FCA Priorities for Payments Firms: Safeguarding Customer Funds and Ensuring Financial Resilience

The Financial Conduct Authority (FCA) has outlined its key priorities for payment firms to ensure customer funds are protected and financial resilience is maintained. These priorities are centred on three areas: safeguarding, prudential risk management, and wind-down planning.

Priority 1: Safeguarding

The FCA emphasises the importance of adequate safeguarding arrangements to ensure quick return of customers' funds in the event of a firm's insolvency. Common failings in payments firms' safeguarding include inadequate documentation, reconciliation procedures, and lack of due diligence. Firms must ensure that they are safeguarding customers' funds in line with the Payment Services Regulations (PSRs) and Electronic Money Regulations (EMRs) and follow the guidance outlined in the FCA's Approach Document. This includes proper documentation, daily internal and external reconciliations, and maintaining appropriate records to identify the customer to which the funds relate.

Priority 2: Prudential Risk Management

The FCA highlights the need for improved prudential risk management in payment firms. Common issues include inadequate liquidity risk management, failure to consider holding capital above regulatory requirements, and lack of scenario planning and stress-testing. Firms should regularly review their prudential risk management arrangements, ensure they meet regulatory capital requirements, and consider holding additional capital based on their risk assessment. They should also set or review their risk appetite, forecast their financial performance in a range of scenarios, and plan well ahead to ensure adequate financial resources.

Priority 3: Wind-down Planning

The FCA has clarified its expectation that all firms should maintain wind-down plans, including clear triggers for commencing an orderly, solvent winding down of their business. Many firms have not yet created wind-down plans, and the FCA has identified several issues with existing plans, such as over-optimistic timeframes, insufficient detail, lack of consideration for winding-down triggers, and inadequate analysis of costs and cash requirements. Firms are expected to have an appropriate wind-down plan in place, review it regularly, and ensure it meets the FCA's expectations.

By addressing these three priorities, payment firms can reduce harm from firm failure, enhance financial resilience, and protect customer funds. Adhering to the FCA's guidance and proactively addressing these areas will be critical in maintaining trust and stability in the rapidly evolving payments industry.