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PSPs and EMIs are the latest firms to get a Dear CEO letter reminding them of their obligations under the new Consumer Duty. The 8-page document gives comprehensive guidance as to what’s expected, and how the Duty will impact the sector.
The FCA’s letter: Implementing Consumer Duty in payments firms, was sent on the 21st of February to Payment Service Providers (PSPs) and E-Money Institutions (EMIs). The letter highlights how the introduction of the Duty has reset and revamped the FCA’s approach to regulation for the retail financial services market more broadly.
With Consumer Duty coming hot on the heels of the operational resilience requirements put into force last year, it’s apparent that PSPs and EMIs are no longer separated by their own regulatory realm. These firms are now being brought into the fold alongside the rest of the financial services sector, and the FCA appears to be taking a more inclusive and unified approach across the board, with the Consumer Duty requirements for firms to “act to deliver good outcomes for retail customers” enshrined within a brand-new Consumer Principle (Principle 12).
The FCA have made it clear that, not only should the consumer experience now sit at the forefront of a firm’s regulatory priorities, the new Consumer Principle should also “be at the heart of firms’ strategies and business objectives”. This means that consumer outcomes must be considered, monitored and proactively managed both in relation to direct retail consumer products and service offerings, and across the entire distribution chain.
Focal points for payments and e-money firms
The Dear CEO letter draws out certain aspects of the Duty for PSPs and EMIs to focus on. In terms of specific customer outcomes, the FCA notes that this sector tends to cater for a diverse range of customer groups, which presents a number of challenges to firms. The upshot is that one size is unlikely to fit all customers when it comes to factors such as product design, channels of communication and pricing.
The FCA goes on to draw a direct parallel between Strong Customer Authentication and the Duty on the basis that some customers groups may be less willing or able to use certain technologies. Similarly, firms are urged to take care to avoid pricing structures that could disadvantage vulnerable customers who may exhibit different patterns of behaviour when topping up an e-wallet or prepaid debit card due to personal circumstances.
Firms are also reminded about the Dear CEO Letter to EMIs in May 2021 on the importance of clarifying the differences between EMI and banks, including the absences of FSCS protection for Payments and E-Money firms.
Another example given by the FCA of how the Duty applies to PSPs and EMIs relates to the cross-cutting rules, which look at the potential for unintended adverse consequences for customers. In the case of PSPs and EMIs, the FCA have observed issues with the freezing of individual customer accounts in cases of suspected fraud. Whilst such freezing of accounts may be reasonable in principle, firms should not be freezing a disproportionate number of accounts or be freezing accounts for too long and without adequate explanation.
For PSPs and EMIs, the scope of the Duty extends also beyond services that involve retail customers in the traditional sense and includes small and medium enterprises too. This is an important distinction as the new requirements will therefore still be relevant for many firms operating within this sector to offer only business-to-business services. Firms will also need to consider their services in relation to PSD or EMD agents, and any e-money distributors that are included within the chain of operation. In addition, non-payment firms undertaking activities connected to payment services or the issuance of e-money, such as banks providing safeguarding accounts will also fall within the scope of a PSPs or EMIs distribution chain.
Exceptions to the rule
While the Consumer Principle applies to payments and e-money firms on an overarching basis, it’s important to note that the conduct of business obligations under Parts 6 and 7 of the Payment Services Regulations 2017 and Part 5 of the Electronic Money Regulations 2011 take precedent. These conduct of business obligations, which are designed specifically for PSPs and EMIs, already set a higher bar than the Duty in areas such as information provisions and customer rights.
On the other hand, the Consumer Principle actually raises the bar in comparison to the FCA Principles relating to customers’ interests (Principle 6) and communications with clients (Principle 7). As a result, where the new Consumer Principle applies, it effectively supersedes both Principles 6 and 7.
Who is responsible?
The onus of all the above lies with senior managers, or in the case of payments services providers and e-money institutions – the PSD and EMD individuals running the firms.
While the existing Senior Managers and Certification Regime does not currently apply to PSPs or EMIs, in its Dear CEO letter, the FCA have set clear expectations for PSD and EMD individuals to take personal accountability and responsibility for the increased standard of care now owed to consumers.
This is in addition to previous FCA guidance that, despite falling outside the SMCR, the requirement for firms to embed the duty still applies to PSPs and EMIs thereby inferring equivalence with COCON Rule 6 for staff to deliver good customer outcomes.
Where are you now?
All firms in scope should have already developed a robust and achievable Board approved implementation plan. You are expected to have identified any areas of weakness and have a remediation phase well underway, with a view to completing implementation of these plans by the deadline of 31 July 2023. The plans would then need to be embedded into ‘business as usual’ soon after.
We’re here to help
We have developed a dedicated Consumer Duty compliance support tool kit, specifically with PSPs and EMIs in mind. Our tool kit includes specialist advice, guidance, and structured support to help you prepare or develop your implementation plan and identify and improve any areas of vulnerability. Our knowledge and familiarity of the payments and e-money sector, as well as our deep understanding of payments and e-money business models, means we can provide targeted insights on the application of the new rules.
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