Strengthened Regulations Imposed on UK Payment Service Providers
In a bid to enhance consumer protection and reduce systemic risks in the fintech and payments sector, the UK's Financial Conduct Authority (FCA) has announced new regulations that will require fintechs, particularly payments firms, to strengthen the safeguarding of customer funds.
JPMorgan Chase, one of the largest banks in the U.S., has proposed charging fees for fintechs to access its customers' data, a shift from the traditional free access model. This move could potentially impact the open banking model, which is built on third-party connections. However, these developments in the U.S. banking paradigm are separate from the FCA's new regulations in the UK.
The FCA's reforms aim to improve the protection of customer assets by requiring firms to keep customer money separate from their own accounts, a practice known as segregation. This measure is designed to avoid commingling, reinforcing protection in case of insolvency.
Under the new rules, payments firms must undergo an annual safeguarding audit to verify compliance with the regulations. Interestingly, firms with less than £100,000 safeguarded funds are exempted from this audit to reduce disproportionate burdens on smaller firms.
Firms are also required to perform daily reconciliations of customer funds and submit a monthly safeguarding return to the FCA detailing reconciliation outcomes and safeguarding status.
A specific individual within each firm must have responsibility for safeguarding oversight, and due diligence must be demonstrated when selecting safeguarding banks, custodians, or investment arrangements.
The FCA has allowed a transition period and calibrated requirements to ensure smaller firms are not overburdened, reflecting a proportionate approach to regulation.
These measures were introduced following evidence that failed payment firms had an average shortfall of 65% in customer funds, highlighting the need for stronger protections to rebuild consumer trust and reduce systemic risks in the fintech and payments sector. The regime builds on the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 to close previous gaps in safeguarding.
In the wake of the scrutiny of financial technology firms following the failure of Synapse last year, these new safeguarding rules are intended to ensure that, if a company fails, customers are more likely to receive a full refund and face fewer delays. The new rules will take effect in nine months, allowing fintechs enough time to reach compliance.
Moreover, fintechs must create plans to prevent delays in reimbursement to customers if the company fails. These measures are part of the FCA's efforts to restore trust in the fintech sector and ensure the safety of customer funds.
References:
- FCA Consultation Paper on Safeguarding of Customer Funds
- FCA Policy Statement on Safeguarding of Customer Funds
- FCA Guidance on Safeguarding of Customer Funds
- FCA Finalised Guidance on Safeguarding of Customer Funds
- FCA Fees and Levies for the 2022/23 Financial Year
The JPMorgan Chase's proposal to charge fees for fintechs' data access might affect the open banking model, while the UK's Financial Conduct Authority (FCA) is focusing on strengthening the safeguarding of customer funds in the fintech and payments sector. The FCA's new regulations also include annual audits for payments firms, daily reconciliations of customer funds, a monthly return detailing safeguarding status, and a responsibility for safeguarding oversight within each firm. These measures are intended to prevent delays in reimbursement to customers, enhance consumer protection, and reduce systemic risks, particularly following the failure of Synapse last year.
