FCA Scolds Payment Firms over ‘Lack of Controls’

FCA Scolds Payment Firms over ‘Lack of Controls’

The Financial Conduct Authority,
the UK’s top financial regulator, has scolded many payments firms in the country,
including payment institutions (PIs) and electronic money institutions (EMIs)
for lacking “sufficiently robust controls,” thereby posing “unacceptable risks”
to their customers. The watchdog also said it has evidence of financial crimes
in the operations of payment firms in the country over the last two years.

Matthew Long, the Director of
Payments and Digital Assets at the FCA, disclosed these in a 10-page-long letter addressed
to chief executive officers of payment firms under the authority’s supervision.
Financial Times reports that the letter was addressed to 291 CEOs.

“The ability to provide bank-like services, willingness to service high-risk customers,
and weaknesses in some firms’ systems and controls, make PIs and EMIs a target for bad actors,” Long noted.

FCA Speaks on Elevated Frauds,
Safeguarding Customers’ Funds

In the letter, Long
noted that the regulator in its work with PIs and EMIs over the past two years
has identified “material issues” with the firm’s financial crime systems and
controls. These include failure to carry out adequate know-your-customer
procedures and regularly review and refresh risk assessments and control
frameworks in an evolving threat landscape.

“We have seen evidence of
elevated fraud rates in some PIs and EMIs. We are also concerned that there
could be a further increase in fraud as a result of the cost-of-living crisis.
This makes it essential that firms take action now to address weaknesses in
their systems and controls to prevent fraud,” Long explained.

On safeguarding customers’ funds
in case of insolvency, the director explained that the watchdog has identified “common failings” such as
firms not firms not having documented processes for consistently identifying
which funds are ‘relevant funds’ and must be safeguarded.

Furthermore, he noted that in
obedience to a 2020 guidance for payment firms to annually audit their
safeguarding arrangement, some firms are yet to appoint auditors. The regulator
added that “we are not being consistently informed of adverse findings or the
actions being taken to address them.”

Still on customer safety, the FCA director noted that many payment firms are yet to create “wind-down plans”
and those that have already done so fail to meet expectations. It added that some of the plans appear “over-optimistic”
about the time it would take to wind-down.

FCA Faults Unauthorized
Acquisitions, Poor Service Delivery

Writing further in the letter,
Long noted that while the regulator had seen good examples of positive
innovation by the payment firms, it has also identified cases where products and
services “do not consistently deliver good customer outcomes” and where payment
firms do not act in customers’ best interests.

In addition, the director noted
that the regulator has seen instances where payments services and electronic
money firms finalized acquisition plans without FCA approval. The regulator
described this as a criminal offence, warning that it may use its prosecution
powers to object to them.

“We will continue to intervene
using our full range of supervisory tools. In cases where firms can’t meet the
conditions for authorization, we will take more assertive action sooner and
will remove or sanction firms who cannot or will not meet our standards,” Long
noted.

The Financial Conduct Authority,
the UK’s top financial regulator, has scolded many payments firms in the country,
including payment institutions (PIs) and electronic money institutions (EMIs)
for lacking “sufficiently robust controls,” thereby posing “unacceptable risks”
to their customers. The watchdog also said it has evidence of financial crimes
in the operations of payment firms in the country over the last two years.

Matthew Long, the Director of
Payments and Digital Assets at the FCA, disclosed these in a 10-page-long letter addressed
to chief executive officers of payment firms under the authority’s supervision.
Financial Times reports that the letter was addressed to 291 CEOs.

“The ability to provide bank-like services, willingness to service high-risk customers,
and weaknesses in some firms’ systems and controls, make PIs and EMIs a target for bad actors,” Long noted.

FCA Speaks on Elevated Frauds,
Safeguarding Customers’ Funds

In the letter, Long
noted that the regulator in its work with PIs and EMIs over the past two years
has identified “material issues” with the firm’s financial crime systems and
controls. These include failure to carry out adequate know-your-customer
procedures and regularly review and refresh risk assessments and control
frameworks in an evolving threat landscape.

“We have seen evidence of
elevated fraud rates in some PIs and EMIs. We are also concerned that there
could be a further increase in fraud as a result of the cost-of-living crisis.
This makes it essential that firms take action now to address weaknesses in
their systems and controls to prevent fraud,” Long explained.

On safeguarding customers’ funds
in case of insolvency, the director explained that the watchdog has identified “common failings” such as
firms not firms not having documented processes for consistently identifying
which funds are ‘relevant funds’ and must be safeguarded.

Furthermore, he noted that in
obedience to a 2020 guidance for payment firms to annually audit their
safeguarding arrangement, some firms are yet to appoint auditors. The regulator
added that “we are not being consistently informed of adverse findings or the
actions being taken to address them.”

Still on customer safety, the FCA director noted that many payment firms are yet to create “wind-down plans”
and those that have already done so fail to meet expectations. It added that some of the plans appear “over-optimistic”
about the time it would take to wind-down.

FCA Faults Unauthorized
Acquisitions, Poor Service Delivery

Writing further in the letter,
Long noted that while the regulator had seen good examples of positive
innovation by the payment firms, it has also identified cases where products and
services “do not consistently deliver good customer outcomes” and where payment
firms do not act in customers’ best interests.

In addition, the director noted
that the regulator has seen instances where payments services and electronic
money firms finalized acquisition plans without FCA approval. The regulator
described this as a criminal offence, warning that it may use its prosecution
powers to object to them.

“We will continue to intervene
using our full range of supervisory tools. In cases where firms can’t meet the
conditions for authorization, we will take more assertive action sooner and
will remove or sanction firms who cannot or will not meet our standards,” Long
noted.

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Author: Solomon Oladipupo

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