The FCA has piled on more rules for payment services and e-money firms in an attempt to protect customers’ funds during the downturn. We can help you to navigate the obstacles.
Two regulations for payment services and e-money firms (Regulation 23 of the PSRs 2017 and Regulation 21 of the EMRs 2011) require that no one other than the payment institution (PI) or electronic money institution (EMI) has “any interest in or right over” relevant funds or assets placed in an account with an authorised credit institution or an authorised custodian.
More specifically, the FCA’s ‘Our approach’ document for the sector said that the PI or EMI should have a written acknowledgement from the authorised credit institution or custodian (or otherwise be able to demonstrate) that they have no rights (such as a right of set-off) or interest (such as a charge) over funds or assets in that account.
The economic impact of Covid prompted the FCA to issue additional guidance on 9 July aiming to further strengthen risk management in the sector. It said PIs and EMIs will be subject to an external safeguarding audit. Included within the guidance was an example safeguarding letter that firms must obtain from credit institutions or authorised custodians confirming that they will safeguard relevant funds.
What’s in the FCA letter?
Firms are asked to send the three-page-long example letter to the credit institution or authorised custodian and ask for their counter signature. In other words, a letter simply issued by the credit institution or authorised custodian is not enough. The example letter also includes confirmations that are not covered in the regulations, such as:
- notifications that the credit institution or authorised custodian has received from the PI or EMI covering: their segregation obligations in relation to relevant funds; the reason why safeguarding accounts have been opened; and confirmation that funds in the account are held by the PI or EMI as trustee
- the titling of the account as a safeguarding account
- the requirement of the authorised credit institution or custodian to release funds standing to the credit of the account on instructions from a liquidator
- that the responsibility for compliance with the safeguarding obligations is with the PI or EMI.
Why it’s worth persisting
What action should you take if you already have a safeguarding confirmation letter issued by your bank pre-dating 9 July 2020?
Our advice is to try to obtain an updated confirmation in the form requested in the FCA guidance. This means that when the FCA asks you to provide confirmation of the safeguarding status of your account, it will be in their precise form and there are unlikely to be any questions arising.
But there’s a fly in the ointment. The feedback we’ve received is that banks are reluctant to provide a confirmation in this form. We don’t know exactly why, but they may feel uncomfortable countersigning a three-page letter which they perceive exposes them to unnecessary risks. They may need approval from their legal department. Or it may simply be too much bother.
How we can help
What happens if you can’t obtain a confirmation in the required form? All is not lost. It may be that the letter you already have does comply with the regulations and that’s all that really matters.
We recently handled a case where the FCA rejected a safeguarding confirmation letter provided by a PI and asked the firm to provide one instead in their example form. The firm approached its bank for a revised letter but the bank would not oblige.
As a result, the FCA considered the firm was in breach of its conditions of authorisation as it had failed to provide appropriate evidence of compliance with Regulation 23 of the PSRs for the bank account in question. The firm even feared that it would be forced to close.
The firm appointed PKF to challenge the FCA’s stance. We were able to argue that the form of the original letter was in compliance with the regulations. The FCA accepted this and, with great relief, the firm now continues to trade successfully.
If you would like further advice on this subject, please contact us.
