During the first week of June, the Financial Conduct Authority (FCA) issued two publications on COVID-19-related matters that will be of particular interest to FCA-authorised firms (“Firms”), including payment services firms that are particularly affected. These two publications are:
Below we discuss the key takeaways from these two publications.
The FCA’s response to COVID-19 and expectations for 2020
In a speech delivered by the FCA’s Executive Director of Supervision, the FCA outlined its response to COVID-19 and its expectations for the Firms in 2020. Here are some of the key highlights about which Firms should be aware:
Temporary Ease of Reporting Burden:
Firms should consult the Dear CEO letter from 31 March to inform themselves of actions taken by the FCA in response to the pandemic. For example, the FCA has temporarily dropped a requirement for some Firms to inform their investors if the value of the portfolio under their management drops by 10% or more until 1 October 2020.
Expectations of the Firms During the Pandemic:
Operational Resilience
- Firms must have contingency plans to deal with disruptions as a result of the pandemic and have tested them properly in line with the FCA’s operational resilience consultation paper.
- Firms should identify and document resources that support their essential business services.
- Firms need to continue focusing on operational resilience, and use the flexibility provided by the FCA’s rules to support customers, as we are not yet certain what the “new normal” may look like.
Financial Resilience
- Firms must not cut corners on governance or systems of controls, such as poor record-keeping and any action which may increase the likelihood of financial crime.
- If some Firms exit the market altogether, these Firms must return client assets and money without delay.
Outcomes the FCA Is Focusing On:
- Firms must maintain sufficient arrangements to protect client money and custody assets in line with FCA’s requirements. Further, Firms must consider the best interests of their clients at all times.
- Firms must continue to provide suitable advice and discretionary investment decisions and act with integrity.
- Firms must continue to prevent financial crime and market abuse through adequate controls and governance.
Future of Regulation:
- Any changes in regulation on the part of the FCA will start from the perspective of the end-user. The FCA will, first and foremost, consider their vulnerabilities.
- Given the complexity of the FCA Handbook, the FCA is looking to shift from a regulatory framework that is based on rules to one that focuses on outcomes.
Coronavirus and safeguarding customers’ funds: proposed guidance for payment firms
The FCA has noticed recently that some of the Firms have not correctly implemented the relevant provisions within the E-Money Regulations 2011 or Payment Services Regulations 2017 (“Relevant Regulations”). As a result, and in the context of the global pandemic, the FCA is proposing additional, but temporary, guidance to help the Firms manage their prudential risks and protect their customers’ funds. Some key highlights from the proposed guidance are as follows:
Keeping Records and Accounts and Making Reconciliations:
- A Firm should keep records and accounts necessary to allow it to identify what relevant funds the Firm holds, at any time and without delay.
Relevant funds for this purpose are i) sums received from, or for the benefit of, a payment service user for the execution of a payment transaction; ii) sums received from a payment service provider for the execution of a payment transaction on behalf of a payment service user; and iii) funds that are received in exchange for e-money issued by the issuer.
- Firms should, among other circumstances, notify the FCA as soon as they have not complied with or are unable to comply with any of the safeguarding requirements in the Relevant Regulations.
Safeguarding Accounts and Acknowledgement Letters:
- If a Firm has a safeguarding account to hold relevant funds or equivalent assets, the Firm must name the account in a way that demonstrates that the account does not hold any Firm money.
- Only the Firm may have any interest or right over the relevant funds or equivalent assets in a safeguarding account, subject to the exceptions in the Relevant Regulations.
- Firms must have systems in place to reduce the risk of loss of customer funds through fraud, misuse, negligence, or poor administration.
Unallocated Funds: If a Firm issues e-money on low-value, pre-paid gift cards (where the ultimate card holder is unknown), funds received are relevant funds. This is particularly important for our clients engaging in the sale of gift cards.
Annual Audit of Compliance with Safeguarding Requirements:
Firms that are under an obligation under the Relevant Regulations to perform audits should arrange specific annual audits to demonstrate their compliance with the Relevant Regulations.
Prudential Risk Management:
- Governance and Controls: Firms should ensure that they have robust governance arrangements, effective procedures and adequate internal control mechanisms in line with their authorisation conditions.
- Capital Adequacy: Firms must accurately calculate, on an ongoing basis, their capital requirements and resources.
- Liquidity and Capital Stress Testing: Firms should carry out stress testing to analyse exposure to, and the potential impacts of, severe business disruptions.
- Risk-Management Arrangements: Firms should always consider their liquidity and whether they need additional credit lines to meet upcoming liabilities.
- Wind-Down Plans: The FCA will now require Firms to have a wind-down plan to manage their liquidity and resolution risks. The wind-down plans should consider the winding-down in both a solvent and an insolvent scenario.
As the pandemic continues to evolve, the FCA and other regulatory bodies in the UK will no doubt issue further guidance for firms within their regulatory scope. At MoFo, we are prepared to help our clients navigate through this turbulent time. Please contact us at any time if you have or your Firm has any questions regarding the financial regulatory landscape.
Tom Macintosh Zheng and Benjamin Beswick, solicitor trainees in our London office, contributed to the writing of this alert.