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Principles for businesses and promotions rules to apply to PSD2 firms

All businesses regulated to provide payment services in the UK will be required to adhere to high-level standards that many other regulated financial services firms are already obliged to meet under new proposals outlined by the Financial Conduct Authority (FCA).02 Aug 2018

The regulator has opened a consultation (62-page / 1.05MB PDF) on plans to extend the application of its 'Principles for Businesses' to payment institutions, electronic money (e-money) issuers, registered account information service providers (RAISPs) and many credit institutions that provide payment services not connected to their regulated activities.

At the moment, those companies are not subject to the principles as they are regulated under a different legal framework from most other regulated financial services firms in the UK, the FCA said. The regulator said that situation has led to "differences in the regulatory requirements on firms, including requirements in terms of behaviour and treatment of customers across the market" – something which it wants to address.

The Principles for Businesses set out the FCA's high-level expectations of firms in relation to the way they operate, including in respect of the integrity and skill, care and diligence with which they conduct business, as well as their consideration of customer's interests, how they should manage conflicts of interest and how they should interact with regulators, among other things.

The FCA has also outlined plans to require businesses regulated under the payment services rules to adhere to its rules and guidance on financial promotions. It said it is concerned that some payment institutions and e-money issuers have been engaged in "misleading advertising and marketing of their services".

By bringing those businesses within the scope of the communication rules under chapter two of its Banking Conduct of Business Sourcebook (BCOBS 2), the FCA said it would have the power to "make specific rules about the form and content of communications" those firms share with customers.

The FCA is consulting on its plans until 1 November. The new rules are to be set out in a finalised policy statement that the regulator anticipates publishing in January 2019. It said it does not currently consider "a need for an implementation period", but would "welcome views on this".

Financial services and technology law expert Angus McFadyen of Pinsent Masons, the law firm behind, said: "The fragmentation of the market for these services has allowed a degree of arbitrage between the different regulatory regimes. There is rationale behind those differences though."

"Some payment services are very simple services and, in the case of RAISPs, are pure technology services. There is always an argument that principles can be applied proportionally but, at the very least, exiting operational firms will need to change aspects of how they operate, even if it is just around how they structure their governance and internal processes. As such, having no transitional period seems a tough line to take. It should be recognised that enforcement by the FCA is typically based upon the Principles – bringing new firms inside the scope of the Principles certainly increases the enforcement risks that they face," he said.

"After these changes take effect, it will only cover those firms that are authorised by the FCA – so, 'passporting' firms from Europe will still benefit from being able to exploit the arbitrage between the regulatory regimes depending upon where they are authorised. That is a challenging outcome for UK businesses and there is no real consideration of it in the consultation," McFadyen said.

In its consultation paper, the FCA also set out proposed new rules and guidance for communications and promotions for currency exchange transfer services issued by credit institutions, payment institutions and e-money issuers.

The proposals seek to tighten restrictions on how providers of currency exchange transfer services advertise the rate of exchange and with how they compare the cost of their service to that of others.

The FCA said it had seen evidence of harm caused from "potentially misleading communications to consumers" and that it wants the new rules to help consumers "make more informed choices about which services to use, without being misled about the rates they can achieve, the cost of those services or about alternative providers’ fees". The regulator has previously warned currency transfer firms about misleading marketing.

"Our proposed rules and guidance make clear that it is misleading to present a rate of exchange in a way that gives the impression that the rate is available to consumers if that rate is not likely to be available to those consumers in respect of a typical transaction," the FCA said. "Adding words or a disclaimer that qualifies the exchange rate, by saying for instance that the rate is not available to all does not prevent the rate from being misleading."

"We propose to require that, where providers compare the costs of their service with other providers, they do so in ways which are meaningful, fair and balanced, and capable of being substantiated. We believe that this will encourage providers to ensure that they only make appropriate claims and do not mislead customers," it said.