On May 18, 2021, the UK Financial Conduct Authority (FCA) published a “Dear CEO” letter (the Letter) asking e-money institutions to ensure that their customers understand how their money is protected. The FCA has expressed concern that e-money institutions do not adequately disclose the differences in protections between e-money and bank accounts and that customers are not aware of the differences in protections between e-money services and traditional banking services, in particular that the UK Financial Services Compensation Scheme (FSCS) protection does not apply to e-money accounts.
The FCA has noted that its rules under BCOBS 2.3 require communications made to e-money customers and payment service or e-money promotions to be accurate and not emphasize any potential benefits of a payment service or e-money product (e.g., current account functionality) without also giving a fair and prominent indication of any risks (e.g., lack of FSCS protection). The FCA has stated that omitting this could mean that the information firms give customers is insufficient or even misleading.
The FCA has also expressed concerns that firms are giving a potentially misleading impression to customers about the extent to which products or services are regulated by the FCA. In particular, if a communication or a payment service or e-money promotion names the FCA as the regulator of a firm or other provider and refers to matters the FCA does not regulate, the firm should ensure that the communication makes clear that those matters are not regulated by the FCA (BCOBS 2.3.4G).
Immediate actions for UK e-money institutions
The FCA has requested that e-money institutions
- write to their customers within six weeks of the date of the Letter to remind them of how their money is protected through safeguarding and that FSCS protection does not apply
- review their financial promotions in light of the BCOBS requirements discussed above
- draw the Letter to the attention of the board and ensure that the board has considered the issues raised and approved any actions taken in response
The FCA has stated that it intends to follow up with a sample of firms to assess the action taken.
FCA approach to enforcement
The Letter is the latest step in a ratcheting up of supervisory efforts by the FCA affecting the payments sector. In particular, the FCA is starting to take a much more proactive approach to supervising nonbank payment service providers, such as e-money institutions and payment institutions, in relation to their safeguarding obligations. The FCA has carried out reviews to assess compliance with safeguarding requirements, which included requests for attestations of compliance from senior managers.
In addition, in February 2021, the FCA publicly censured Premier FX Limited for failing to properly safeguard its customers’ money. The FCA also determined that the firm had seriously misled its customers by informing them that it was able to hold their funds indefinitely, that their funds would be held in secure, segregated client accounts, and that their funds would be protected by the FSCS.
Key takeaways for firms
UK e-money institutions
Any UK e-money institution that has not received a copy of the Letter from the FCA should check with the FCA whether it should have. We have heard anecdotally that previous Dear CEO letters have not always been sent to the correct contacts and in some cases were sent to an individual who had left the relevant firm.
UK e-money institutions should raise the Letter to their board and start preparing the communication to their customers, taking into account how it should be tailored to their business and customers (e.g., consumers, corporate customers).
The Letter is not clear on how an e-money institution that provides payment services with a credit line to customers (rather than prefunding) should deal with this request. Such firms may wish to seek clarity from the FCA as to whether they would need to send a communication to those customers and, if so, what it should contain.
All UK payment service providers
All UK payment service providers, including banks, e-money institutions, and payment institutions, should proactively review and, where necessary, update their marketing and customer communication practices and procedures. In particular, a UK payment service provider should ensure that promotions and other material communications to customers about its service are reviewed against the applicable BCOBS rules and the FCA’s Principle 7, which requires firms to communicate information to customers in a way that is clear, fair, and not misleading.
The BCOBS rules apply more extensively in relation to communications to customers that are consumers, microenterprises, or small charities. However, firms that rely on the “corporate opt-out” provisions under the UK Payment Services Regulations 2017 are still subject to requirements under BCOBS in relation to promotions of regulated payments and e-money services.
Lastly, a UK payment service provider that offers regulated and unregulated services — e.g. payments services plus unregulated technical, data processing, or analytics services — must generally make clear in its communications that the FCA does not regulate the latter.