25 May 2021
On 18 May 2021, the FCA sent a Dear CEO Letter to e-money firms setting out their concerns about e-money firms comparing their services to traditional bank accounts or holding themselves out as an alternative to banks in their financial promotions. The FCA has asked e-money firms to write to their customers to remind them of how their funds are protected through safeguarding and to make it clear that FSCS protection does not apply.
The FCA’s concerns
The FCA has noted that many financial promotions from e-money firms do not adequately disclose the differences between how funds are protected in e-money accounts and bank accounts. In particular, some financial promotions by e-money institutions do not make it clear that the Financial Services Compensation Scheme (FSCS) does not apply to e-money accounts.
The FCA has previously raised concerns about e-money firms giving consumers misleading impressions about the level of protection afforded to safeguarded funds in e-money accounts and that customers would not understand that their funds are not protected by the FSCS. In particular, the potential disadvantage for a customer holding funds as e-money (as compared to depositing funds in a bank account) is that in the event of an insolvency of the e-money firm then an insolvency process would need to be completed before the customer receives back their funds. This could mean that the customer experiences a delay in receiving their money back and could also mean that insolvency fees are deducted.
In the Dear CEO letter, the FCA is concerned with firms not meeting its financial promotion requirements. The FCA’s rules on financial promotions requires that:
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every communication (including any promotion) made to e-money customers is accurate and must not emphasise any potential benefit of a payment service or e-money product without giving a fair and prominent indication of any risks – such as the lack of FSCS protection (BCOBS 2.3.1AR); and
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for communications which name the FCA as a regulator of a firm or other provider and refers to matters which it does not regulate, the communication should make clear those matters that are not regulated by the FCA (BCOBS. 2.3.4G).
Next Steps
The FCA expects e-money firms to send a letter to their customers within six weeks of 18 May 2021 to remind customers of how their money is protected through safeguarding and that FSCS protection does not apply (Customer Letter).
The Customer Letter must be separate from any other messaging or promotional activity and the method of communication should be consistent with existing communication channels and take consideration of the needs of vulnerable customers. The FCA suggests that the Customer Letter could link to the FCA’s webpage for consumers which explains the important differences between an e-money account and a bank account.
E-money firms are also expected to review their financial promotions process in light of the BCOBS requirements set out above and ensure that financial promotions give customers enough information. Moreover, where there is any promotion that names the FCA as regulator, the promotion should make clear those matters are not regulated by the FCA.
The FCA expects the Dear CEO Letter to have the attention of the e-money firm’s Board and for the Board to consider the issues raised in the Dear CEO letter and approve action as appropriate to address these issues. The FCA intends to follow up with a sample of firms to assess the action taken.
The Dear CEO Letter and its requirements set out a tight deadline for e-money firms to develop their Customer Letter and this will be expected to be reviewed and approved by the Board before being sent to customers. In parallel, e-money firms will be expected to review existing promotions and marketing communications and their approval process to ensure it takes into account the concerns raised by the FCA in its Dear CEO Letter.
This communication follows related communications from the FCA to payment firms and electronic money firms which relate to the safeguarding of customer funds. The FCA is making it very clear that protecting customer funds is a key concern and so both payment firms and e-money firms should expect further scrutiny in this area.
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For further information, please contact:
Michelle Chan, Partner, Bird & Bird
michelle.chan@twobirds.com
