What are we talking about? The FCA has set out the CASS rules (Client Asset Sourcebook) to help guide and regulate FCA registered firms who hold or control client money or custody assets.
The sourcebook is a comprehensive document that deals with all elements of CASS including who should apply what elements of the rules and what they need to do. I have previously summarised the main CASS rules and how they may apply to authorised firms and now move onto the payment services regulatory regime.
Some abbreviations to start
A company may be authorised as a Payment Institution (PI) under the Payment Services Directive (PSD), a European Directive. This will then be recorded in the Financial Services Register (FSR).
To apply the directive in the UK, the Payment Services Regulations (PSRs) were enshrined in law. The Financial Conduct Authority (FCA) then publicised the approach that should be followed to help firms navigate the PSRs.
Who needs to be a PI?
In short it is anyone who provides payment services in the UK. Though some firms may already be covered under an existing FCA registration such as e-money issuers or banks.
The PSD provides the legal framework for a single market in payment services. As always, the FCA Handbook has the full detail, within PERG 15, however as an example a firm who offers a facility to hold cash and carry out payment services or can execute payment services on behalf of a customer is a Payment Institution.
Deposit holders do not need to be registered as PIs, though it may hold funds for a customer, it is doing so without the view to providing payment services. This is important as holding deposits requires a more onerous registration, they could be considered a bank!
What types are there?
A Money Remittance provider is a firm that sends money from one location to another. For example, Western Union.
A firm that Executes transactions is a firm that acts only as an intermediary between the payment service user and the supplier of the goods or services.
Other firms covered by the PSD would include those holding cash on account for payment or providing direct debit services and payment cards. A UK ‘challenger’ bank Monzo is a good example of a company offering these types of services.
Why register under the PSD?
1 – It gives you access to a ‘passport’. This a European Economic Area (EEA) wide right to provide services that the firm is authorised to provide in its home nation.
2 – The registration process is not as stringent as full FCA registration under the Financial Services and Markets Act 2000 (FSMA) so can provide a company with an access point to the financial services world.
3 – The market has great potential, the big banks do not offer a competitive service and it is not difficult to offer a cost effective and efficient service. At least that’s what the 370 authorised Payment Institutions and 750 Small Payment Institutions in the UK think!
What are the obligations of a PI?
There are certain capital requirements that must be maintained depending on the type of permissions that have been applied for and granted. This will range from an initial requirement of €20,000 for a money remittance provider, €50,000 for a firm executing transactions to €125,000 for any other payment institution.
Ongoing capital requirements will apply and there a choice of methods for calculating these taking into account overheads, monthly payment volumes or income. See Section 9 of the FCA’s guidance or Schedule 3 of the PSD for more information.
A capital adequacy return must be submitted on the FCA reporting portal, GABRIEL, to confirm ongoing capital requirements. This is annual and must be submitted within 30 days of the accounting reference date. Section 13.2 of the FCA’s guidance has more detail.
With regards to the requirement for an audit, unlike an e-money issuer or a bank a PSD firm may be entitled to the small company exemption. I have written a separate article on financial services firms exemption from audit which can provide more detail.
What is a Small PI (SPI)
A firm that has monthly transactions of less than €3m on average in the last 12 months may be eligible to be a SPI. The benefits of this include less stringent requirements and a considerably faster application process. However, a SPI may struggle to find a bank that will set up an account for it and will not have access to EEA wide passporting.
PSD II is near. It must be ‘transposed into national law’ by member states on 13 January 2018. This will bring a raft of exciting changes to the payments landscape in the UK and could significantly change the way we do business.
Please note that the above information is a summary of selected chapters of the FCA Handbook and the Payment Services Regulation and should not be solely relied upon when making decisions. Please always ensure the appropriate professional advice is obtained to ensure compliance. The FCA Handbook contains the detailed rules and can be accessed here. This information is correct as at 12 May 2017.