The FCA’s proposed interpretation of the safeguarding obligation is causing serious concern in the industry. Under the new guidance, payment and e-money institutions will be expected to match the value of payments they make on behalf of their clients from their own funds because they will have to both keep the value in a safeguarding account and remit it to the payee.
The additional guidance has been added to the safeguarding chapter in the draft approach document published on 13 April as part of the consultation on the implementation of the second Payment Services Directive (PSD2).
In it, the FCA addresses the questions of when the safeguarding obligation begins and ends and how often the relevant funds should be segregated.
When the obligation begins
On the way in, funds must be safeguarded as soon as the e-money or payment institution is entitled to them. In cases where the institution receives the funds by credit transfer this will be the point at which the funds are received into their account and shouldn’t present a problem.
However, for those who pull funds through a merchant acquirer, the safeguarding obligation could begin once the merchant acquirer has received the funds, even though settlement may be delayed. If the merchant acquirer is a payment institution or a credit institution authorised outside of the EEA, the payment institution or e-money institution will have to safeguard the funds collected by the merchant acquirer but not yet settled.
When the obligation ends
On the way out, funds must be safeguarded until they have been paid out to the payee’s payment service provider. The problem with this is that e-money and payment institutions rarely receive confirmation of receipt so they will not be able to withdraw the funds from the safeguarding account with confidence that their obligation in satisfied.
I’ve been advised by the FCA that they could be willing to accept that the obligation ends once the payee’s payment service provider should have received the funds. However, for payments outside of the EEA or in a currency other than EUR and GBP, the maximum execution times in the directive do not apply so there will still be doubt as to when the funds are received and over- and under-safeguarding remains a possibility.
Using other payment service providers
Where other payment service providers are involved in the payment chain, the payer’s payment or e-money institution must safeguard the funds until the funds have been paid to the payee’s payment service provider, even though this will result in the duplication (or more) of the funds.
For example, if e-money institution A uses payment institution B and a bank in Hong Kong C to send £500,000 to a payee in China, A and B will have to safeguard £500,000 each while sending another £500,000 to the payee.
When to segregate
Most payment and e-money institutions now recognise that they must segregate the relevant funds at least once a day by removing the profit, margin or any other funds received from the customer that is not relevant for payment services (for example, in some cases, margin for FX forwards and funds for currency conversion that will be repatriated to the first party should not be treated as relevant funds).
The supplementary guidance makes the FCA’s expectation clear that the segregation should be conducted as soon as practicable throughout the day and at least once a day.
The guidance states that:
‘[i]n no circumstances should such funds be kept comingled overnight.’
While this is an understandable objective, it may be impossible to achieve because clients can pay funds into the segregated account at any time of day. For this reason, most firms find that segregation is only achievable at a snapshot in time.
The guidance is subject to consultation and I have raised these issues directly with the FCA on behalf of my clients and will make formal representation as part of my other roles as Project Regulator Leader with the Emerging Payments Association and the APCC’s Payment Services Working Group.
Firms and individuals are strongly encouraged to provide their comments to the FCA in their own right or through their representative body by the consultation closing deadline of 8 June 2017. If you would like assistance in understanding the impact of the guidance on your business or in presenting your concerns to the FCA, get in touch.
While the safeguarding guidance has been included in the consultation on PSD2, the directive does not alter the safeguarding obligations so once the FCA publishes it in final form, it will be effective immediately.