In March 2018, the FCA published its consultation (CP18/6) on its proposed approach to the implementation of the European Banking Authority's final guidelines on security measures for operational and security risks of payments services under PSD2. The FCA's final policy statement is expected to be published shortly.
On the whole, the consultation does not tell us much we did not already know. However, it does introduce a new and important requirement for PSPs to report to the FCA on an annual basis, and submit an updated risk assessment of the operational and security risks relating to the payment services they provide.
Under PSD2, payment service providers are required to establish an effective operational and security risk management framework relating to the payment services they provide. The EBA published its final Guidelines on 12 December 2017. It has then been up to the FCA (and other European national competent authorities) to implement this requirement into national law and to introduce reporting requirements.
The proposal takes the form of a direction that all PSPs are to comply with the EBA Guidelines and a new Chapter 18 in the FCA's payment services and e-money Approach Document, together with additions to Chapter 13 of the Approach Document. The new Chapter 18 is designed to highlight areas in which the FCA has identified the potential for particular operational and security risk concerns, including relating to the way payment accounts are accessed for the purposes of account information services (AIS) and payment initiation services (PIS), and on its expectations where PSPs make use of third parties.
Changes will also be made to the FCA's Supervision Handbook, together with amendments to the Payment Services Regulations 2017 (PSRs 2017) and the Electronic Money Regulations 2011 (EMRs 2011).
In its proposed additional Chapter 18, the FCA mandates the following headline points:
- A PSP's operational and security risk management should be proportionate to its size and the nature, scope, complexity and riskiness of its operating model and the payment services it offers.
- In particular, PSPs should consider how the use of agents introduces operational or security risks – it is the responsibility of the PSP to ensure that all identified risks, including those arising from or related to agents, are mitigated.
- When outsourcing functions relevant to the payment services it offers, the PSP's operational and security risk framework should set out mitigation measures associated with risks that arise from the outsourcing. These may relate to the relationship between the PSP and the outsourced provider or how the PSP monitors risks relating to those activities. This applies whether the outsourcing is ‘internal’ to an entity within the PSP’s organisation, or ‘external’. PSPs should note that even if parties to which services are outsourced fall outside the FCA's regulatory perimeter, the PSP retains full responsibility for discharging their regulatory obligations. A relevant act or omission by a party to which a PSP has outsourced activities will be considered the act or omission of the PSP. PSPs will therefore need to have effective (and full) oversight over all of their various outsourced functions and ensure the relevant systems and controls are in place to mitigate the identified security and operational risks.
- Any firms wishing to outsource obligations to the cloud or to any third-party IT services company should consult the FCA's specialist guidance on this point.
PSPs will be required to report to the FCA at least once per calendar year, but no more than once per quarter, via a new "REP018 Operation and Security Risk" reporting form. PSPs are otherwise free to choose the frequency of reporting - albeit noting the FCA’s expectation that PSPs will “submit their reports when they are carried out and when they are most pertinent, rather than at a point in time when the information contained in reports might be less pertinent”.
The proposed reporting form is set out in the consultation and requires the PSP to include certain details in relation to the relevant reporting period, such as the number of operational and security incidents notified to the FCA and the number of security related customer complaints. Together with the report, PSPs are required to submit to the FCA:
- an updated risk assessment of the operational and security risks relating to the payment services it provides; and
- an assessment of the adequacy of the mitigation measures and control mechanisms implemented in response to those risks.
Each supporting document must include all of the relevant requirements of the EBA Guidelines, including the following:
- in relation to the risk assessment: a list of relevant functions, processes and assets supporting the payment services together with a risk assessment relating to the same, a description of the security measures implemented to mitigate those risks, and the conclusions of the results of the risk assessment; and
- in relation to the assessment of adequacy of mitigation measures: a summary description of the methodology used to assess effectiveness and adequacy of the mitigation measures, together with the assessment and any conclusions on deficiencies identified as a result of the assessment and proposed corrective actions.
Further guidance on the reporting requirements will be set out in Chapter 13 of the Approach Document.
With the exception of the details relating to the reporting requirements, the consultation does not add much to what we already know: the substantive law is contained within the EBA Guidelines and the proposed additions to the Approach Document and the FCA's Supervision Handbook only complement those EBA Guidelines.
Given the increasing role of technology in the payments sector and the increasing (and evolving) risks posed by fraud and cyber threats, the FCA has made it clear that it is expecting PSPs to have adequate systems in place to understand the risks relevant to the payment services they offer and to demonstrate that they have considered and implemented mitigation measures addressing those risks. It is also apparent that the FCA will be focusing more closely on how firms ensure sufficient oversight of their agents and/or outsourced arrangements, including how those arrangements are monitored. This is likely to become a key area of supervision by the FCA for PSPs which have multiple agents and/or outsourcing arrangements.