Extending PRIN and BCOBS to payment services and e-money: a question of enforcement?

The FCA is proposing to bring payment services and e-money within the scope of the Principles for Businesses (PRIN) and provisions relating to communication standards under the Banking Conduct of Business Sourcebook (BCOBS). To do this, it is relying on new rule-making provisions under the PSRs and EMRs which extend the scope of its standard rule-making powers under s.137A FSMA. While the FCA does not expect the changes to have a significant impact in practice in most cases, this suggests a shift in its supervisory and enforcement approach in this area going forward.

What is the current position?

PRIN sets out the high-level standards with which FSMA-authorised firms are expected to comply when carrying out regulated activities. While this will cover the issuance of e-money by a FSMA-authorised firm, it does not cover payment services unless they are ancillary to a regulated activity. To the extent that a firm is not FSMA-authorised, for example payment institutions (PIs), e-money institutions (EMIs) or registered account information services providers (RAISPs), PRIN is not currently applicable.

In terms of communication standards, while FSMA sets out restrictions on financial promotions, payment services and e-money are not covered by that regime. For FSMA-authorised firms carrying out the activity of accepting deposits from banking customers from a UK establishment, these restrictions are supplemented by specific rules covering the content of communications under BCOBS 2.

What are the FCA's proposals?

Under the FCA's proposals, PRIN would be extended to apply to PIs, EMIs and RAISPs (as well as FSMA-authorised firms) and to cover payment services, e-money issuance (where not already a regulated activity) and connected activities.

BCOBS 2 communication rules would also be extended to PIs, EMIs and RAISPs and to cover communications with payment service and e-money customers. The clear, fair and not misleading principle would apply and the FCA also proposes some new specific guidance which would apply to communications about currency transfer services (where those services are part of a wider payment service or e-money service).

What is driving these proposals?

Drive for a more consistent regulatory approach

The FCA is concerned about the uneven playing field for the regulation of payment services and e-money. By ensuring a more consistent approach across the board, the FCA believes that it can better address harm and protect the interests of customers.

Particular concerns about exchange rate and currency transfer communications

It has very specific concerns about communication standards, driven by complaints which it has seen in this area. Examples of behaviour which the FCA has observed, and which fall below the standards that it would expect, include presenting exchange rates which are not likely to be available to customers in respect of a typical transaction. The FCA had already formalised its concerns on this point in a July 2017 statement , noting that the rate actually available to customers might in some cases be materially inferior but not disclosed until a late stage in the process (leaving customers with little room for manoeuvre). The FCA's proposals specifically address communications about exchange rates and currency transfer services. In particular, under proposed guidance, it is likely to be misleading to give the impression that a rate is available if it is unlikely to actually be obtained. A disclaimer to the effect that the exchange rate shown is not available to particular customers would not necessarily go far enough to prevent this.

Potential for increased enforcement activity?

The FCA acknowledges that it could have relied on a number of existing rules and powers to fill the gaps between the two regimes instead. For example, it notes that there is overlap between some of PRIN and existing conditions for authorisation under the PSRs and EMRs.

However, it concludes that "application of these Principles gives us the ability to better supervise to existing standards." This suggests that its choice of approach comes down to a question of enforcement. While the FCA can cancel, vary or place requirements on a PI, RAISP or EMI’s authorisation or registration, the application of PRIN opens up the possibility of disciplinary sanctions. Providers will be wary that this may signal an intention to increase enforcement activity in this area.

Similarly, from a communications perspective, the Directive on Unfair Commercial Practices 2005, as implemented in the UK by the Consumer Protection from Unfair Trading Regulations 2008, prohibits misleading actions or omissions which impact or may impact transactional decisions taken by customers. The FCA could have chosen to continue to rely on the ability to obtain enforcement orders where a communication does not meet these standards. However, it has taken the view that this change will facilitate a consistent approach and also seems to draw a distinction between what it refers to as the "not unfair or misleading" standard under existing legislation and the "clear, fair and not misleading" principle under the FCA Handbook. Again, it is unclear how that distinction might be applied in practice from an enforcement perspective.

Next Steps

The FCA is inviting feedback on its proposals by 1 November 2018. It is anticipating publishing a Policy Statement before 31 January 2019 and does not currently consider that any implementation period would be necessary.

Wider changes to come?

While these changes should not have a significant impact on day-to-day operations for many providers, the extent of any knock-on effect on the FCA's overall supervisory approach in this area is not yet known. This may also just be the beginning of wider changes for the market: the FCA has made it clear that while it does not currently have sufficient evidence to justify extending other parts of the Handbook, it will keep this under review.

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