Dear CEO | Release Date: 4th July 2019
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a critical directive to non-bank payment service providers, including authorised payment institutions (APIs) and e-money institutions (EMIs), emphasising the paramount importance of safeguarding customer funds. This communication outlines the FCA’s observations from their recent reviews and provides detailed guidance on expectations and compliance requirements under the Electronic Money Regulations 2011 (EMRs) and Payment Services Regulations 2017 (PSRs). The directive is driven by the need to protect consumers, especially since these institutions are not covered by the Financial Services Compensation Scheme (FSCS).
Importance of Compliance
The safeguarding of customer funds is identified as a crucial consumer protection measure within the regulatory framework. The FCA stresses that appropriate and effective safeguarding measures are essential to ensure that, in the event of a firm’s insolvency, customer funds can be returned promptly and in full. The directive underlines that safeguarding failures can lead to significant harm to consumers, potentially eroding trust in the financial system.
Key Findings from FCA’s Review
The FCA’s recent review focused on how well firms are adhering to the safeguarding requirements prescribed in EMRs and PSRs. The review uncovered several common issues that could jeopardise the safety of customer funds:
Problems with Fund Segregation:
- Many firms demonstrated a lack of understanding about which funds need to be segregated.
- Significant delays were noted in the segregation of funds following their receipt.
- Firms were not performing frequent enough reconciliations to ensure that the correct amounts of funds were segregated.
Inadequate Risk Management and Oversight:
- The review highlighted that many firms had insufficient policy documentation that lacked detail and rational justification.
- There was an evident lack of effective and regular monitoring and review of safeguarding practices.
- Firms with rapidly evolving business models often failed to assess how changes impacted their safeguarding arrangements adequately.
Guidance and Expectations for 2019/20
Given these findings, the FCA has set forth detailed expectations and actions for firms to enhance their safeguarding arrangements:
Comprehensive Review and Improvement of Safeguarding Arrangements:
- Firms are expected to conduct a thorough review of their existing safeguarding practices to ensure they fully meet the regulatory requirements.
- This includes critically assessing and mapping each product or service to determine the adequacy of current safeguarding measures.
Prompt Remedial Actions:
- Firms must take immediate action to rectify any shortcomings identified during their reviews.
- It is mandatory for firms to notify the FCA without delay if they find any material non-compliance within their operations.
Continuous Monitoring and Updating:
- The FCA expects firms to regularly update and review their safeguarding arrangements to reflect any changes in their operational or business models.
- This ongoing process is crucial to maintaining robust safeguarding measures that adapt to evolving market conditions and regulatory expectations.
Attestation and Reporting Requirements
- Firms are required to attest to their compliance with the safeguarding requirements by completing and returning a specific form provided by the FCA. This attestation must be submitted by the stipulated deadline, and any inability to comply should be communicated to the FCA to discuss alternative arrangements.
Conclusion and Next Steps
The FCA’s directive concludes with a strong reminder of the importance of safeguarding customer funds and the role of compliance in maintaining market integrity and consumer trust. Firms are encouraged to actively engage with the regulatory process, continuously improve their safeguarding measures, and maintain transparent and open communication with the FCA.
Key Takeaways and Actions for Firms
Immediate Review and Compliance Check: Firms should urgently review their safeguarding procedures and ensure full compliance with FCA guidelines.
Engagement and Transparency with the FCA: Open lines of communication with the FCA are crucial, especially in instances of potential non-compliance.
Regular Updates and Continuous Improvement: Regularly update safeguarding measures to accommodate changes in business practices and market conditions.
This summary aims to provide CEOs and compliance officers with a comprehensive understanding of the FCA’s expectations regarding the safeguarding of customer funds and the necessary steps to ensure compliance and protect consumer interests