The latest missive from the FCA’s Payments Supervision department has hit e-money firms’ virtual letterboxes. This 'Dear CEO' letter is certainly a curious thing. What is curious is how narrow the letter is, focusing exclusively at the communications to customers and the (lack of) explanations provided in terms of the differences in protection between e-money services and traditional banking services.
A ‘Dear CEO’ letter is one of the supervisory tools that the Financial Conduct Authority (FCA) uses to impart significant ‘guidance’ to a particular population of firms on a range of technical matters (i.e. clear instruction absent any specific regulation or policy statement). This letter is aimed solely at electronic money institutions (EMIs) – 284 Authorised EMIs (including those with Temporary Permission), and 32 Small EMIs.
So far, so good. But the key to this letter can be found in the second paragraph, where the FCA states “We are concerned that many e-money firms compare their services to traditional bank accounts…but do not disclose the differences in protections between e-money accounts and bank accounts.”
This reflects the rise of EMIs who are content to be described (if not describing themselves) as ‘challenger banks’. ‘Bank’ is a 'Sensitive Business Name' under the Companies Act 2006, for which permission to use is needed from the FCA. Only banks licensed as such can use the word ‘bank’. Simple enough.
But the features and functionality of many EMI products are often very similar to traditional ‘current accounts’ and EMIs are more than happy to market on that basis. Whilst not using ‘bank’ anywhere in their marketing collateral, the press is more than happy to include such firms within the ‘challenger bank’ or ‘neobank’ description. More accurate to use ‘banking challenger’ I’d say.
What’s the difference?
In terms of the protection, bank customers’ deposits are protected under the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per bank (up to £170,000 for joint accounts). Money held in an e-money account is not protected under the FSCS. Instead, EMIs are required to ‘safeguard’ relevant funds using one of the methods allowed by legislation – segregation or insurance/guarantee.
In theory, if a client holds over £85,000 with an EMI then the totality of that sum is protected by safeguarding. So, in theory, it could be argued that safeguarding affords better protection to customers than the FSCS. Well, that’s fine in theory but, and this is key to the Dear CEO letter, the FCA’s experience is that EMIs (and payments firms in general) are still failing to safeguard customers’ funds properly.
What is the FCA expecting?
The FCA is now asking EMIs to write to their customers and explain the differences between safeguarding and FSCS coverage and, explicitly that FSCS does not apply. This is separate to any marketing or contractual documentation the EMI may have already issued e.g. within its Terms and Conditions.
BCOBS2 is mentioned in the letter and this already contains specific rules in relation to what needs to be included in communications or promotions. For example, a firm must not emphasise potential benefits without indicating relevant risks. Check.
In addition, FCA Principles for Businesses have been in place for EMIs (and other payment firms) since 1 August 2019. Prior to 2019, the high-level Principles for Businesses did not apply to payment and e-money institutions. This was largely because it was easier to implement the first Payment Services Directive (PSD1) in the form of standalone Treasury regulations (the Payment Services Regulations 2009), rather than implement the directive through the Financial Services & Markets Act and the corresponding FCA Handbook.
Since PSD2 and the establishment of a dedicated Supervision Department, the FCA have been concerned that communications with customers are misleading. This includes a tendency for some EMIs to use language in their marketing materials indicating that they are offering ‘bank accounts’ and, by implication, that FSCS protection may apply.
How we can help
You have six weeks in which to review your financial promotions in line with the 'Dear CEO' letter, and prepare and issue a letter to all your e-money customers to remind them how their money is protected. This is not a general outline as I have provided above, but specific to your firm and, I would suggest, including details of the credit institution(s) with whom safeguarding accounts are held.
Oh, and don’t forget to sight your Board on both the contents of the letter and your plan to address. Governance within payments firms is another ‘hot topic’ for the FCA, so do ensure you are able to demonstrate an appropriate discussion and an audit trail.
We can provide assistance in reviewing your marketing material and your proposed correspondence to your customers. In addition, and remembering that this is now mandatory under the FCA’s Finalised Guidance last year, we can conduct a Safeguarding Audit of your overall compliance with the regulations and guidance, including an assessment of marketing material.