On 22 May 2020, the FCA published a short consultation proposing additional temporary guidance intended to strengthen payment firms’ prudential risk management and arrangements for safeguarding customers’ funds in light of the exceptional circumstances of the COVID-19 pandemic.

In terms of prudential risk management the proposed temporary guidance covers: governance and controls, capital adequacy, liquidity and capital stress testing, risk management arrangements and wind down plans. As regards risk management arrangements, the FCA expects firms to consider their own liquid resources and available funding options to meet their liabilities as they fall due, and whether they need access to committed credit lines to manage their exposures. To reduce exposure to intra-group risk, the FCA considers it best practice for firms not to include any uncommitted intra-group liquidity facilities when assessing whether they have adequate resources in place to cover the liquidity risk to which they are exposed.

For safeguarding customers’ funds the draft guidance covers: keeping records and accounts and making reconciliations, safeguarding accounts and acknowledgment letters, selecting, appointing and reviewing third parties, when the safeguarding obligation starts, unallocated funds, annual audit of compliance with safeguarding requirements, small payment institutions and disclosing information on treatment of funds on insolvency to customers.

In terms of unallocated funds, the FCA is now giving guidance to clarify that these funds are not relevant funds, but they should be protected according to Principle 10 of the Principles for Business. This means they should be clearly segregated from both the firm’s own funds and relevant funds, and placed in a separate account. The FCA expects firms to try to identify the customer to whom the funds relate. Once the firm has identified the customer, it should either return the funds to the customer or, if the firm is to provide the payment service or issue the e-money as originally intended, it should treat the funds as relevant funds and safeguard them accordingly. The FCA is also clarifying that if a firm issues e-money on low value pre-paid gift cards, where the identity of the ultimate card holder is not known, the funds received from customers are relevant funds, even though the identity of the e-money holder might not be known to the e-money institution.

The deadline for comments on the consultation is 5 June 2020. Following the consultation, the FCA plans to publish a Dear CEO letter to payment service providers in which it will include the guidance as amended by the consultation. Later this year the FCA will issue a full consultation regarding changes to its Approach Document which will likely include a proposal to incorporate in it the temporary guidance (subject to any amendments made in response to the feedback).