The Financial Conduct Authority, the UK’s top financial regulator, has scolded many payments firms in the country, including payment institutions (PIs) and electronic money institutions (EMIs) for lacking “sufficiently robust controls,” thereby posing “unacceptable risks” to their customers. Additionally, the watchdog said it has evidence of financial crimes in the operations of payment firms in the country over the last two years.

Matthew Long, the Director of Payments and Digital Assets at the FCA, disclosed these in a 10-page-long letter addressed to chief executive officers of payment firms under the authority’s supervision. The Financial Times reported that the letter was addressed to 291 CEOs.

"The ability to provide bank-like services, willingness to service high-risk customers, and weaknesses in some firms’ systems and controls, make PIs and EMIs a target for bad actors," Long noted.

FCA Speaks on Elevated Frauds, Safeguarding Customers’ Funds

In the letter, Long noted that the regulator in its work with PIs and EMIs over the past two years has identified “material issues” with the firm’s financial crime systems and controls. These include failure to carry out adequate know-your-customer procedures and regularly review and refresh risk assessments and control frameworks in an evolving threat landscape.

“We have seen evidence of elevated fraud rates in some PIs and EMIs. We are also concerned that there could be a further increase in fraud as a result of the cost-of-living crisis. This makes it essential that firms take action now to address weaknesses in their systems and controls to prevent fraud,” Long explained.

On safeguarding customers’ funds in case of insolvency, the director explained that the watchdog has identified “common failings” such as firms not having documented processes for consistently identifying which funds are ‘relevant funds’ and must be safeguarded.

Furthermore, he noted that in obedience to a 2020 guidance for payment firms to annually audit their safeguarding arrangement, some firms are yet to appoint auditors. The regulator added that “we are not being consistently informed of adverse findings or the actions being taken to address them.”

Still, on customer safety, the Director of the FCA noted that many payment firms are yet to create “wind-down plans” and those that have already done so failed to meet expectations. It added that some of the plans appear “over-optimistic” about the time it would take to wind down.

FCA Faults Unauthorized Acquisitions, Poor Service Delivery

Writing further in the letter, Long noted that while the regulator had seen good examples of positive innovation by payment firms, it has also identified cases where products and services “do not consistently deliver good customer outcomes” and where payment firms do not act in customers’ best interests.

In addition, the director noted that the regulator has seen instances where payments services and electronic money firms finalized acquisition plans without the approval of the FCA. The regulator described this as a criminal offence, warning that it may use its prosecution powers.

“We will continue to intervene using our full range of supervisory tools. In cases where firms can’t meet the conditions for authorization, we will take more assertive action sooner and will remove or sanction firms who cannot or will not meet our standards,” Long noted.