EBA and ESMA consultation could affect APIs and EMIs

Posted on: 12 August 2020

Written by: John Burns

Authorised Payment Institutions (APIs) and E-Money Institutions (EMIs) could be forgiven for not paying attention to the launch of a new consultation last month. But they might be well advised to take notice, as it is highly likely the requirements will be reflected in the Financial Conduct Authority’s (FCA’s) expectations of payment services providers.

On 31 July 2020, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued a consultation to revise their joint guidelines for assessing the suitability of members of the management body and key function holders.

It’s hardly surprising if this went unnoticed by APIs and EMIs, as the guidance is addressed to credit institutions. However, the term ‘management body’ is already in use in the EBA’s payment institution and EMI authorisation guidelines. Given the FCA’s recent ‘Dear CEO’ letter and their concern about governance issues, it seems likely that the direction of travel will mean that requirements for credit institutions will be reflected in the FCA’s expectations of payment services firms.

The consultation considers gender balance in the management body, saying firms should take measures to improve a more gender-balanced composition of staff in management positions. It also, helpfully, says that being a member of affiliated companies or affiliated entities is not, of itself a barrier to a member of the management body acting with independence of mind.

Perhaps the more important messages for APIs and EMIs concern financial crime and management having the required knowledge, experience and sufficient time to devote to their role, especially where they occupy multiple roles.

Members of the management body must have sufficient time to commit to the job, so people with multiple roles may be challenged to show that they are able to fulfil their responsibilities to an appropriate standard in each.

The members of the ‘management body’ must equally have appropriate knowledge, experience and skills to contribute to identifying, managing and mitigating money laundering and financing of terrorism risks. We have increasingly witnessed the FCA’s Payments Authorisations Team focus on EMI and PSD Individuals possessing appropriate skills and experience. It is a condition of authorisation that the directors and management of APIs and EMIs have appropriate knowledge and experience. Given these concerns and the potential for APIs and EMIs to be used for money laundering and financial crime, it’s perhaps not surprising to expect increased regulatory focus.

The proposed amended guidance says:

When concerns have been raised, it is up to the institution to demonstrate that the individual meets reputation, honesty and integrity standards. In this respect, competent authorities are also required to verify whether the suitability requirements are still fulfilled where they have reasonable grounds to suspect that money laundering or terrorist financing is being or has been committed or attempted, or there is increased risk thereof in connection with that institution.”

This essentially calls for firms to reassess the collective suitability of the members of the management body, particularly where there are reasonable grounds to suspect that money laundering or terrorist financing has been or is being committed or attempted or there is an increased risk.

The EBA and ESMA consultation considers the competent authorities’ power under the directive to remove members of the management body where they do not fulfil the requirements.  While there is no such specific power for the FCA in the Payment Services Regulations or E-Money Regulations, the FCA’s increased willingness to take regulatory action means that in such circumstances they would probably seek agreement with the firm that any such individuals resign voluntarily.

In summary, this consultation gives further indication of the concerns of regulators and is very likely to influence the FCA’s supervision of payment institutions and EMIs.  A regular review of governance arrangements is essential for firms in this sector and it would be wise to take into account the consultation when undertaking any such review.

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John B

John Burns

John is one of the UK’s foremost compliance experts in payment services, and he is Senior Advisor in our Payment Services Practice.

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