Safeguarding: our client’s assets, our reputations

Currently, the business area we work in is enjoying a period of expansion – which is good news for all electronic money institutions, and non-bank payments more generally. However, as we’ve seen from a variety of corporate scandals recently, it only takes one or two lapses for the reputation of an entire sector to be sullied. Think about the long-term problems now facing big tech following recent data breaches and the alleged misuse of customer information: some consumers will never trust those firms again.

To avoid a similar fate, I believe all NBIs licensed to do business in the UK must be treating full regulatory compliance with FCA guidance on safeguarding client funds as non-negotiable, and an essential part of their business practice. However, it’s not clear that all firms in our sector share that view: a 2019 review of 11 non-bank PSPs by the FCA revealed some significant divergences from best practice when it comes to safeguarding.

First, the good news: most of the firms surveyed by the FCA maintained solid documentation regarding the receipt of client funds, and the rationale for their method of safeguarding those funds – whether in a separate account, or in secure, liquid assets with a recognised credit institution. However, the FCA’s review also revealed that only one of the eleven firms examined held the segregated funds in a separate account earmarked for safeguarding. The rest elected to use agents for this purpose, and did not always maintain records regarding the agent’s choice of safeguarding procedures. In some of these cases, the relevant safeguarding funds were mixed with general cashflow overnight – effectively putting the safeguarded funds at risk.

Although some firms were able to provide documentary evidence of where their funds had been stored, others could not. Worse, some also did not carry out daily reconciliations to determine whether safeguarded funds were adequate to meet day-to-day operational requirements. To sum up, the FCA has judged our industry to be lacking in some key aspects of safeguarding compliance, including safeguarding funds on receipt; having the right checks and balances in place, and having good oversight of the operations of any agents employed for safeguarding purposes.

As the leader of a fast-growing e-money institution that does business across 34 European markets, I want our entire sector to be successful. I believe we offer greater flexibility and a better cost profile than traditional financial institutions; I also believe we’re more nimble, and above all that we are more creative and innovative than many major credit institutions could hope to be.

I have also heard some opinions to the effect that the FCA’s guidelines on safeguarding create unnecessary burdens; that full segregation of funds is not always required, and that matching the total value of funds disbursed on behalf of a client in a segregated account amounts to a duplication of funding, and is time-consuming and expensive.

Although we are directly regulated by Gibraltar’s FSC, rather than the UK FCA, we maintain full compliance with FCA requirements as well as those of the FSC in the interests of our UK and international client base. Both the FSC and FCA have been completely clear about their expectations and requirements when it comes to safeguarding: it’s now up to us as a sector to step up to make sure that, in both our processes and our business practice, we are fully compliant with issued guidance.

Failure to do so could have two negative outcomes for our sector. Firstly, it’s possible that the FCA could lose confidence in our sector’s capacity to maintain adequate funding for safeguarding client funds, and require our clients or ourselves to “double fund” operations, effectively making our services twice as expensive, in cashflow terms, for clients to use. The effect of this on our sector’s competitiveness is obvious. Non-compliance, could have a catastrophic effect on our sector’s reputation, and on our short and medium term growth prospects.

I’m sure no-one running a PSP or any NBI business wants such an outcome. That’s why I am urging us all to review our documentation processes and our safeguarding procedures to ensure full compliance with FCA guidelines, and those of the local regulators in the markets you serve. The alternative to full compliance with current guidelines could include some profoundly negative outcomes for our entire sector.

Aaron Carpenter, CEO