FCA issues warning on fintechs - are you at risk?

Financial security is at the top of everyone’s agenda at the moment. Yet, with a growing number of ways for finances to be held, invested and transacted, it can be hard to keep up with them. That’s why the UK’s Financial Conduct Authority (FCA) exist – to make the security of funds a responsibility of companies, not individuals.

For established financial organisations, controls and regulations are the bedrock of what they do. However, this should also be the case for new disruptive players, especially given that an increasing proportion of contemporary audiences find their offerings more suitable. With this in mind, along with the cost-of-living crisis, the FCA has written directly to payment companies urging them to invest in robust controls to protect their customers.

What was said? What does it mean? What can payment companies do better? Read on to find the answers to all of these questions and more.

For the attention of CEOs of companies supervised by the FCA

On the 16th of March 2023, over 300 CEOs of payment companies received a cautionary letter from the FCA outlining three outcomes which they wished to encourage. The overarching theme of these outcomes was to protect customers and the overall integrity of financial systems. Currently, the FCA believes that many payment firms are presenting an “unacceptable risk” to both.

Just days after Credit Suisse delayed its annual report due to a lack of internal financial controls, the letter similarly highlighted “material issues”. It also went on to clearly state that the FCA was not scared to impose sanctions on those who did not oblige with their suggestions. Ultimately, the letter was an eye-opening read showing that the FCA was determined to fulfil its 2022 – 2025 ambitions.

The main points

Protecting client funds

As mentioned earlier, taking care of assets is extremely important for anyone right now. For payment organizations, it is therefore paramount if they are to retain the trust and faith of their clients. However, the FCA is concerned that many payment companies are failing customers and their assets should the worst happen.

They highlight that segregation of corporate and client funds is absent, and in some instances, documentation on how to identify “relevant funds” is missing entirely. Another common failing amongst payment companies which the FCA spotlighted was that of “inadequate reconciliation procedures to ensure that the correct sums are protected on an ongoing basis”.

Tackling financial crime

As the financial world becomes more digital, greater opportunities for cybercriminals emerge. Unfortunately, the FCA believe that “over the past 2 years, we [they] have seen increasing evidence of financial crime in the payment portfolio”.

They put this down to various factors, but particularly focused on the importance of payment companies updating their risk management arrangements regularly and proportionally as they grow. Another emphasized point was the need to investigate fraud in a timely manner, something they fear is currently overlooked due to long backlogs of fraud reports from customers.

A thinning of the FCA’s patience

The FCA’s letter made headlines because it directly addressed payment company CEOs. However, this is not the first time that they have voiced their concerns about this part of the financial industry. In July 2019, they conducted a multi-firm review of the safeguarding arrangements of non-bank payment service providers. They stated “an institution should carry out internal and external reconciliations as often as necessary, considering the risks to which the business is exposed.” Yet, in their most recent letter, they have placed even greater importance on reconciliation, demanding that it is a daily event.

The FCA’s enhancement of their original recommendations from 2019, along with their use of language such as “unacceptable”, suggests that their patience is thinning. If this was ever in doubt, a threat of administrative fines, and even potential “enforcement of cancellation” should businesses not provide required data shows that the FCA are determined to pull payments companies in line with other financial organizations.

What next for payment companies?

Undoubtedly, payment companies know that the problems which the FCA flagged are extremely important. After all, the trust of their clients is what keeps them operating. However, the success they have had to date is assured thanks to the investment they have taken to innovate their front office.

Now though, the FCA’s timely letter signals that payment companies have a duty to equally well-equip their back office, amongst other responsibilities. To appease the FCA, keep their businesses growing, and assure customers, there are a few no-brainers which payment companies can apply today:

• Invest in software – manually conducting back-office operations is an arduous affair, meaning that they are often repeatedly ignored to the point of becoming a problem. The attitude which the FCA suggests payment companies are taking to their back-office actions suggests that this is exactly what is happening.
  
  Fortunately, a foundational back office activity can now be automated – reconciliation. By investing in automated reconciliation software, companies can be confident of how much client money they are holding per individual and segregate it correctly, plus lots more.
  
  For instance, an additional benefit of software such as Aurum is the vast amount of saved time. Through reconciling millions of transactions in seconds, thanks to automated reconciliation software financial professionals will regain autonomy to pursue other important tasks, such as overseeing compliance which the FCA suggests.
  
  Finally, it should not go forgotten that reconciliation software such as Aurum is the ultimate tool for sifting through data. This allows it to flag exceptions so that investigation and potentially detection of fraud can happen promptly. By aiding the elimination of fraud, reconciliation software allows firms to have pure data sets, which will prove invaluable when forecasting and delivering requested data reports to the FCA.

• ‍Increase ESG – prioritizing ESG might have not seemed like a business-minded move a few years ago but it is now a major driver behind consumer choices. In fact, McKinsey discovered that paying attention to ESG had a bigger positive rather than negative effect on returns for companies. Larger payment companies like Mastercard are already pressing forward with such initiatives through their ESG compensation scheme but following the FCA’s statement, paired with the financial benefits ESG generates, following suit seems integral for payment firms of all sizes.

• Balance innovation with compliance – payment companies are now rightly household names for many. They have achieved this through some incredible innovations. From Square transforming every mobile into a payment processor, to Monzo’s terrific growth despite having no brick-and-mortar banks, the new ways we all interact with money has been thanks to the boldness of payment companies. However, for their story to continue to be a successful one, it is clear that they must improve their game when it comes to regulations.
  
  This shouldn’t signal an end to payment company’s positive disruption. In fact, by investing in processes and software which ensure that back-office data is handled with greater care, payment companies will likely unlock an invaluable source of inspiration. It is no secret that data has been fuelling the growth of numerous companies over the last decade or so. If payment companies heed the FCA’s advice from a compliance point of view, they will also achieve the benefits of greater data insights.

Stay ahead

This was a letter with a strong tone. It placed a spotlight on payment companies, reminding them that they are part of the financial community. As such, they have a responsibility to the financial sector and consumers alike. That was the FCA’s very clear message.

Keen to see their recommendations enacted promptly, they also included many suggested “actions to take”. When it comes to protecting client funds and sustaining growth, one of the best “actions to take” is investing in automated reconciliation software. This is a must considering that the FCA expects payment companies to “undertake internal and external reconciliations at least once a day to ensure that safeguarded funds are adequate and not excessive.”

At Aurum we are financial data matching software specialists. For more than 14 years we have been helping some of the world’s most recognizable brands achieve their reconciliation goals in seconds.

By putting businesses in the driving seat with their data, our clients ensure compliance and control with a quality product tailored for each of their needs. We work across industries and have a diverse client list including Octopus Investments, Admiral, Ladbrokes, and Versapay. Our partnership approach ensures we’re always on hand during your reconciliation journey.

Push on with your growth and guarantee the security of your client funds with automated reconciliation.

‍Book a demo with us now.