with our proposed guidance on wind-down plans? If not, please explain why.’
Most respondents supported the FCA approach, however some raised questions about which types of firms should have wind-down plans. The FCA clarified that the regulator requires firms to have a winddown plan to manage their liquidity, operational and resolution risks as well as to quickly identify customer funds and return them as a priority. The FCA also expects firms’ wind-down plans to be proportionate to the size and nature of the firm.
Additional Guidance
In light of the impact of COVID-19, the FCA released additional temporary guidance to the industry to strengthen firms’ prudential risk management and arrangements for safeguarding customers’ funds.
The main highlights are as follows:
Safeguarding
- A firm should keep records and accounts necessary to identify what relevant funds the firm holds, at any time and without delay;
- Some permitted forms of safeguarding create the potential for discrepancies that are difficult to avoid (i.e. where relevant funds are held in a currency that is different to the currency of the payment transaction), in such situations, firms should carry out reconciliations as often as is practicable; and
- The FCA expects firms to clearly document this reconciliation process and provide an accompanying rationale.
Prudential risk
- APIs, AEMIs, and SEMIs should ensure they have robust governance arrangements, and effective procedures to identify, manage and monitor risk;
- APIs, AEMIs and SEMIs should carry out stress testing to analyse their exposure to a range of severe business disruptions, or the failure of one or more of their major counterparties, and assess whether they would cause the firms’ business to fail, and assess their potential impact, using internal and/or external data and scenario analysis;
- A firm’s senior management should ensure that its capital resources are reviewed regularly; and
- APIs, AEMIs and SEMIs should carry out capital adequacy assessments at least annually. They should also undertake them if there is a substantial change in their business model.
Wind-down plans
The wind-down plan should consider the winding-down of the firm’s business under different scenarios, including a solvent and insolvent scenario.
In particular, the wind-down plan should include/address the following:
- information which would help an administrator or liquidator to quickly identify customer funds and return them as a priority;
- funding to cover the solvent wind-down of the firm, including the return of all customer funds;
- realistic triggers to start a solvent wind-down;
- the need for any counterparties (e.g. merchants) to find alternative providers; and
- realistic triggers to seek advice on entering an insolvency process.
Additionally, the FCA expects the complexity of firms’ wind-down plans to be proportionate to the size and nature of the firm. Firms should review their wind-down plans at least once annually.
For many payment institutions and e-money institutions, the guidance represents heavier expectations on firms than firms may have understood up to now. Consequently firms must consider their current arrangements in the light of this guidance and many of them or likely to have to enhance their systems and controls in the areas to which the guidance relate.
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