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Why FCA matters

PPL obtained its licence from the Financial Conduct Authority (“FCA”) a few months ago.  As much as we would love to publish an article about the 1978 disco hit 'YMCA', this post actually explores why FCA matters to the direct payments and personal health budget sector. 

Any organisation that is holding funds or processing payments on behalf of others as part of its regular activities should consider the scope of the Payment Services Regulations 2017, and the resulting requirement to be licenced by the FCA.

We published an article a few months ago discussing whether organisations that are processing or holding direct payments and personal budgets fall within the remit of the FCA.  A number of bodies within the sector have subsequently digested that article and concluded that both commissioning organisations and service providers should be considering FCA compliance and taking advice on the matter where appropriate. 

In this article, we look at what assurances being licenced by the FCA brings.   

1. Formal safeguarding of client funds. Only firms that are regulated by the FCA can operate safeguarded bank accounts.  In practice, this means that if a firm becomes insolvent, the client funds that it holds are wholly separate and neither the firm nor its bank has any claim on the funds whatsoever.  As a result, if PPL were to fail or become insolvent, the liquidator or administrator would return 100% of the client funds back to PPL’s customers immediately.  Whilst other firms may state that client funds are held separately from their own, only firms that are regulated by the FCA can provide a formal, legally binding safeguarding assurance.  As such, if an unregulated firm goes out of business, the liquidator or administrator may take time to return client funds and/or may not ultimately return 100% of the funds.  

2. Fit and proper person test. All of the directors and senior managers of an FCA-regulated firm must pass the FCA’s ‘Fitness and Propriety’ test.  This includes assessment of the individuals' honesty, competence & capability, and financial soundness.  It covers their skills, experience and qualifications along with any criminal proceedings, civil proceedings or regulatory proceedings. 

3. Financial crime and safeguarding audit. As part of its FCA licence, PPL must undergo an annual audit of its financial crime and safeguarding of client funds policies and processes by an external party.  This is wholly separate from the annual external audit of PPL’s financial statements.  It provides reassurance to all stakeholders (our public sector clients, the individuals we support, our colleagues, our banking partner and the FCA) that the risks of fraud, waste and abuse are being adequately managed and minimised. 

4. Wind-down plan. The FCA requires all regulated firms to develop and maintain a comprehensive wind-down plan.  This starts with a risk assessment of the matters that could impact the firm, along with mitigation of those factors.  Firms are required to prepare formal plans detailing how a third party (such as an insolvency practitioner) may access all the systems and records that are required to wind-down the business.  Firms must prepare detailed financial forecasts based on different 'stress test' scenarios and ultimately show that they hold sufficient amounts of their own funds to enable the wind-down of their business in an orderly fashion whilst safeguarding any client funds and effecting a smooth transition.  

5. Financial stability and capital requirements.   Alongside the wind-down plans detailed above, the FCA assesses the firm's financial stability.  Firms are required to meet strict requirements on an ongoing basis in respect of the amount of capital that they hold (i.e. their 'own funds'), which is linked to their activity levels (i.e. how much client money they are holding and processing).  

Of course, the other reason this all matters is that organisations that "receive customer money before passing it on to a seller" and that are not licenced by the FCA (or exempt) are committing a criminal offence, punishable via imprisonment and/or a fine.  If that happens, even the YMCA won't be able to help you. 

In conclusion, although being licenced by the FCA does have significant implications for organisations like ourselves, it intuitively feels that because we are holding and processing such large sums of public money and working with vulnerable people, external oversight and regulation are appropriate.  

Knowing that we are fully compliant and the above assurances are in place ultimately means that I (and our customers, stakeholders & partners) can sleep well at night knowing that we are meeting the very highest standards in accounting for and managing the client funds that we hold. 

To find out more about how the Payment Services Regulations and the FCA may impact your organisation (and/or to discuss tenuous links to 1970s disco hits), please get in touch. 

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