UK's Safeguarding Plans Go Beyond PSD3, But Regulatory Alignment May Be Coming

October 29, 2024
Back
The UK proposals are stricter than the regime planned for the EU, but the European Banking Authority's regulatory technical standards could lead to similar requirements across the board.

The UK proposals are stricter than the regime planned for the EU, but the European Banking Authority's (EBA) regulatory technical standards (RTS) could lead to similar requirements across the board.

Both interim and long-term rules are included in the Financial Conduct Authority’s (FCA) plan, with interim measures focusing on strengthening compliance with existing regulations, improving recordkeeping and enhancing monitoring. 

In the long term, the introduction of a statutory trust over relevant funds will prioritise consumer claims over creditors in the event of insolvency.

Key provisions include mandatory annual safeguarding audits, improved reporting and the submission of safeguarding returns.

The proposals come as the EU negotiates its proposed third Payment Services Directive (PSD3), which includes amendments to the safeguarding regime that is operational in the trading bloc. 

According to Alison Donnelly, director at fscom, the FCA has historically gone further than most European Economic Area member states in “grappling with the complexity and understanding the difficulties that have arisen when firms have become insolvent”. 

“Others, like Ireland and Lithuania, have, in more recent years, also started scrutinising arrangements and have experienced the safeguarding rules playing out in wind-down situations,” she pointed out. 

Much stricter, more burdensome?

“The proposed text of PSD3 itself does include certain changes to the EU safeguarding regime, but these are not as substantial as the FCA's proposals,” said Max Savoie, a partner at Sidley Austin.  

Simon Treacy, senior associate at Linklaters, agreed that the EU plans are less prescriptive. “Under the PSD3 proposals, there will be changes to the safeguarding regime, but the FCA is going well beyond what the EU is proposing. 

“The result is likely to be a much stricter and more burdensome regime in the UK,” he acknowledged. 

Article 9 of PSD3 outlines the safeguarding requirements for payment institutions and e-money providers to protect customer funds, stipulating that firms need to “avoid concentration risk to safeguarded customer funds by ensuring that the same safeguarding method is not used for the totality of their safeguarded customer funds”.

“In particular, they shall endeavour not to safeguard all consumer funds with one credit institution,” the legislation states. 

Savoie said that this change in PSD3 in particular could have a significant impact for firms. “Ensuring that a method is not used for the totality of customer funds could be operationally challenging and expensive for some firms,” he said. 

Others appear to have taken notice of this as well, and the European Parliament has proposed adding the qualification "where appropriate" to this requirement, suggesting a potential shift towards more flexibility than the proposals originally published by the European Commission. 

Time will tell what the regulation will ultimately mandate. “We won't know where we stand on this until we have the final text,” said Savoie. 

Diversifying safeguarding accounts across multiple banks could increase operational costs for payments and e-money firms. However, this is still a lighter touch approach than the proposals under consultation in the UK.

“This is partly because the FCA only has to consider one jurisdiction, whereas the EU faces the challenge of creating rules that work across 27 member states with different insolvency laws,” explained Treacy. “The FCA is using its regulatory freedom to tailor the EU framework for the UK market."

All down to the RTS?

Escalated compliance requirements could also be bestowed upon payments and e-money firms by secondary legislation. 

For example, PSD3 delegates the EBA to develop RTS to ensure these safeguarding rules are properly managed. 

"Differences between the UK and EU approach will ultimately depend on what the EBA's regulatory technical standards under PSD3 specify,” said Savoie. 

He explained that although detailed rules are unknown, PSD3 proposals would give the EBA delegated powers regarding safeguarding, similar to how the FCA operates under the UK Payment Services Regulations and Electronic Money Regulations. 

“There will be more detailed, prescriptive, and granular standards introduced and, although we don't know the specifics, we expect they will address areas like segregation, designation, and the scope of funds, as well as the calculation of funds subject to safeguarding requirements.” 

Savoie added that comments from the European Parliament indicate an emphasis on insulating relevant funds and avoiding liquidity and concentration risks. 

“Apart from the new diversification requirements, it appears that more detailed and far-reaching safeguarding standards are being pushed onto the EBA."

"How much divergence are we seeing between the UK and the EU? There's likely to be quite a bit of overlap between the themes covered in the FCA’s proposed rules and the areas on which the EBA will be given powers to issue technical standards,” he said. 

Ultimately, the overarching themes around safeguarding are quite similar, but alignment in entirety is unlikely. 

“The detailed rules will probably end up differing in material ways and that divergence could mean firms need to adopt different approaches for their EU and UK businesses,” Savoie concluded.

In spite of Brexit, ideas and outcomes remain similar in the EU and the UK, with inspiration being drawn from across the divide.

For example, the EU has opted to grant e-money and payment firms direct access to payment systems through the Instant Payments Regulation (IPR), and the UK has considered creating a standalone anti-money laundering (AML) supervisor and potentially merging the e-money and payment institution regimes.

Our premium content is available to users of our services.

To view articles, please Log-in to your account, or sign up today for full access:

Opt in to hear about webinars, events, industry and product news

Still can’t find what you’re looking for? Get in touch to speak to a member of our team, and we’ll do our best to answer.
No items found.