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Are non-bank payment service providers protecting customers funds?

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Financial Conduct Authority (FCA) recently revealed that some non-bank payment service providers (PSPs) are not doing enough to protect customers’ funds and it is urging them to take action. Although the PSPs are not rushing to react, they are looking to make sure they understand the safeguarding requirements fully before the act.

Non-bank PSPs have received letters from the regulator, that requests them to provide a written declaration that they are compliant with the 2017 regulations by 31st July 2019. The regulations are created to ensure that the claims of electronic money holders or payment service users are prioritised over other creditors in the event that a non-bank PSP becomes insolvent. PSPs that fail to comply could face potential sanctions, such as licenses being revoked or financial penalties and censures for breaches, alongside this they could face serious reputational damage.

what was the review focus?

The regulator’s decision to focus on safeguarding arrangements follows a recent review of non-bank PSPs – including electric money (EMIs) and authorised payment institutions (APIs) – to assess how well they are meeting requirements to protect users’ funds.

Review findings

The review carried out made light of a number of shortcomings, which some non-bank PSPs may need to address to ensure their compliance. For example, some of the firms surveyed by the FCA were unable to identify funds that should be safeguarded and take steps to segregate them on receipt by receiving them into a designated account. Others were failing to ensure that these safeguarding accounts were clearly designated as such. Some non-bank PSPs were not doing enough to ensure that agents or distributors were safeguarding relevant funds appropriately. Others were failing to perform reconciliations regularly and act on their findings quickly enough.

For the non-bank PSPs to avoid the wrath of the FCA, they must take stock of the services they provide and familiarise themselves with the regulations – ensuring a clear understanding of how the requirements impact their operational activities.

Companies must be aware of the risks to customer’s funds and ensure they oversee the safeguarding arrangements. The FCA have emphasised the need of segregating relevant funds upon receipt. This therefore means regular checks will be required to confirm that the correct amount of money is being safeguarded. Non-bank PSPs should also ensure that documentation is accurate, detailed and includes a clear rationale. These safeguarding arrangements should be continuously reviewed and monitored. This is especially important in a fast-growing industry sector.

Are your measures up to scratch?

Where the FCA sees flaws in a firms’ safeguarding measures, it has stated they will take steps to aid them, providing their self-assessments are honest, and reasonable attempts to comply are evident. The firm should gain the support of a compliance officer or advisor to ensure the process runs smoothly, with minimal operational disruption. In addition, the firm may need to invest in staff training, to ensure that skilled people are in the correct roles and the firm’s safeguarding policies and arrangements are well managed.

Although communicating safeguarding to customers is not essential especially if in the process of improving the internal processes, those that apply with the FCA’s regulations may wish to promote this internally and to others in the industry.

Don’t be to hasty

Before you go running to make a declaration of compliance to the FCA, PSPs must ensure they provide an accurate response. In this situation it is better to flag the areas where further attention may be needed and the steps the firm is taking to address these issues, than ignore the matter altogether.

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Sarah Hallam - FCCA

Director

Sarah Hallam is a Menzies Director with a wealth of audit and compliance experience. Sarah also provides international accountancy & tax advisory.