Only 10 per cent of payments firms reviewed by the regulator had adequate risk and governance resources, it was revealed at this year’s PayExpo.

Speaking during a payments exchange session at the conference, Daniel Hurl, head of the prudential specialists department at the Financial Conduct Authority (FCA), said that there was quite a lot of improvement needed across the industry in order to meet the watchdog’s expectations.

Over the last 18 months, the FCA has been “really supervising non-bank payments more actively”, according to its head of payments department and retail banking division, Maha El Dimachki, who warned: “for such a rapidly-growing area, if things go wrong, trust can be eroded.”

Hurl explained that only eight per cent of payments businesses were found to be accurately reporting to the regulator.

“There are lots of optimistic business plans out there, which lea to a reliance on external funding,” he stated. “Only around half have a capital plan for getting that funding though, which incentivises poor conduct.”

He went on to say that his team have found a lot of complex group structures, with leveraging and outsourcing common. “When combined with the lack of capital plans, this gives me cause for concern.”

Hurl added that there was a worrying lack of wind-down plans at many payments firms, echoing his colleague’s findings.

Emad Aladhal, head of the client assets and resolution department at the FCA, said that a sign of healthy competition within a sector is that you see both entries and exits.

“But firm failure needs to be in a safe way – it’s critical that client money is appropriately segregated and safeguarded in a robust way,” he stated. “In order to keep your authorisation you can’t have co-mingling of funds or inaccurate record keeping.”

Aladhal said that about 10 firms in the payments sector have folded in recent months, with many of them suffering from not having differentiated funds or telling their bank which money is which when it comes to settlement.

“Too often firms have not taken these simple steps,” he added, warning that the FCA has a programme of increasing the number of assessments beginning next year.

Hurl commented: “Failure is a good sign of a competitive market, but there needs to be continuity of service, and adequate funds are crucial in maintaining that.”

Given it was a payments event, the topic of the second Payment Services Directive (PSD2), and in particular the Strong Customer Authentication (SCA) rules, came up.

Alex Roy, head of the FCA’s consumer distribution policy, said that on these regulations there have been good relationships built up within the financial services sector, but “I’m slightly more nervous about the connections they have with merchants” in terms of getting systems and processes up to speed in time for the extended SCA deadline.

He added that the FCA is finalising a more granular plan for how it will become embedded in the payments sector.

Responding to a question from the audience about the late notice for the delay to SCA implementation, Roy blamed the timing of the EU guidance. “We have worked with the EBA [European Banking Authority] for years to get more clarity - we’re still unclear on things like dynamic linking - but our goal is to be clear, and as early as possible.”

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