The UK’s Financial Conduct Authority has written to chief executives of fintech companies over concerns that they are not making clear to customers that they are different from fully-authorised banks.
Many fintech firms in the UK that offer basic banking services operate on an e-money licence, meaning they are authorised to offer current accounts, money transfers and pre-paid services as long as customers’ money is held in ring-fenced accounts by a fully-permissioned bank.
The advantage of this approach is a faster route to market because an e-money licence is easier to obtain, but it limits a firm’s ability to generate revenue by lending, and does not offer customers protection under the Financial Services Compensation Scheme if the company were to fail.
Examples of those adopting this structure include Wise (formerly TransferWise), Monese and Revolut — though the latter can also currently operate on its European banking licence awarded by Lithuania’s regulator.
However, others such as newcomer Lanistar have previously fallen foul of the FCA’s rules on properly disclosing the nature of its licence in marketing materials.
The FCA said e-money-licensed companies must write to their customers within six weeks to remind them of the risks of operating under the model, warning that some had been “misleading” users about the regulation of their products.
“Given the growth of the payment services and e-money sector, we noted the risk that consumers may not understand how their money is protected and the difference compared to sectors they may be more familiar with, such as banking,” wrote Paul Roe, the FCA’s head of payment supervision.
Roe said the lack of FSCS protection means customers should be made aware that if the business holding their money were to fail, it may take longer to refund their cash, and some might never be returned after costs were deducted by administrators or liquidators.
The 18 May letter made public on the FCA’s website comes in the wake of the collapse of German lender Wirecard, which provided services to a number of e-money institutions. As the firm failed, the accounts of UK fintech companies such as Curve were frozen for several days as administrators worked out how to handle the fallout.
The FCA implemented some rule changes last year to tackle the issue of e-money freedoms, requiring companies to meet stricter requirements on risk management and put wind-down plans in place.
“We are still concerned that many e-money firms are not adequately disclosing the differences in protections between their services and traditional banking,” Roe said, adding that the FCA will follow up with a sample of firms to assess their actions.
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