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    FCA Issues Further Prudential Guidance for Payment Firms Amid Crisis

    FCA published a short consultation that sets out additional temporary guidance to strengthen payment firms’ prudential risk management and arrangements for safeguarding customer funds, in light of the exceptional circumstances of the COVID-19 pandemic. The proposed guidance also outlines how firms can put in place more robust plans for winding down. Comments are requested by June 05, 2020.

    The proposed guidance on managing prudential risk covers the following key areas:

    • Governance and controls—Authorized payment institutions and e-money institutions should ensure they have robust governance arrangements, effective procedures, and adequate internal control mechanisms, in accordance with their conditions of authorization.
    • Capital adequacy—It is essential that firms accurately calculate their capital requirements and resources on an ongoing basis and report these correctly to FCA in regulatory returns as well as on request from FCA. A firm’s senior management should ensure that its capital resources are reviewed regularly.
    • Liquidity and capital stress testing—Firms should carry out liquidity and capital stress testing to analyze their exposure to severe business disruptions and assess their potential impact, using internal and/or external data and scenario analysis. Firms should use the results of these tests to help ensure they can continue to meet their conditions of authorization and own funds requirements. 
    • Risk management arrangements—As part of the liquidity risk management procedures, FCA expects firms to consider their own liquid resources and available funding options to meet their liabilities as they fall due and whether they need access to committed credit lines to manage their exposures. To reduce exposure to intra-group risk, FCA considers it best practice for firms not to include any uncommitted intra-group liquidity facilities when assessing whether they have adequate resources in place to cover the liquidity risk to which they are exposed.

    In addition, FCA published finalized rules and guidance for insurance and premium finance firms on fair treatment of customers in temporary financial difficulty as a result of COVID-19. FCA also published its feedback statement that includes summary of the feedback received on the proposed measures. This guidance applies to all non-investment insurance contracts—that is, general insurance and protection contracts—but not to re-insurance products.

     

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    Keywords: Europe, UK, Banking, Insurance, COVID-19, Payment Service Providers, Governance, Regulatory Capital, Stress Testing, Liquidity Risk, FCA

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