His comments follow an announcement by the FCA on May 22 to propose guidance on safeguarding customers’ funds in wake of coronavirus. The consultation period ends tomorrow.
“There’s a feeling of beating around the bush. What do they really want? What’s the measurement, what’s the hurdle to be cleared in terms of reporting, capitalisation – what is the total definition of compliance?” asks Lyddon.
In the announcement, the FCA stated that some firms have not implemented the 2011 Electronic Money Regulations or the 2017 Payments Services Regulations (PSRs) as expected, leaving consumer funds at risk. The regulations serve to offer guidance to payment firms on safeguarding and managing prudential risk.
“I think they’ve been concerned about a lot of these things for a while. A cynic would say they’re using coronavirus to act, a non-cynic would say clarification is overdue. And I think it is, but whether the clarification actually clarifies or just adds to confusion, that remains to be seen,” says Lyddon.
According to Lyddon the issue arises from a misunderstanding of the definition of safeguarding. Payment institutions only need to safeguard money if it is being held at the end of the next following business day, he says.
“I think the FCA may have realised how much there’s confusion that you can have money in segregated accounts but isn’t safeguarded and these terms have been misunderstood. And I don’t think their guidance necessarily clarifies matters. I think they need to go back to the start and forget the guidance they gave out before and issue completely new guidance from the bottom, not layering one on the other, otherwise there’d be complete confusion.”
He says there is a disconnect between separate accounts and segregated accounts.
“All of our members do have separate accounts for customer money and their own money, but I’m pretty sure that most of them don’t have accounts which the bank would then name as segregated and have the documentation where it’s known. If the pension fund administrators go down, it doesn’t affect the pensioners because the pensioner’s money is ring fenced. But these separate accounts are not ring fenced, whereas the safeguarded money is ring fenced. That’s the issue.”
The watchdog also expressed concern over payment institutions that are growing rapidly but may be unprofitable and unable to access external funding during the pandemic.
In 2019 the FCA undertook a review of safeguarding at large payment firms, which resulted in the collapse of fintech Ipagoo in September. The firm, which offered online multicurrency accounts, was suspended due to concerns that it had not properly segregated customer money.
Lyddon says the regulator is now afraid more firms may go under.
“The bigger they are the harder they fall. The bigger firms will have more customer money. If the processes aren’t there or the necessary legal documentation isn’t there to make sure if the firm went under the liquidator of the firm can’t draw on the customer money. If that documentation isn’t there, that’s big alarm bells.”