FCA has finalised its guidance to payment and e-money firms on safeguarding customers’ funds in light of the impact of Covid-19. Alongside the guidance is a portfolio strategy letter to CEOs of relevant firms, setting out the potential areas of harm FCA has identified and the action it expects firms to take.
The guidance takes effect immediately, and FCA plans to consult later in the year on changes to its approach document, which is likely to include incorporating the guidance.
The letter identifies the areas of potential consumer harm where firms do not comply with their obligations as:
- safeguarding – FCA is still finding material issues even after asking firms to review their safeguarding arrangements;
- prudential risk management – FCA found many firms had incorrectly calculated their own funds requirement;
- financial crime – firms need better to manager their risks, particularly on AML and in agent oversight;
- financial promotions and customer communications – where firms often use inappropriate terminology;
- governance and oversight – firms often do not review their businesses as they grow and change; and
- records management and reporting.
FCA expects CEOs to discuss these matters, and, if appropriate, the firm’s Brexit preparations, with their boards, and agree any further action that needs to be taken.
The guidance primarily:
- places more stringent requirements being placed on firms in terms of documenting and communicating with regard to safeguarding customer funds. There are further restrictions on when and how safeguarded funds can be utilised, including unallocated funds. Specific audit now required in relation to safeguarding activity and compliance. The guidance includes a suggested (but not required) format of acknowledgement letter that firms could use;
- increases requirements on firms to review governance processes and conduct liquidity and capital stress testing. Firms should more regularly consider their liquidity position, and capital adequacy assessments should be carried out at least annually. Firms must also periodically review the key third parties with whom they work; and
- stresses the need for firms to prepare wind down plans for a number of circumstances and to review them annually. Firms which are part of groups should have their own independent plan.