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UK FCA Consults on Changes to Strong Consumer Authentication, Dedicated


On January 28, 2021, the UK Financial Conduct Authority (FCA) published Consultation Paper CP21/3, “Changes to the SCA-RTS and to the guidance in ‘Payment Services and Electronic Money – Our Approach’ and the Perimeter Guidance Manual” (Consultation Paper). This follows the FCA’s announcement in its 2020-21 business plan that payment services were one of its main supervisory priorities1 and its temporary guidance of July 9, 2020, on prudential risk management and safeguarding in light of the COVID-19 pandemic (Temporary COVID Guidance).

The FCA is proposing amendments to:

  1. the UK onshored versions of EU technical standards on strong customer authentication (SCA) and common and secure methods of communication (UK SCA-RTS);
  2. its Approach Document on Payment Services and Electronic Money (Approach Document); and
  3. its Perimeter Guidance Manual (PERG).

Temporary COVID Guidance

The FCA has proposed to make permanent most of its Temporary COVID Guidance, including on safeguarding, prudential risk management, and wind-down plans. It plans to do this by incorporating the relevant guidance into its existing Approach Document. However, firms should review the Approach Document changes, as the provisions incorporated from the Temporary COVID Guidance are not identical in all cases.

Safeguarding

As originally noted in the Temporary COVID Guidance, the FCA has confirmed that an electronic money institution (EMI) or a payment institution (PI) required to safeguard customer funds should have a written acknowledgement from its safeguarding bank or custodian to demonstrate that the bank or custodian has no interest in, recourse against, or right over the relevant funds or assets in the safeguarding account. In its Payments and E-Money webinar on January 21, 2021 (the January Webinar), the FCA noted that it had observed deficiencies in acknowledgement letters, including that some letters had not been signed and that appropriate signing authority was not in place.

The FCA is also proposing to make permanent provisions in the Temporary COVID Guidance requiring PIs and EMIs subject to annual account audits under the Companies Act 2006 to arrange specific annual audits of their compliance with safeguarding rules under the UK Payment Services Regulations 2017 (PSRs) and UK Electronic Money Regulations 2011 (EMRs) (as applicable).

The FCA has provided new guidance for PIs and EMIs using the “insurance or comparable guarantee” method of safeguarding. This includes a requirement that the insurance policy or comparable guarantee must pay out for the full amount of any claim regardless of how the relevant insolvency event occurs (including if the firm is at fault). The additional guidance also states that firms using this safeguarding method must maintain a designated safeguarding account with a credit institution for the full term of the insurance policy or comparable guarantee. In other words, even if a firm is not using the segregation method of safeguarding, it will generally need to comply with the same requirements as a firm that does.

Prudential risk management

The FCA is also proposing to make permanent provisions in the Temporary COVID Guidance requiring EMIs and PIs to carry out liquidity and stress testing to assess their exposure to severe business disruptions and the potential effects. These tests are intended to help firms assess whether they have adequate liquidity and capital resources as well as identify any required changes to their systems and controls.

Further, the FCA has confirmed its position set out in the Temporary COVID Guidance that it expects the senior management or governing body of an EMI or PI to document, review, and approve — at least annually — the design and results of the firm’s stress testing.

The FCA also proposes to introduce the following as best practices for firms in relation to regulatory capital and liquidity arrangements:

  • to deduct any…



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