FCA demands UK fintechs clarify non-bank status to customers

The UK’s financial watchdog has issued a letter to CEOs of non-bank firms – particularly e-money licensed firms – demanding they make it clear they are not banks.

“We are still concerned that many e-money firms are not adequately disclosing the differences in protections between their services and traditional banking,” the Financial Conduct Authority (FCA) said in the letter.

The regulator issued an initial statement around this in July 2020, during the pandemic when customers were at their most vulnerable. It has since monitored the situation, and is still not happy with the fintech industry.

Companies have six weeks to write to their customers

Advertising as the “alternative”

In particular, the regulator cites the issue of FSCS protection. The Financial Services Compensation Scheme (FSCS) does not apply to non-bank firms. This means cash stored with e-money firms isn’t insured to the same extent it is by a bank.

Around 15 firms – the majority advice-focused – have made it onto FSCS’s default list since the beginning of March, meaning the lifeboat fund can accept compensation claims against these firms because they’re unable to pay the liabilities against them.

Customers of firms without FSCS protection could find it takes longer for their money to find its way back to them, compared with banks.

Administrators or liquidators can deduct fees from non-bank firms which fall into insolvency, resulting in consumers not necessarily getting their money back.

“We are asking you to write to your customers to make it clear how their money is protected,” the FCA says in the letter to fintech CEOs.

Companies have six weeks to do so and must separate the notice to customers from any other messaging or promotional activity.

It accuses such firms of advertising themselves as an “alternative” to high street banks in their “promotions”, but “not adequately [disclosing] the differences in protections between e-money accounts and bank accounts”.

The regulator continues: “Firms must consider the information needs of customers and communicate with them in a way which is clear, fair and not misleading.”

In other words, fintech start-ups offering customers a current account must make clear the lack of FSCS protection.

The FCA also points to those firms’ making “potentially misleading impression[s] to customers about the extent to which [their] products or services are regulated by the FCA”.

UK fintech start-up Lanistar fell into hot water on this count late last year. The FCA added Lanistar to its warning list in November. It followed a string of high-profile influencers sharing Lanistar’s product advertisements without stating its lack of licensing from the FCA at the time.

Risks don’t stop at FSCS

The FCA cites the lack of FSCS protection as the biggest risk surrounding non-bank firms. But FinTech Futures’ independent investigations have brought to light another key risk. That is, the wait times around anti-money laundering (AML) and Know Your Customer (KYC) checks.

Two UK fintech start-ups, Pockit and Wirex, have attracted swathes of customer complaints around prolonged locked funds due to what the companies claim are their AML and KYC checks.

Under 2017-enacted UK laws, companies like Pockit and Wirex can limit communication with customers whilst they review their validity. This is to ensure they don’t ‘tip-off’ potential fraudsters or criminals.

But the law does not specify a time limit for these checks to be completed. Which means fintech start-ups can lawfully freeze funds as long as they like with minimal communication to their customers.

According to consumer advocacy website ‘pissedconsumer.com’, Pockit has received around 345 reviews on the site since May 2018. The website totals £110,000 in claimed “losses” by customers. This would mean, on average, the amount locked per customer sits somewhere around £319.

In February, FinTech Futures counted at least 16 Wirex customers having complained over unexplained account restrictions in just a nine-day period on Twitter. The worst case included one customer having waited more than 246 days to get access to their account.

The FCA has advised customers of these firms to take these companies to court. But many of these start-ups’ customers can’t afford to do that, because they are often some of society’s most vulnerable. A demographic these fintechs claim to serve.

A handful of customers have told FinTech Futures the effects of such prolonged locking of their funds. These include the near loss of their family homes. As well as the inability to pay for urgent operations. And severe mental illnesses such as depression.

Companies like Pockit and Wirex aren’t transparent on the issue of why their checks take so long. But as smaller companies with less free flowing capital, it’s likely they can’t invest like big banks do in their AML and KYC processes.

Not just an issue in the UK

The FCA isn’t the only regulator reigning in non-bank firms. In April, France’s central bank issued a reminder to its fintech industry on the rules around using the term “neobank”.

The Prudential Control and Resolution Authority (ACPR), operating under the Banque de France, issued a statement. It read: “The term ‘neobank’ must necessarily qualify a credit institution”.

The regulator is wary firms “mislead users on their actual status” by wrongly qualifying their businesses as neobanks.

It puts onus not only on companies, but also on the press, to communicate correct terminology to the public.

“Use of this word to qualify another activity [other than that of a credit institution] is prohibited by law and is likely to result in sanctions for entities that contravene them,” says the ACPR.

It specifically called out payment institutions and electronic money issuers, as well as their agents and distributors.

“Erroneous qualification” of the term neobank “is not without consequences” in France. Those fintechs which continue to mislead customers into thinking they are a credit institution are “punishable [by] three years’ imprisonment and a fine of €375,000″.

The FCA is yet to cite such specific punishments for non-bank firms failing to clarify their differences from bank-licensed firms.

Read next: France’s central bank warns fintech industry of rules when using term “neobank”