In the UK the financial services industry is regulated by two bodies namely the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). The FCA acts as watchdog for the conduct of all regulated firms from smallest SMEs to larger institutions, whereas the PRA is responsible for prudential matters ensuring financial stability of the larger organisations. Some firms are dual regulated by FCA and PRA. The PRA is part of the Bank of England and has the general objective to promote the safety and soundness of firms it regulates. Firms regulated by PRA (in addition to FCA regulation) are all major banks, building societies, credit unions, insurers, and major investment firms in the UK.
Therefore, Payment institutions (PI) and e-money institutions (EMI) in the UK are only regulated by the FCA. It is forbidden to provide regulated activit(ies) unless you are i) authorised person or ii) an exempt person as per Financial Services and Markets Act 2000 (FSMA). It should be noted that consequences of provision of services without obtaining authorisation are quite serious.
Activities require authorisation from FCA as a Payment Institution
When any services provided by a firm whether as a business, a not-for-profit organisation or a sole trader falls within the scope of payment services or e-money services, such firm must be authorised or registered by FCA unless any exemption applies.
The following activities, when they are carried out as a regular occupation or business activity, are payment services and require authorisation from FCA as a PI.
Sec 1 – Schedule 1 of Payment Service Regulations 2017
- services enabling cash to be placed on a payment account and all of the operations required for operating a payment account;
- services enabling cash withdrawals from a payment account and all of the operations required for operating a payment account;
- the execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider—
- execution of direct debits, including one-off direct debits;
- execution of payment transactions through a payment card or a similar device;
- execution of credit transfers, including standing orders
- the execution of payment transactions where the funds are covered by a credit line for a payment service user-
- execution of direct debits, including one-off direct debits;
- execution of payment transactions through a payment card or a similar device;
- execution of credit transfers, including standing orders;
- issuing payment instruments or acquiring payment transactions;
- money remittance;
- payment initiation services;
- account information services
Authorisation to act as an Electronic Money Institution
If a firm wants to issue electronic money, it must be registered or authorised by FCA as an EMI. As per the Electronic Money Regulations 2011, “electronic money” means ‘electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which (a) is issued on receipt of funds for the purpose of making payment transactions; (b)is accepted by a person other than the electronic money issuer; and is not excluded.
Therefore, authorisation required for including but not limited to money remitters, non-bank merchant acquirers and non-bank payment instrument issuers.
What are the requirements to obtain authorisation as a Payment Institution or E-Money Institution?
From the general perspective, applicant firms seeking authorisation from FCA to provide payment services or issue e-money must meet a range of requirements before they start operating in the market. They must satisfy the FCA with their business plans, that they identified and mitigated risks to their regulated business, budgets, resources, systems, controls, and the key staff having the necessary qualifications and experience to carry out their roles effectively.
Place of Business and Management:
Both PIs and EMIs must have their main place of business is in the UK. Furthermore, their central management and control must be in the UK, i.e., the day-to-day decision must be made in the UK and the critical personnel including all C-level must be residing in the UK.
Initial Capital Requirement and Ongoing Requirements:
Payment Institutions:
The initial capital requirement for Payment Institutions varies based on their proposed activities. The range is between €20k to €125k. The ongoing capital requirement is calculated based on financial forecasts.
E-Money Institution:
The initial capital requirement for E-Money Institution is 350k. Their ongoing equity requirement is 2% of the outstanding e-money.
Safeguarding funds:
Both PIs and EMIs must safeguard the payment service users’ funds by a segregated bank account. Insurance policy may be put in place under some circumstances.
Minimum number of employees:
It must be noted that GCA does not stipulate a minimum number of employees that firms must recruit. Rather, the number of employee and structure of departments should reflect the nature and volume of business. That is, it must be evaluated case-by-case. However, FCA will expect at least the firm to have a managing level (C- level) personnel (may be CEO, and perhaps COO and/or CTO) and MLRO who must be based in the UK. i.e., resident of UK. Depends on the size of the forecasted business, compliance officer will be expected to be onboard before the application for authorisation. All such personnel should have the appropriate qualifications and experience to carry out their roles effectively.
What do you need to submit when applying for authorisation before FCA?
Authorisation for PIs and EMIs requires the applicants to provide a business plan including a forecast budget calculation for the first three financial years which demonstrates that the applicant is able to employ appropriate and proportionate systems, resources and procedures to operate soundly.
Furthermore, applicant must provide the details of any person or firm with 10% or more of the capital or voting rights in the firm. Moreover, the identity of directors and persons who are responsible for the management of the firm together with the evidence that they are of good repute, and they possess appropriate knowledge and experience to perform payment services.
In addition, applicant firms must provide with FCA including but not limited to a description of
- its structural organisation,
- its outsourcing arrangements,
- its participation in any national or international payment system,
- its governance arrangements and internal control mechanisms,
- its procedure for monitoring, handling, and following up security incidents and security-related customer complaints,
- its process for filing, monitoring, tracking, and restricting access to sensitive payment data,
- its business continuity arrangements,
- its security control and mitigation measures to provide adequate protection to users against the risks identified,
How long would it take for FCA to decide on the authorisation application?
It takes up to 6 months for FCA to decide on the application if the application is complete but could take up to 12 months if the application is not complete.
Application fees payable to FCA
The authorisation fee that will be paid to FCA depends on whether your application is straightforward, moderately complex, or complex and fees are £1,500, £5,000, and £25,000 respectively.
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