By James Borley, Director of fscom
The payments industry seems constantly awash with new regulation. The last two years alone have seen the advent of the 4th Money Laundering Directive (4MLD), the Second Payment Services Directive (PSD2) and GDPR. In addition, firms are currently preparing for the open banking and strong customer authentication requirements coming into force on 14 September.
Given the pace and extent of regulatory change, you might be forgiven for having missed the FCA’s planned extension of its Principles for Businesses, and certain other communication rules, to payment and e-money institutions. Nevertheless, this extension will take effect from 1 August, giving firms just over a month to finalise preparations.
What’s driven this change?
Historically, the high-level Principles for Businesses have not applied to payment and e-money institutions. This was largely because it was easier to implement the first Payment Services Directive (PSD1) in the form of standalone Treasury regulations (the Payment Services Regulations 2009), rather than implement the directive through the Financial Services & Markets Act and the corresponding FCA Handbook.
In recent years however, the FCA has been concerned that some payment and e-money institutions have been communicating with customers in a misleading manner, such as:
- misleading use of the interbank rate on firm websites;
- unsubstantiated comparisons with competitors;
- lack of transparency in charging structures; and
- a tendency for some e-money institutions to use language in their marketing materials indicating that they are offering “bank accounts”.
In light of these concerns, the FCA was granted new powers in the Payment Services Regulations 2017) to apply Handbook rules to payment institutions (PIs), e-money institutions (EMIs) and registered account information service providers.
After a period of consultation, the FCA issued new rules in February, which can be broken into the following categories.
- Extending the Principles for Businesses to PIs and EMIs.
- Extending communication rules in Chapter 2 of the Banking Conduct of Business Sourcebook (BCOBS) to PIs and EMIs.
- Introducing new rules and guidance on communication and marketing of currency transfer services.
Extending the Principles for Businesses
The Principles for Businesses (“the Principles”) are high level principles governing the conduct of firms. While the Principles will not have technically applied previously to PIs and EMIs, most firms will already seek to apply them to their business. For example, no firm would currently say that they do not seek to fulfil Principle 6 on treating customers fairly.
Rather, the import of the extension of the Principles is that it provides the FCA with a wider net for enforcement action. One only needs to peruse the enforcement notices on the FCA website to see how many FCA enforcement actions are based upon breaches of the Principles.
While the FCA’s Policy Statement does state that “the Principles should be applied in a way which is appropriate and proportionate to firms”, their extension nonetheless increases the FCA’s supervisory and enforcement powers.
Carphone Warehouse’s recent breach of the Principles
A recent example of enforcement action for breaches of the Principles is the case of Carphone Warehouse. The FCA issued a “Final Notice” in March and fined the firm over £29 million for breaches of Principle 3 (management and control), Principle 6 (customers’ interests) and Principle 9 (customers: relationships of trust) in relation to the sale of mobile phone insurance.
Among other things, sales consultants failed to give suitable advice to customers as to whether the insurance product met their needs. This failing was compounded by inadequate management oversight.
Examples such as this illustrate the wide enforcement net provided to the FCA by the broad-based descriptors in the Principles. Therefore, while the Principles largely represent best practice that most firms will already follow, the potential supervisory impact of this extension should be noted.
Clear, fair and not misleading – extending BCOBS 2 communication rules
In contrast to the broad-based Principles, the extension of BCOBS 2 applies very specific communication related rules to PIs and EMIs. For example:
- Certain words are singled out in relation to product descriptions, including the words “guaranteed”, “protected” or “secure”. Where such words are used, they must be presented with all necessary information to make the use of the word fair, clear and not misleading.
- An exchange rate will be misleading if it gives the customer the impression that they can avail of a rate not actually available to them. A disclaimer will not necessarily prevent this exchange rate being misleading.
- Specific rules in relation to what needs to be included in communications or promotions. For example, a firm must not emphasise potential benefits without indicating relevant risks.
One implication here is for use of the interbank rate on firm websites or social media. In response to FCA concerns, many firms have simply removed reference to that rate altogether from their websites. While this is not a requirement, firms should review any display of indicative rates on their websites, or advertisements (including social media), along with corresponding disclaimers. Any disclaimer will have to be clear and prominent to ensure that customers will not be misled and, even then, it is not certain that the FCA will approve of it.
New rules on cost comparisons of currency transfer services
The FCA has also introduced new rules within BCOBS 2 regarding cost comparisons with competitors, in relation to currency transfer services. Where comparing costs with a competitor or group of competitors, the comparison must be based on sufficient research to make that comparison substantiable.
Furthermore, the comparison must consider the following elements.
- Charges relating to the currency conversion.
- Charges related to the e-money issuance or payment service.
- Margin between the rate that would be offered to a majority of persons in the class to whom the promotion is directed, and the interbank rate.
It is therefore not acceptable under the new rules to make a comparison with your competitor simply based on the FX margin, when after taking into consideration other fees, your service is not in fact cheaper.
Next steps for PI and EMI firms…
Firms are advised to conduct a thorough review of their communications with customers prior to 1 August. This review should cover:
- Firm website.
- Other promotional material and social media.
- Charging structure.
- Terms and conditions.
- Customer sales calls.
Communication is an area that has seen increased focus by the FCA in recent years, and with the increased supervisory and enforcement powers provided by the new rules, a thorough review is recommended to avoid falling foul of the FCA’s payments supervision team.