Last August, the FCA published Consultation Paper 18/21 entitled “General Standards and Communication Rules for the Payment Services and E-Money Sectors” see our previous blog here. The FCA has now published its follow-up Policy Statement PS19/3, which contains in Appendix 1 the final rules that will extend the FCA’s overarching Principles for Businesses and certain communication rules in the FCA Handbook to the UK payments sector. The new requirements will apply to non-bank payment institutions (“PIs”) and electronic money institutions (“EMIs”) from 1 August 2019. We use the generic term “payment firms” to refer to both PIs and EMIs. In this article, Kai Zhang in BCLP’s Financial Regulatory practice, discusses the potential impact of the new rules on the payments industry and what firms need to do to prepare for implementation.
Application of the FCA’s Principles for Businesses
There are 11 FCA Principles for Businesses, which are contained in PRIN 2.1 of the FCA Handbook, available here. From 1 August 2019, these Principles will apply to both small and authorised PIs and EMIs. As these Principles were originally designed for firms authorised under the Financial Services and Markets Act 2000 (“FSMA”), some respondents to the consultation (i.e. CP18/21) requested further guidance and clarification as regards how the Principles should be applied to payment firms.
For example, some respondents commented on the overlapping between the requirements in the Principles and those under the Payment Services Regulations 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”), and inquired whether compliance with the PSRs/EMRs would be sufficient for purposes of the Principles. The FCA essentially concluded that such concern on overlapping was irrelevant since under a new rule (PRIN 3.1.6R) these Principles would give way where there would be conflicts with obligations in the PSRs/EMRs. However, the FCA itself acknowledged that given the Principles were high-level standards it would be “difficult to explain every overlap”. It is therefore not clear how payment firms could effectively assess whether or not there is a conflict between these Principles and the obligations under the PSRs/EMRs and accordingly whether or not a particular Principle gives way.
Further, the Principles will also apply to “activities connected to…payment services and to the issuing of electronic money”. Some respondents requested clarification on what “connected activities” would capture. The FCA declined to provide any specific guidance and stated that “connected activity” would have its “natural broad meaning”. While “natural meaning” may be relatively clear to understand, the reference to “broad” seems unfortunate. The FCA in CP18/21 suggested that “connected activities” would be those connected with payment services or e-money issuance but “outside the scope of the PSRs and EMRs”. This seems to point to a potentially very wide scope for the word “broad”.
One reason that the FCA cited for not defining “connected activities” was that a similar term, “ancillary activity”, has been used in the FCA Handbook for FSMA activities for a long time and “it does not include further definition or guidance”. However, the term “ancillary activity” is indeed defined in the FCA Handbook as “an activity which is not a regulated activity but which is (a) carried on in connection with a regulated activity; or (b) held out as being for the purposes of a regulated activity”. Therefore, the term “ancillary activity” has a much clearer scope than the “natural broad meaning” for “connected activity”.
In summary, the FCA is generally of the view that the new rules are sufficiently clear in themselves and thus there is no need to provider any further guidance or clarification as regards how they should be applied to payment firms. It does allude to possible industry-led initiatives (e.g. market guidance or best practices that may be issued by relevant trade bodies) and states that it is willing to engage with the industry in this respect.
Click here here to download a table summarising some of the potential issues we consider with the application of each of the Principles to payment firms.
New rules on communicating with customers
Certain rules on communicating with customers contained in BCOBS 2 of the FCA Handbook (which were originally designed for credit institutions) will also apply to payment firms from 1 August 2019. The overarching requirement is that a payment firm must communicate information with its customers in a way that is “fair, clear and not misleading”. This general rule applies to:
There is no definition or guidance on the concept of “connected activities” here either. A “payment service/electronic money customer” is defined to mean a consumer, a micro-enterprise or a charity with an annual income of less than £1 million. This definition tracks the corporate carve-out rules under the PSRs/EMRs whereby a payment firm can disapply certain obligations when dealing with corporates. This means that, with respect to general communication with corporate customers, the “fair, clear and not misleading” rule does not apply. However, it is advisable that payment firms nonetheless take this overarching rule into consideration when dealing with corporate customers (albeit the rule is not a regulatory “requirement” in such circumstances), not least because some of the Principles for Business may have a bearing in this regard (e.g. Principle 1 requires firms to conduct their business with integrity).
Note that this overarching rule applies to all communications of a “payment service or electronic money promotion”. That is, the categorisation of the (potential) customer is irrelevant in this regard. A “payment service or electronic money promotion” is defined as “an invitation or inducement to: (a) enter into an agreement for the provision of a payment service; (b) initiate a payment order; or (c) acquire electronic money”.
In addition, there are also specific communications rules that payment firms must comply with. For example, a payment firm must ensure that, amongst others, the relevant communication does not emphasise any potential benefits without also giving a “fair and prominent indication” of “any relevant risks” and does not disguise, diminish or obscure important information or warnings. This means that when, for example, providing the pre-contractual, post-transactional and/or on-going disclosures (as required under Part 6 of the PSRs) a payment firm must also comply with these additional requirements. Payment firms may need to develop new internal procedures, for example in relation to appropriate risk warnings for each payment service or e-money product.
A payment firm must also ensure that the relevant communication is presented in a way that is likely to be understood. This means that payment firms may need to consider the format and phraseology of the disclosures it is required to make to a relevant customer. Further, payment firms should note that omission of some information may result in information given being unclear, unfair or misleading.
While the new communication rules in and of themselves may be relatively straightforward to implement, some payment firms may nonetheless face challenges, for example when designing and distributing mass marketing campaigns. This may be particularly relevant for new FinTech firms, such as payment initiation service providers and account information service providers, which may be more inclined to carry out marketing activities through social media or other innovative means.
Following the implementation deadline on 1 August 2019, payment firms will need to be ready to demonstrate (if requested by the FCA) their compliance with the new rules. The FCA expects payment firms to evidence their compliance through having appropriate systems and controls in place and record keeping. The implementation date of 1 August is fast approaching. Given the potential challenges, particularly in relation to the concept of “connected activities”, payment firms are advised to start assessing their current internal compliance procedures and preparing or revising the relevant documentation to take into account the new rules.
If you have any questions in relation to the FCA’s new rules and your implementation projects, please do not hesitate to contact Kai Zhang.