The UK’s Financial Conduct Authority (FCA) has signalled an end to the light-touch regulation of payment and electronic money (e-money) firms, which have been at the forefront of the UK’s financial technology (fintech) boom.
Earlier today, the FCA tightened its rules for the custody of client money at e-money and payments firms, less than two weeks after it froze the activities of a UK subsidiary of German fintech giant Wirecard, citing concerns over the safety of customers’ funds.
Wirecard’s parent company collapsed into insolvency on June 25 after the exposure of a €1.9bn corporate fraud.
The FCA’s freeze on Wirecard’s UK operations caused over a dozen pre-paid card and digital wallet providers to suspend their services.
This, in turn, led to millions of users of payment cards and apps around the world losing access to their savings.
Although the FCA subsequently reversed its Wirecard freeze, the case has raised broader concerns about the safety of customer funds at e-money and payment firms.
E-money holders are not protected by government deposit insurance schemes and some industry experts suggest client money could be at risk if a payments or e-money firm became insolvent.
However, in its new guidance the FCA made no reference to Wirecard.
It said it was introducing its new e-money safeguarding requirements as a follow-up to a May consultation on the impact of Covid-19 on payment firms’ business models.
Under the new rules, the FCA said, e-money and payment firms will have to undertake a number of extra steps to ensure that customer funds are kept separate from those of the service provider.
In particular, the FCA said, firms should be able to identify what relevant client funds the firm holds, ‘at any time and without delay’.
“It is important that the asset pool is not improperly mixed”
And payment firms’ accounting records should enable a third party, such as an insolvency practitioner, to distinguish clients’ funds from the firms’ own money, and the funds of one customer from those of another, the FCA said.
Payment firms should also obtain written assurance from the banks holding safeguarding client funds that those banks have no interest in or access to funds held in the customer account, the regulator said.
In its new guidance, the FCA said extra care is also needed to ensure that customers can retrieve their funds without delay in the case of a payment firm’s insolvency.
“It is important that the asset pool from which to pay the claims of e-money holders or payment service users in priority to other creditors in the event of insolvency is not improperly mixed with funds, assets or proceeds received or held for different purposes,” the FCA said.
“We are now clarifying that this is because mixing these assets may cause delays in returning funds to e-money holders or payment service users following an insolvency event of the firm,” the regulator said.
The FCA is also warning payment and e-money firms not to make misleading statements about the extent to which customer funds are protected.
“Examples [of misleading statements] include firms implying that customer protections arising from safeguarding extend to a firm’s non-regulated business, or implying that on the firm’s insolvency, the customers’ claims for repayment of their funds would be paid in priority to an insolvency practitioner’s costs of distributing the safeguarded funds,” the FCA said.
“Payment and e-money firms should also avoid suggesting to customers that the relevant funds they hold for them are protected by the Financial Services Compensation Scheme.”
In one recent payment services firm insolvency, customers of Supercapital, which entered administration in October, are still waiting to retrieve their money and have already been told that they are likely to lose at least 10 percent of their funds to cover the costs of administration.
“Many firms may be failing to meet the required standards”
In a ‘dear CEO’ letter published to accompany the new guidance and addressed to the heads of payment and e-money firms, the FCA warned it had found widespread breaches of the existing regulatory standards for safeguarding, risk management, financial crime, advertising, governance and record-keeping.
“We have found that issues in these areas are widespread and many firms may be failing to meet the required standards. You are responsible for ensuring that the appropriate people at your firm understand the rules and ensure that your firm complies with them,” the FCA said.
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