FCA finalised guidance for payments firms: safeguarding customer funds and Covid-19

The FCA recently issued its finalised guidance for payments and e-money firms on safeguarding customer funds and Covid-19. The guidance is designed to mitigate, in the short-term, concerns that some firms are not complying with the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) safeguarding rules in the way the FCA expects. It is also designed to help prevent potential harm to customers in the event of insolvencies caused by Covid-19.

The finalised guidance follows a consultation (see our blog post) and is temporary pending an expected consultation and changes to the FCA’s Approach Document on Payment Services and Electronic Money. The FCA has also published a Dear CEO portfolio strategy letter to payments and e-money firms covering safeguarding and various other matters, as well as a feedback statement following its consultation.

In broad terms, the guidance addresses:

• the PSRs and EMRs safeguarding rules and the FCA’s expectations on firms, including when the FCA expects to be notified of a firm’s failure to comply with the safeguarding rules and clarifications on how Principle 10 (“A firm must arrange adequate protection for clients' assets when it is responsible for them”) applies to small Payment Institutions (who are not otherwise subject to the specific PSRs and EMRs safeguarding rules) and small Electronic Money Institutions (to whom the guidance applies in respect of their payment services unrelated to issuing e-money);
• guidance on various prudential risk and capital issues and rules for payments and e-money firms; and
• guidance on matters which the FCA expects payments and e-money firms to address in their wind-down plans.

The FCA has also included in its guidance an example acknowledgement letter. Firms are required to have an acknowledgement (or otherwise demonstrate) that the credit institution or custodian which provides its safeguarding account (for customer funds) has no interest in or right against the funds or assets held in that account (see paragraph 10.40 of the FCA’s Approach Document for further information). The FCA has clarified that the acknowledgment should be in the form of a letter and has set out its expectations of the content of that acknowledgement letter.

As we noted in our earlier blog post, firms should continue to expect this to be an area of increasing regulatory focus, particularly as the FCA (and other UK regulators) assess how firms have responded to COVID-19. As with the client money regime for investment firms, it is likely that the FCA will view ongoing failures to comply with the safeguarding rules as a serious matter – particularly as the FCA continues to articulate its expectations and standards expected of firms in this area.