FCA criticises how e-money and payments firms manage risk

The Financial Conduct Authority has called on UK payments firms to improve their compliance arrangements. It follows a review which has found examples of inadequate risk management frameworks and wind-down plans. Firms across the payments sector should test their processes against the FCA’s rules and expectations.

The FCA's multi-firm review into enterprise and liquidity risk management and wind-down planning covered a sample of 14 payment and e-money institutions. According to the FCA, none of the firms fully met its expectations. In response, the FCA has shared examples of good practice and areas for improvement.

For example:

• Risk management frameworks failed to regularly identify and quantify material risks or articulate risk appetite. The FCA says that boards should set and stress test risk appetite and use risk management frameworks to support informed decision-making.
• Some firms failed to monitor and control liquidity risks, including potential shortfalls in safeguarded funds. Firms should stress test liquidity risks and whether they have sufficient resources.
• The FCA found insufficient consideration of group risks. Firms should manage the financial and operational risks arising from intra-group dependencies.

The FCA also shared concerns about wind-down plans. Payments firms are required to have wind-down plans to help them exit the market in an orderly manner, if necessary. Despite having published guidance last year, the FCA found plans that were insufficiently detailed, included limited financial modelling or relied too much on group resources. The FCA expects firms to integrate wind-down planning with their wider risk management framework and regularly test their operability. 

The FCA is at pains to say that these findings do not set new standards but rather aim to help firms understand their existing expectations. Firms should review their arrangements against the latest findings and make sure they are clearing the bar.