Reconciliation in the Firing Line at Payment Service Providers

The FCA is enforcing more stringent reconciliation controls at Payment Service Providers in order to ensure controls are in place to safeguard service users’ funds.

By Chris Peacock, Head of Marketing.

In the first half of 2019 the Financial Conduct Authority carried out an in-depth review of 11 non-bank Payment Service Providers (PSPs). This was due to concerns about the effectiveness of the internal controls they had in place for safeguarding service users’ funds, as demanded by the Payment Services Regulations 2017 and Electronic Money Regulations 2011.

This wide governance and oversight review included areas such as:

• How well institutions understood which funds are relevant funds
• Segregation of funds
• Oversight of agents and distributors
• Safeguarding procedures

Reconciliation rules

One particular area of priority that the FCA pinpointed was internal and external reconciliation practice and procedures.

As the report states, ‘An institution should carry out internal and external reconciliations as often as necessary, considering the risks to which the business is exposed.’  It also says that the institution should, ‘support its approach to reconciliation with a clear explanation, which must be signed off by its board of directors’ and that ‘in no circumstances would it be acceptable for a firm to carry out the reconciliation less than once during each business day.’

These reconciliations are supposed to flag discrepancies between the balance in the safeguarding accounts and the amount that needs to be safeguarded.  The balance in the safeguarding account needs to be enough to cover the requirements, but not be excessive, to minimise the possibility of commingling. 

A task too far?

The review found that reconciliation practices were not being followed adequately at all firms. Some were not performing reconciliations at all, while others were doing them on an infrequent or ad-hoc basis.  Even then, balances were often not adjusted appropriately, resulting in significant risk.

In many cases, these processes were also carried out manually and there was no certification or sign off workflows in place. Similarly, often no governance procedures were in place to review discrepancies or trends.

Tackling the reconciliation headache

It’s clear that PSPs need to move away from spreadsheets and manual processes, both to ensure the regulatory requirements are met, and more generally to reduce operational risk. A robust reconciliation and review process is needed, but getting one in place has traditionally been a headache. 

Traditional reconciliation systems are on-premise deployments, requiring long installation projects and teams of consultants to go live. Getting these in place from scratch in the time the regulator or authority requires is very difficult, not to mention the cost implications of such projects.

Even worse, some PSPs may have a legacy system in place, but the technological limitations of that system mean it’s time-consuming and expensive to onboard new reconciliations and controls. So the firm has no choice but to revert to spreadsheets and manual workarounds for any new requirements that crop up. 

Step forward the SaaS reconciliation solution

Fortunately for PSPs, there’s now a quicker and easier way to get controls in place. Why build a legacy stack if solutions can be puzzled together from building blocks quickly? Software-as-a-Service (SaaS) solutions, such as Duco, can be live in 24 hours with no major infrastructure projects. This is a step change from the multi-month deployments of the past. 

PSPs are often growing fast. The beauty of a SaaS reconciliation software is it can scale effortlessly with this growth. Increasing volumes, complexity and new lines of business can easily be accommodated.

And then there’s agility. While traditional systems require lengthy IT work to onboard new reconciliations, solutions like Duco empower business users to build the controls themselves. CurrencyCloud’s operations staff, for example, were able to build their first reconciliation on Duco in just two hours.

So with reconciliation at PSPs currently in the FCA’s firing line, it feels a no brainer to look at a reconciliation solution like Duco to quickly address the risks around reconciliation and safeguarding controls.  For more information, see how easy it was for CurrencyCloud and Mama Money to implement robust reconciliation processes with Duco.