On 1 August 2018, the UK Financial Conduct Authority (“FCA”) published Consultation Paper 18/21 on ‘General Standards and Communication Rules for the Payment Services and E-Money Sectors’. The FCA proposes in the Consultation Paper to extend certain rules in its Handbook of Rules and Guidance (“FCA Handbook”) to the non-bank payment services and e-money sector. The consultation closes on 1 November 2018. We provide below a brief description of what is being proposed by the FCA, and discuss the potential issues and complications with the proposals.
What is being proposed?
The FCA proposes to extend the Principles for Business in the FCA Handbook to certain payment service providers and e-money issuers. Currently, most of the rules and requirements in the FCA Handbook do not apply to non-bank payment service providers and e-money issuers. This is because the FCA Handbook is derived from the Financial Services and Markets Act 2000 (“FSMA”) whereas payment services and e-money are regulated under the Payment Services Regulation 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”), respectively, which are separate regimes sitting alongside the FSMA regime. (Note that we use the term “non-bank” as a simplified reference to firms which are not authorised as a credit institution, credit union or building society, because credit institutions and the like can carry on payment services and e-money issuance under the banking regulation which is covered by the FSMA. To be consistent with the Consultation Paper, we also refer to credit institutions and the like that carry on payment services or issue e-money as “FSMA firms”.)
As currently proposed, entities that will fall within the extended scope of these rules are essentially non-bank payment service providers and e-money issuers, including payment institutions, e-money institutions and account information service providers (a new type of payment service provider created under the EU Payment Service Directive 2015/2366.) (collectively, “non-bank payment firms”). Under certain circumstances, EEA non-bank payment firms that have passported into the UK under the EU Payment Service Directive 2015/2366 will also be subject to these rules.
The Principles for Business are 11 overarching principles relating to how a firm must conduct its business. All UK authorised firms (apart from the non-bank payment firms referred to above) must comply with these principles. The FCA states in the Consultation Paper that for the purposes of the proposed extension, some of the principles apply only to a non-bank payment firm when it deals with consumers, micro-entities or small charities. For example, Principle 6 requires a firm to pay due regard to its customer’s interests and treat them fairly and the term ‘customer’ is currently defined widely, for FSMA firms, to include institutional clients. The Consultation Paper proposes a new definition of “customer” for non-bank payment firms to limit Principle 6 to customers that are essentially consumers only.
The FCA also proposes to apply to non-bank payment firms the rule that requires communications to customers (i.e. consumers) to be clear, fair and not misleading. For non-bank payment firms that engage in currency conversion as part of their services, certain additional communication rules will also apply (e.g. with respect to how charges payable must be presented). Similarly, the FCA proposes to limit the application of such communication rules to communications provided by non-bank payment firms to customers that are consumers.
Potential issues and complications
We focus in this section on the potential issues and complications that the proposals, particularly with respect to the Principles for Business, may give rise to.
One general issue is that the FCA seems to have difficulty in providing a rationale for extending the rules to the non-bank payment/e-money sector. The FCA states that the ‘harm’ it is trying to address is to prevent market conduct inconsistencies between FSMA firms that carry on payment services or issues e-money (essentially banks) and non-FSMA firms that engage in the same activities (i.e. non-bank payment firms). However, the payment and e-money regime has been deliberately designed to be different so that non-bank payment firms are subject to ‘lighter’ requirements. The FCA itself acknowledges this in the Consultation Paper but it goes on to say that this creates an uneven playing field which the proposed changes are intended to level.
However, the very intention of the separate non-bank payment/e-money regime is arguably to create an uneven playing field because the non-bank payment firms and banks that carry on payment/e-money services are fundamentally different in terms of the risks they pose to the market and to consumers. A bank that carries on payment/e-money services, by its nature, also has other banking businesses such as providing current or savings deposits. Therefore, it is both logical and justifiable to subject banks to additional requirements even if they may also be carrying similar services to non-bank payment firms which likely have no other businesses. Recital 11 of the EU Payment Services Directive 2007/64/EC (“PSD1”) which first established the payment regime states that “[t]he requirements for the payment institutions should reflect the fact that payment institutions engage in more specialised and limited activities, thus generating risks that are narrower and easier to monitor and control than those that arise across the broader spectrum of activities of credit institutions”.
The second and more specific issue relates to the principles themselves. An argument can be made that the requirements set out in the principles are either already included in the payment/e-money regulatory regime or not easily applicable to non-bank payment firms. For example, Principles 1 and 2 requires a firm to act with integrity and conduct its business with due skill, care and diligence; the conditions for authorisation of a non-bank payment firm already cover such fitness and propriety requirements. Principle 4 requires a firm to have adequate financial resources and Principle 10 requires a firm to protect its clients’ assets; a non-bank payment firm is already subject to specific capital requirements and safeguarding requirements with respect to customer funds.
For further example, Principle 8 requires a firm to manage conflict of interest between itself and a customer and a customer and another client, and Principle 9 requires a firm to ensure the suitability of its advice. These are clearly intended for businesses such as investment services (e.g. investment advice or investment management). It is difficult to contemplate how a non-payment firm would provide advice or have a conflict of interest with its customers, in the sense depicted in the principles.
While the draft amendments made to the relevant section of the Principles for Business Sourcebook contain a statement that the principles will not apply to the extent that they purport to impose an obligation which is inconsistent with the PSRs or the EMRs or the relevant EU legislation. However, such a general consistency statement does not seem to offer much certainty as regards how each principle should be interpreted and applied in the context of payment/e-money regulation. Such uncertainty is also exacerbated by the lack of a clear rationale, as discussed above, for extending the requirements to the non-bank payment/e-money sector.
The Consultation Paper itself sets out certain explanations and expectations when discussing how each principle should be interpreted/applied, which should be helpful in setting out the scope of each principle. However, these are not included in the wording of the actual rules.
Finally, the extension of such requirements potentially increases the risk of non-compliance for non-bank payment firms. With respect to FSMA firms, the FCA seems to be increasingly focusing on the Principles for Business as basis for its enforcement actions rather than by referring to breaches of specific rules in other parts of the FCA Handbook. Such an enforcement focus may not be as challenging for FSMA firms as for non-payment firms, because the Principles for Business are designed as overarching principles for FSMA firms and are backed by detailed requirements in other parts of the FCA Handbook. For example, with respect to Principle 11 which requires a firm to notify the FCA of certain matters, SUP15.3 contains details on what matters should fall with the scope of Principle 11 and how a Principle 11 notification should be made. There are currently no such express provisions for non-bank payment firms in the PSRs, EMRs or the FCA’s Approach Document for Payment Services and Electronic Money (July 2018).
Therefore, unless the final rules come with clear guidance and parameters on the scope of each of the principles which are all expressed in generic and very broad terms, it would likely present significant challenges to non-bank payment firms with respect to managing their compliance arrangements and mitigating the risk of being subject to an FCA enforcement action.
The proposed extension of the relevant rules does not seem to sit very well with the current non-bank payment/e-money regime. As discussed, such extension is arguably unnecessary as the substantive requirements contained in the relevant rules are either already included in the payment/e-money regulatory regime or (without necessary amendment) difficult to be made applicable to the sector. Therefore, it is difficult to see what value the proposed extension of the rules can add to the regulation of the non-bank payment/e-money sector other than facilitating enforcement actions by the FCA. It is therefore crucial for the payment industry to engage with the FCA at an early state to ensure its concerns are heard and understood.
If you would like to discuss anything in relation to this article, please contact Kai Zhang.