According to a recent survey by Compliancy Services, the UK-based provider of compliance consultancy and regtech services, 45% of firms are potentially breaching FCA regulations whilst failing to meet regulatory obligations.
In a supervisory engagement with the sector in 2020, the FCA noted a number of shortcomings in how firms had calculated their own funds requirement. An announcement was made in the ‘Dear CEO’ letter ‘Portfolio strategy letter for payment services firms and emoney issuers’, issued in July 2020, and firms were reminded to take action to meet the requirements.
Compliancy Services has identified that, despite this notification, many firms are still falling short of the requirements and misunderstanding exactly what the FCA is looking for. Compliancy Services held a webinar on 14 September 2021 to help firms understand the requirements.
During the webinar, Compliancy Services posed a question to the delegates asking, “how frequently they reviewed their firms’ regulatory capital position”. 45% were found not to be meeting the FCA’s expectations.
“The FCA requires firms to monitor their regulatory capital position on an ongoing basis, and anything less than monthly is unlikely to be acceptable especially in changing business conditions,” comments Harpartap Singh, Head of Prudential at Compliancy Services. “Ensuring that payments firms are meeting their regulatory capital requirement is an increasing area of focus for the FCA, so it is important that firms get it right.”
It’s also apparent that many firms are miscalculating their ‘own funds’. Retained profits may only be included in the ‘own funds’ calculation if the accounts have been audited. Many Authorised Payment Institutions (APIs) are classed as “Small Companies” under the Companies Act 2006 and are not required to undertake a statutory audit. This means that, unless they have chosen to have an audit in spite of the exemption, any profits they have made are not eligible for inclusion in the own funds calculation and this seems to have been catching many firms out.
According to John Burns, Technical Director of Payment Services at Compliancy Services, “The cross-referencing of the Payment Services Regulations and Capital Requirements Regulations, and the apparent mismatch between the Companies Act and the Capital Requirements Regulations can make the requirements difficult for firms to follow. While this may mean that, technically, some of these firms may not be meeting their required regulatory capital levels, as long as the unaudited profit figures are accurate it shouldn’t really affect the financial resilience of the firms in question. However, it is important that firms, and the FCA, are aware of this pitfall, and take steps to avoid it.”