Tony Craddock: FCA’s ‘Dear CEO letter likely to destabilise the e-money sector’
In a ‘Dear CEO’ Letter sent out by the FCA yesterday, the regulator called on UK electronic money institutions (EMIs) to ensure their customers understand how their money is protected.
The regulator expressed concern that many e-money firms compare their services to traditional bank accounts or hold themselves out as an alternative in their financial promotions, but don’t adequately disclose the differences in protections between e-money accounts and bank accounts.
Specifically, the Letter raised the differences in relation the Financial Services Compensation Scheme (FSCS), stating that “we are still concerned that many e-money firms are not adequately disclosing the differences in protections between their services and traditional banking.”
The FCA states that EMIs must write to their customers within six weeks (by end June 2021) to remind them of how their money is protected through safeguarding, and, that the FSCS does not apply. It specifies further that this communication is to be separate from any other messaging or promotional activity.
In response, Tony Craddock, director general of the Emerging Payments Association, posted on LinkedIn that “this Dear CEO Letter is likely to destabilise the e-money sector. Two steps forward, one step back for the emerging payments sector. Such a shame.”
“I like to be upbeat about our progressive relationship with the FCA, our regulator. But sometimes they let down the emerging payments sector. Their Dear CEO letter sent today to all EMIs is ‘asking them to write to your customers to make it clear how their money is protected’ seems to be largely a backward step.”
Craddock furthered that this obligation will require time, cost and effort for the EMIs, “who know their customers are holding less than £85,000 in their e-wallets – the amount above which their balances would not be protected in the case of a corporate failure. Most cardholders, will probably hold less than £85 in their wallets.”
“Such a move is likely to scare small customers away from cost-effective, flexible and secure prepaid accounts in a time of communal pandemic-induced fear, and make more confident customers with higher balances question whether to use such an account. In reality, when a bank receives £100 from a customer, £90 of it is lent out to another customer, leaving only £10 left. EMIs, on the other hand, have to keep 100% of this £100 in a secure, safeguarded account, and can’t lend it out.
Alison Donnelly, payments regulation specialist, director of fscom, advisory board member of The Fintech Corridor, and director at the APCC, added to the post that while she would never argue against providing clear information to consumers, “the value of the work the FCA is doing now to hold payments and e-money institutions to account for their safeguarding arrangements and what they write about themselves on their websites and elsewhere is far more valuable that this unprompted email that is likely to be ignored or possibly cause panic.”
The FCA added that the Letter is in line with its intent to address any weaknesses and risks in the key areas of payments and e-money, given their potential to harm consumers – particularly in light of the economic impact of Covid-19. “Given the growth of the payment services and e-money sector, we noted the risk that consumers may not understand how their money is protected and the difference compared to sectors they may be more familiar with, such as banking.”
The Letter also follows an announcement by the FCA earlier this month which set out plans for a new Consumer Duty, to set a higher level of consumer in retail financial markets for firms to adhere to.