Financial Conduct Authority lays down clear priorities for UK payments sector

In a portfolio-wide letter sent on 16 March 2023 to the payments and e-money industries, the Financial Conduct Authority (FCA) has emphasised its expectations regarding what firms authorised under the Payment Services Regulations 2017 and Electronic Money Regulations 2011 must deliver and the priorities they should uphold while carrying out their services.

The three outcomes

The FCA commended competition and innovation within the UK payments industry but highlighted in its letter the inadequate governance practices that could pose a danger to customers and the financial system as a whole. The UK financial regulator, in light of the cost-of-living crisis and its objective to protect consumers, identified three outcomes that businesses should deliver:

1. Ensure that customers' money is safe.
2. Ensure that firms do not compromise financial system integrity.
3. Meet the needs of customers, through high-quality products, innovation, and implementation of the Consumer Duty.

The FCA has also taken the step of setting out exactly what actions it expects firms to take as a result of its letter.

Outcome one aims to mitigate the risks posed by a firm's failure, an issue which is increasingly important given recent market turbulence in the banking sector. The regulator draws reference to inadequacies in governance practices, in particular in safeguarding, prudential risk management and wind-down planning.

Outcome two focuses on the exposure of payments firms to financial crime, expressing the concern that certain practices of payment institutions (PIs) and electronic money institutions (EMIs) may be weak points, as compared to banks, in preventing financial crime. The FCA's priorities in this area are to enhance PIs' and EMIs' protections against money laundering, sanctions and fraud.

Outcome three reconfirms the regulator's commitment to overseeing implementation of the "Consumer Duty". The FCA has previously set out its expectations for PIs and EMIs in implementing the Consumer Duty, and this letter reinforces those previous messages.  

Cross-cutting priorities

The FCA also set out three other priorities that they believe underpin and cut across the outcomes set out in the letter:

1. Governance, leadership and oversight of agents/distributors – ensuring that PIs and EMIs have individuals with the correct level of expertise, supported by appropriate governance arrangements to allow for the proper oversight of activities, as well as a robust process for entering into arrangements with agents and/or distributors.
2. Operational resilience – the FCA has reminded firms that the operational resilience requirements as found in SYSCO (the Senior Management Arrangements, Systems and Controls Sourcebook) 15A apply, and that firms have milestones they must meet prior to 31 March 2025 in implementing the regime properly.
3. Regulatory reporting – PIs and EMIs are required to submit regular reports to the FCA, which has stated that it has "seen sustained non-compliance with our reporting requirements". In a sign that it is losing patience, the UK regulator has suggested that administrative charges of £250 and possible enforcement action or loss of authorisation may result from non-compliance.

Authorisation process

The FCA also reiterated that the authorisation process is necessarily robust, with firms needing to be ready to conduct activities at the point of application, including having appropriate controls and suitable senior individuals put forward as part of the application.

This is supported by a further FCA comment in its recent Perimeter Report, in which it stated that, across the regulated perimeter as a whole, one in five applications in the financial year 2021-22 were refused, rejected or invited to be withdrawn; this is up from one in 14 applications in the previous financial year 2020-21.

What does this mean in practice?

Firms should work through the FCA's expectations and confirm which of the areas covered by the letter applies to them. Documenting the subsequent work undertaken, and decisions to make or not make any operational changes, will be key in demonstrating that the content of the letter has been taken seriously. Previous enforcement cases indicate that the FCA expects firms to take heed of its warnings and failure to do so can potentially be seen as an aggravating factor in any potential sanction.

The letter zeroes in on several specific measures that all PIs and EMIs should make a priority. The FCA has focused on wind-down planning and re-emphasised the need to include clear triggers to commence an orderly, solvent wind-down. Despite not specifically applying to PIs or EMIs, the FCA has highlighted that firms should take into account regulatory guidance on wind-down planning, alongside the findings of its recent thematic review.

The letter also reiterates the urgency of Consumer Duty-related requirements, drawing attention to the expectations outlined in the FCA's letter to payments firms last month. Here, the regulator stressed that firms should ensure that they are prioritising their work appropriately, which may involve accelerating their sharing of information with other firms in the distribution chain in order to meet the end of April 2023 deadline.

Osborne Clarke comment

The FCA's recent communications to PIs and EMIs reinforce the overall message that the regulator is increasingly prepared to take an assertive stance in supervising and enforcing the obligations placed on PIs and EMIs.

With the payments and e-money industries firmly in the FCA's crosshairs going into second quarter of 2023, relevant businesses should take steps to align their governance processes with the expectations and priorities set out by the regulator in these latest letters and be prepared to explain those actions to the regulator, if requested.

All payments firms (including those seeking authorisation) can expect a greater level of scrutiny over obligations such as safeguarding, wind-down planning and operational resilience, and the regulator to take more decisive action when expected standards are not met. 

This Insight was authored by Adam Rutledge, a Trainee Solicitor at Osborne Clarke.