Payment Services Regulations: Update 5
July 2010
Perhaps the founding principle of the PSRs is customer protection. This principle is reflected in a number of requirements that payment services firms have to comply with. In this update we look at two of these; safeguarding and the capital resources requirement.
Although these requirements apply only to authorised firms, registered firms should consider implementing these as well to demonstrate that they are operating above the minimum regulatory thresholds and have customer protection at the forefront of their offering.
Some potential customers might ask why they should use a money remittance business to send monies overseas. Surely the risks are too great? The money remittance business could go into liquidation and the funds that they have entrusted may not be recovered. Or the remittance business could be subject to internal fraud resulting in the theft of funds. What protection is there for the customer? This security of funds issue is probably the biggest problem perceived by potential customers.
Safeguarding
The PSRs impose safeguarding requirements to protect customer funds where they are held by the remittance business overnight or longer. Controls must be in place to ensure funds are either segregated from the remittance business's working capital or are covered by an appropriate insurance policy or a third party guarantee. If the remittance business were to become insolvent, the claims of its customers would be met from these funds in priority to all other creditors. Safeguarding bank accounts must be identified by having the word "client" or "safeguarding" in the title. The former is more common than the latter.
The funds to be safeguarded are those received from a payment service user for the execution of a payment transaction and those received from another remittance company for execution on behalf of a payment service user.
The safeguarding requirements relate to any single transaction over £50. The safeguarding account must only hold customer funds. It must not be used to hold any other funds. In order to ensure that it is clear what funds have been segregated, and in what way, the remittance business must keep a record of the segregated funds. There should be at least monthly reconciliations of the remittance business's financial records for customer funds and the safeguarded bank accounts. The more frequent the reconciliations, the stronger the internal control. Any reconciliation discrepancies identified should be investigated and corrected by paying in any shortfall or, if appropriate, withdrawing any excess immediately, unless the discrepancy only arises due to timing differences.
The PSRs require that the remittance business maintains systems and controls that are sufficient to minimise loss through fraud. Examples of such systems and controls include; segregation of duties between different accounting functions; more than one person being involved in the transaction authorisation process; setting authorisation limits for transactions; password protection procedures; performance of reconciliations and having reconciliations approved by another person.
Capital Resources Requirement
It is normally the case that, the greater the capital of a business, the more financially secure it should be. Capital as defined by the PSRs, not only includes paid up share capital, but also profit reserves. Capital is needed to act as buffer for absorbing losses that may arise while the business is trading. Therefore to achieve an acceptable level of security, the PSRs specify that a money remittance business that is seeking authorisation should have a minimum initial capital of €20,000, and that ongoing capital should not fall below €20,000 or an amount calculated in one of three different ways. The initial capital level is fairly small given the volume of remittances that may flow through an authorised business.
One of three methods must be used to calculate the ongoing capital requirement. An applicant for authorisation is asked which method it wants to use and the FSA then determines if that method is appropriate to the business.
- Method A - 10% of fixed overheads. Overheads include administration expenses, rent and salaries.
- Method B - A scaling percentage of between 0.25% to 4% is applied to money payment transactions in the year.
- Method C - A scaling percentage of between 1.5% to 10% of income. Income is the total of commission and fees, interest income, interest expenses, and other operating income.
An authorised remittance business is required to report information to the FSA about how it has met the ongoing capital requirement through an annual return.
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.
