If you provide payment services or issue e-money (or both) in the UK and you aren’t authorised under the Financial Services and Markets Act 2000 (“FSMA”) you currently enjoy the relatively light touch regulatory regime established under the Payment Services Regulations 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”).  But that is likely to change.

When they were introduced, the PSRs gave the FCA new powers to extend the general regulatory framework set out in the Handbook of Rules and Guidance to payment institutions (“PIs”), small payment institutions, registered account information service providers (“RAISPs”), EEA authorised payment institutions, EEA registered account information services providers and electronic money institutions (“EMIs”);[i] and it intends to use those powers.

In this context, the FCA has published Consultation Paper CP18/21 in order to consult on the following proposals:

• Extending the Principles for Businesses and associated guidance to

1. payment services and connected activities,
2. the issuance of e-money (where it is not already a regulated activity) and connected activities, and
3.  EMIs, PIs and RAISPs when carrying on these activities.

• Applying the communications (including marketing communications) rules and guidance in BCOBS 2 to communications with payment service and e-money customers and extending their application to EMIs, PIs and RAISPs

The kicker here is that once the consultation period is complete, the FCA does not intend to implement any transition period following the publication of the policy statement which will contain the final rules.  Firms will, therefore, be expected to comply with the new requirements immediately from the point of publication.

Extending the Principles for Businesses

As a principles-based regulator, the FCA is keen to ensure that it can intervene across the full body of firms it regulates in order to stop behaviours that it believes are detrimental to consumers or which are inconsistent with the general principles that firms should comply with the demonstrate good business practices in the regulated world. Under these principles firms should:

• conduct their business with integrity;
• conduct their business with due skill, care and diligence;
• take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems;
• maintain adequate financial resources;
• observe proper standards of market conduct;
• pay due regard to the interests of their customers and treat them fairly;
• pay due regard to the information needs of their customers and communicate information to them in a way which is clear, fair and not misleading;
• manage conflicts of interest fairly;
• take reasonable care to ensure the suitability of advice and discretionary decisions for any customer who is entitled to rely upon their judgment;
• arrange adequate protection for clients’ assets when they are responsible for them; and
• deal with regulators in an open and cooperative way and disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.[ii]

In the existing regime the above principles only apply to firms that carry on an activity regulated under FSMA, certain activities carried on as ancillary to a regulated activity and limited unregulated activities.  Meanwhile, PIs and EMI are subject to a general prohibition against unfair commercial practices in Regulation 3 of the Consumer Protection from Unfair Trading Regulations 2008.  The FCA considers that the lack of consistency between these two regimes creates the opportunity for firms in the payments space to carry on misleading practices and to communicate with their customers in ways that are not clear or transparent.

Extending the Communications Rules and Guidance 

EMIs, PIs and RAISPs are not currently restricted to any particular conduct requirements under the PSRs and EMRs when communicating with clients or the wider world.  This has led to dubious marketing practices where firms intimate that they offer services that they do not: take for instance the neo-banks that start out as e-money institutions before graduating on to a full FSMA authorisation but that, throughout their lifecycle, attract customers to do their ‘banking’ with the firm.

The FCA also sets out in CP18/21 the example of operators of currency exchanges who entice customers with exchange rates that aren’t attainable by consumers, but who only find out about the real rates that will apply after going through a sign-up or on-boarding process.

The FCA is, therefore, proposing to apply the communications rules in BCOBS 2[iii] to PIs, EMIs and RAISPs when providing payment services and connected activities.  This would include the implementation of:

• the fair, clear and not misleading rule, i.e. that firms must take reasonable steps to ensure that a communication or a financial promotion is fair, clear and not misleading;[iv]
• systems and controls or policies and procedures to ensure the appropriate implementation of the fair, clear and not misleading rule;
• the rules around the marketing of savings accounts when conducted as a direct offer financial promotion;[v] and
• other general rules as set out in BCOBS 2.3 in relation to communications and financial promotions.

Affected firms should note that this does not amount to an extension of the financial promotions rules in section 21 FSMA and that the BCOBS fair, clear and not misleading rule is to be implemented in a manner proportionate to the activities of the firm in question and reinforce Principles 6 and 7 (i.e. paying due regard to customers’ interests and their information needs).

What is the effect?

Regulated firms will already have a general duty to operate their businesses sensibly and in accordance with the applicable regulatory rules – which will have been considered as part of the process for applying to the FCA for authorisation under the PSRs / EMRs.

However, the FCA’s principles for business are wide ranging, primarily as a result of their lack of specificity, and firms should be ensuring that their general practices are brought up to the level expected by the FCA.  In this regard, the FCA’s stance is clear (and I am quoting from CP18/21 here): “we would expect well-managed businesses to find much that is familiar, given the authorisation, prudential and conduct provisions of [the second Payment Services Directive] and [the second Electronic Money Directive] and other more general requirements that apply to them.”  Of course, not all businesses will meet the definition of a “well run business” in the FCA’s eyes and there will be work to be done by those firms. And yes, there will be a cost implication – “particularly around familiarisation with the extended regime and ensuring/demonstrating compliance” according to the FCA.

That last point is important.  Firms will be required to demonstrate to the regulator that they are acting in accordance with the principles and that their communications are compliant.  In practice, this will mean documenting processes, decisions and considerations taken into account in operating the business and being seen to act with integrity with all counterparties (including consumers and the FCA).

In addition, any marketing campaigns should be reviewed as against the BCOBS standards, which is likely to lead to more legal/compliance intervention in the final content in the case of firms who take these obligations seriously.

Ultimately, the proposals are intended to foster greater consumer protection and it is hard to argue with that in this context.  But firms should be ready.  With no transition period the FCA’s new teeth will bite as soon as the policy statement is published sometime before 31 January 2019.

[i]See paragraph 3 of Part 1 of Schedule 6 of the Payment Services Regulations 2017.  See also paragraph 2A of Schedule 3 of the Electronic Money Regulators.

[ii]See the PRIN 2of the Principles for Businesses Sourcebook of the FCA Handbook.

[iii]The Banking Conduct of Business Sourcebook of the FCA Handbook.

[iv]BCOBS 2.1.

[v]BCOBS 2.2A.