Payment Services Regulations: Update 1

September 2009

From 1 November 2009 all businesses engaged in money remittance will be subject to the Payment Services Regulations (PSRs).  Businesses required to comply with the PSRs will be subject to regulation by the Financial Services Authority (FSA).

In order to comply with the deadline, businesses should be submitting registration or authorisation applications now.

However, if your business started before 25 December 2007 you may delay authorisation until 1 May 2011 and registration until 25 December 2010.

Authorisation and registration

A money remittance business which has an average turnover in payment transactions that does not exceed €3 million per month, is known as a Small Payment Institution or Small PI.  A Small PI is "required to register" under the PSRs.  A business with an average monthly turnover of payment transactions in excess of €3 million is required to become authorised under the PSRs, and is known as an Authorised Payment Institution or Authorised PI.

What are the consequences of the PSRs for business?

1. Conduct of business requirements

These rules apply from 1 November 2009, regardless of whether your money remittance business has gained authorisation or registration.  The rules are fairly detailed and cover the provision of information before and after the execution of a remittance, and the rights and obligations of money remittance businesses and their customers.

 These rules are applicable to both Small and Authorised PIs.

2. Safeguarding of customer funds

The PSRs impose safeguarding requirements to protect customer funds when they are held by the PI overnight or longer.  This can be done by either segregating customer funds from working capital by holding them in a separate safeguarding bank account or protecting funds by means of an insurance policy or guarantee.

These rules apply to authorised PIs and are optional for small PIs.

3. Capital resources requirements

Authorised PIs will be required to have a minimum initial level of capital of €20,000.  They will also be required to satisfy ongoing capital requirements.  The ongoing capital requirements can be based on fixed overheads, volume of remittances or the PI's income.

You should have a suitable accounting system in place to enable you to monitor your capital to ensure compliance with the PSRs.

The capital resources requirements apply only to authorised PIs.

4. Complaint handling procedures

Money remittance businesses need to have their own complaint handling arrangements which must comply with the FSA rules.  The rules cover a range of issues including aiding consumer awareness, establishing internal complaint handling procedures, timeliness, the requirement for a final response letter, rules on referral of complaints to others and a requirement to co-operate with the Financial Ombudsman Service.

The complaint handling procedures apply to both small and authorised PIs.

5. FSA reporting requirements

Annual reports will be required to be submitted to the FSA.  Though the final details of the reports are still being decided, the FSA is likely to require details of how you are meeting the capital requirements, how you satisfy the safeguarding requirements and the number of agents you have engaged.

The report for small PIs is likely to be less onerous, reflecting the "lighter touch" the FSA will take to regulate your business.  However, you will still need to provide information to them annually.  This is likely to include the number and value of payment transactions you have made in the last 12 months, the number of agents you have engaged and the safeguarding arrangements you entered into.

What you should be doing now?

The FSA will require a substantial amount of information when considering an application.  An application for authorisation is significantly more than a form filling exercise.  They need to understand:

  • the business
  • your future plans
  • your marketing strategy
  • your governance arrangements
  • your anti-money laundering procedures
  • your financial forecasts
  • the competence of management
  • the methods you use to manage risk
  • the methods you have put in place to manage fraud and error
  • your accounting systems
  • your management structure and reporting
  • your systems relating to ensuring compliance with the PSRs
  • detailed information relating to your IT systems and controls.

It is quite possible that you will not have all of the above in place and that you will have to develop, improve or implement at least some aspects to ensure that the FSA will approve your application.  This could delay your authorisation.

Once authorised you will also need to develop a system of internal monitoring of compliance with the PSRs.

The FSA's approach to PSR regulation

The FSA will use a number of "triggers" to flag up possible problems that it will then investigate further.  These will be:

  • "complaints-led" - examining how you have complied with the conduct of business rules
  • a review of your annual report to ensure you have complied with the capital resources requirement rules
  • a review of your annual report to check the volume and value of your transactions to ensure that your Small PI status remains appropriate.

In view of the above it is vital that all PIs have a thorough knowledge of the conduct of business rules, that authorised PIs adequately monitor compliance with capital requirement rules and that small PIs monitor the value of payment transactions on an ongoing basis.

Enforcement of the PSRs

When the FSA considers whether to refer a case to its Enforcement Division for investigation, it will take into account a number of criteria:

  • is there actual or potential loss or detriment?
  • is there evidence of financial crime or risk of financial crime?
  • is there evidence that indicates a widespread problem or weakness?
  • is there evidence that the firm has profited from the action or potential breaches?
  • have you failed to bring the actions or potential breaches to the attention of the FSA?
  • how has the money remitter responded to the breach?

The PSRs provide the FSA Enforcement Division with the following powers:

  • information requirements: the FSA may require information by serving written notice on a money remittance company or any person connected with a money remittance company
  • interviews: the FSA may require individuals working at or connected to the money remittance company to attend an interview and answer questions
  • entry without a warrant: the FSA may enter and inspect premises
  • search warrants.  The FSA may apply to the court for a search warrant to allow for the entry and searching of premises and the obtaining of documents.

The FSA can also use a number of sanctions when a money remittance provider breaches the PSRs:

  • imposition of penalties and censures
  • instigation of criminal proceedings against those who provide money remittance services, but are not authorised to do so
  • ordering firms to pay damages to their customers

  • cancelling or placing restrictions on authorisation or registration.

How we can help

 Littlejohn can assist you in the following areas in relation to the PSRs:

  • preparation of applications for authorisation
  • preparation of applications for registration
  • advice in relation to complaints procedures
  • advice in relation to conduct of business rules
  • compliance reviews in relation to the PSRs
  • completion of FSA annual returns

 Littlejohn can also provide the following services:

  • audit of financial statements
  • preparation of financial statements
  • corporation tax services

If you would like further information, contact Azhar Rana on 020 7516 2232 or email

 

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