Update on implementation of Payment Services Regulations, with reference to practical FSA supervisory regime

1. Update on implementation of Payment Services Regulations, with reference to practical FSA supervisory regime Presentation by John Burns to The UK Money Transmitters Association London 25 February 2010

2. Latest Position (as at 15 February) • 86 Authorised PI applications received so far • 60 APIs intending to passport • 502 Small PI Applicationsreceived • The UK has by far the largest number of payment institutions in the EEA

3. Recent issues • Gabriel Reporting • Unauthorised business checking • Agency – What is it and where do responsibilities lie?

4. Gabriel Reporting • API/SPI Requirements • What payment transactions need to be reported? • What exchange rate should I use? • What happens if I’m late in reporting or don’t report?

5. API Reporting Requirements

6. Annual Report – GABRIEL will issue a reminder Approach Document 13.9 – prudential return due “within one month of the accounting date If you are a “hybrid firm” “payment services only accounts” to be submitted at the same time as full audited accounts go to Companies House If not required to lodge at Companies House – within 9 months of year end. API Reporting - Timing

7. SPI Reporting Requirements As at 31 December – to be submitted by 31 January

8. SPI Reporting Requirements • All payment transactions to be reported PI (2) Creditor Settlement Netted out PI (1) PI (2) Key Payment instructions (1) –(2) Payment instructions (2) –(1) Payers Payees

9. SPI Reporting • 'Payment transaction' is defined as "an act, initiated by the payer or the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee." The payment out by PI(1) in the example above would therefore appear to fall within this definition as a payment transaction.

10. SPI Transaction Reporting • However, Schedule 1 (2)(m) does exclude as payment services "payment transactions between payment service providers, or their agents or branches for their own account". This would appear to exclude payments made in settlement, so that if PI(1) had sent funds to PI(2) to cover the payments out that PI(2) had made, this would be excluded and would not need to be reported.

11. SPI Transaction Reporting • The question therefore is whether the payment out made by A on behalf of B could be classed as being "for its own account". In our view, if the payment is being made to a third party, this is unlikely to be the case. • If these transactions are to be reported for the annual report, they will also count towards the € 3 million monthly value threshold for SPI status

12. Firms Operating Illegally • Large number of firms who, according to HMRC Register, began operating after 25 December 2007 – the exact numbers are difficult to identify, a significant proportion may be agents of other money remitters • Our Unauthorised Business Team are contacting these firms - action will follow if they are discovered to be operating illegally

13. If you become aware of a competitor who is operating illegally, let us know. S110 PSRs:” A person who contravenes paragraph (1) is guilty of an offence and is liable— (a) on summary conviction, to imprisonment for a term not exceeding three months or to a fine not exceeding the statutory maximum, or both; (b) on conviction on indictment, to imprisonment for a term not exceeding two years or to a fine, or both. Firms Operating Illegally

14. Agency – What is it and where do responsibilities lie? • PSRs definition:“a person who acts on behalf of an authorised payment institution or a small payment institution in the provision of payment services” • Test is who is the customer contracting with (and who does the customer believe they are contracting with) ?

15. Agency/Wholesaling – FSA Concerns The Consumer Protection from Unfair Trading Regulations 2008 • A commercial practice is misleading if the documentation if its overall presentation in any way deceives or is likely to deceive the average consumer … … even if the information is factually correct; and • it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise.

16. Moneymadeclear - Sending Money Safely • Launched 9 February by Gareth Thomas, Minister of State at DfID • Significant press coverage –BBC News Website/ Radio 1/ bdnews24.com/Yorkshire Post… • Leaflet now available to download or order from Moneymadeclear website http://www.moneymadeclear.fsa.gov.uk/publications#general • Copies available here today

17. Supervision of Payment Institutions • Complaints-based supervision: What does it mean? • Not just complaints-based • Same basis as the banks are being supervised for conduct of business • Outcomes-focused

18. What will we do if we get a complaint? • Assess severity & determine if it is an isolated case or, through complaints monitoring, is systemic across the sector. • Consider investigation: • Desk-based (internal review, telephone interview and/or letter) • Visit firm (interview senior management & staff, review systems & controls, files etc.) • Require firm to rectify weaknesses identified • If firm unable or unwilling to rectify weaknesses, consider enforcement action.

19. Complaints to FOS • If a firm fails to co-operate with FOS, they will refer the firm to us. • We will contact the firm to raise the issue with them. • If the firm continues to fail to co-operate, we are very likely to move to enforcement.

20. Returns • Returns are subjected to a number of validation checks to ensure accuracy of reporting and that PIs continue to meet the requirements of the PSRs • If a firm reports a breach we will make contact to agree appropriate remedial action to rectify the breach by a set date • Failure to submit a return on time will be a breach and result in a £250 administrative charge

21. Overall Approach • Firm given opportunity to sort out the problem itself • Investigation and agreed action follow • Only move to enforcement if and when previous two steps have failed. • Important to note that the PSRs do not allow us to grant waivers for non-compliance – we will always reserve the right to take action.

22. Enforcement Powers • Entry & inspection without a warrant (Reg 83) • Public censure (Reg 84) • Fines – of such amount as we consider appropriate (Reg 85) • Seek injunctions (Reg 87) • Require restitution (Regs 88 – 90) These are used as a last resort, but as can be seen elsewhere, the FSA is willing and able to use its powers if and when necessary

23. Contact Details: John Burns Technical Specialist Banking & Payments Conduct Policy Financial Services Authority Phone: +44 (0)20 7066 8692 E-mail: john.burns@fsa.gov.uk paymentservices@fsa.gov.uk Website: http://www.fsa.gov.uk/Pages/About/What/International/psd/