On 9 July 2020, the Financial Conduct Authority (FCA) sent a “Dear CEO” letter to all UK payment services firms and electronic-money issuers (collectively, payment firms). The Letter highlighted six key areas where the FCA has identified non-compliance by payment firms which harms consumers.
The Dear CEO Letter was sent on the same day that the FCA published Feedback Statement 20/10 and new finalised guidance for payment firms in light of the issues presented by the COVID-19 pandemic. You can find our FinBrief on Feedback Statement 20/10 and finalised guidance here.
The new guidance and Dear CEO Letter both come at a time when the FCA has just allowed Wirecard Card Solutions Limited, the UK regulated firm associated with Wirecard AG in Germany, to re-commence issuing electronic money and provide payment services, subject to the FCA’s ongoing monitoring and other restrictions.
Dear CEO Letter
In the Dear CEO Letter, the FCA reminded payment firms that they must continue to comply with the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, as appropriate. In addition, payment firms must continue to meet the conditions of their authorisation as well as the FCA’s Principles for Businesses (PRIN) which was extended to apply to payment firms from 1 August 2019.
The FCA also commented on the market conditions for payment firms. The payments and electronic money sectors have developed quickly with an increasing number of firms and products entering the market. The FCA has expressed concern that some firms that are growing rapidly may be unprofitable as they seek to claim market share. According to the FCA, the COVID-19 pandemic may affect payment firms’ financial strength and the availability of their external funding at time when these firms are under competitive and market stress.
The FCA identified the following six areas where non-compliance with these obligations harms consumers.
- Safeguarding
All payment firms have obligations to ensure customer funds are appropriately safeguarded so if the firm enters insolvency, customer funds are returned in a timely and orderly way.
The FCA asks payment firms to review their safeguarding arrangements regularly and follow the new FCA guidance on safeguarding. The FCA will proactively be testing payment firms’ safeguarding arrangements.
- Prudent Risk Management
Payment firms must ensure they have adequate financial resources. In the Dear CEO Letter, the FCA states that firms should continue to meet their own funds requirements at all times and have sufficient regulatory capital in order to be able to incur losses whilst remaining solvent. The FCA notes that it expects to see payment firms reviewing and remediating their prudential risk management, where appropriate.
- Financial Crime
Combating and preventing financial crime is a key cross-sector priority for the FCA. During a recent supervisory review of the payments sectors, the FCA found that several firms were failing to take appropriate steps to manage their financial crime risks.
Among the issues the FCA found are the following:
- payment firms not having effective business-wide anti-money laundering risk assessments;
- the absence of customer risk assessments or assessments with methodologies that didn’t include all relevant risk factors;
- a lack of effective and risk-sensitive enhanced due diligence for high-risk customers; and
- senior management and payment firms not having adequate oversight of agents, particularly when these agents operate overseas.
In terms of actionable items, the FCA asks payment firms to be aware of the financial crime risks inherent within their businesses – including risks associated with innovate products, unusual or agency-type business models and cross-border payments.
- Financial Promotions and Consumer Communications
The FCA recently reviewed a sample of firms financial promotions for compliance with the rules and guidance in PRIN and chapter 2 of the Banking Conduct of Business Sourcebook (BCOBS) which has applied to payment firms since 1 August 2019, as applicable. The FCA noted several issues, including the following:
- claims about service and pricing that could not be substantiated;
- use of the FCA regulatory status in a promotional way, including inappropriate use of terms, such as “secure”;
- inappropriate use of the term “free” when describing costs and charges relating to a currency conversion;
- promotions of electronic money providing a misleading impression the firm is a “bank”.
According to the Dear CEO Letter, payment firms should ensure all their financial promotions are clear, fair and not misleading. The FCA will continue to undertake proactive reviews of financial promotions and will contact firms where they observe issues.
- Governance and Oversight
According to the FCA, a root cause of many payment firms’ regulatory issues is inadequate governance and oversight. In particular, the FCA has observed that many payment firms do not review their regulated processes with sufficient frequency in light of the applicable regulatory framework as their business changes or grows. The FCA requests that payment firms’ senior management ensure that processes are reviewed regularly and governance functions are appropriately scaled to reflect the growth of that firm and the risks that apply to it.
- Records Management and Reporting
The FCA has identified material inaccuracies and omissions in the information that payment firms have provided the FCA through regulatory reporting and responses to requests for information. The FCA has also found that, in most cases, record keeping of regulated processes is inadequate to demonstrated they have been conducted in a manner which meets the regulatory requirements.
The FCA has asked payment firms to ensure they maintain compliant records and supply the FCA accurate and clear information on time.
The Dear CEO Letter concludes by the FCA stating that it will take action to address consumer harm, including in restricting regulatory permissions of payment firms or by cancelling permissions if it will protect consumers.
The Dear CEO Letter also reminded payment firms with customers in the European Economic Area (EEA) that they must decide on their approach to their existing EEA customer contracts in light of the end of the transitional period on 31 December 2020.
and then 