Deliverable FX

Deliverable FX

Unlike investment-based Forex Trading such as CFDs and Options, Deliverable FX providers focus on the payment aspect of Currency Exchange and use their experience in the FX Markets to provide a more cost-effective means of making an international payment transaction.

As they are there to provide a payment service, and not an investment service, Deliverable FX firms only need to be authorised as a Payment Service Provider by the regulator. This means obtaining a licence under the Payment Services Regulations (PSRs) and adhering to the various rues.

However, despite the experience of Deliverable FX firms, there are still a lot of misconceptions about how the rules relating to the PSRs apply to them, which has led to a few mistakes being made.

We outline these below and recommend that Deliverable FX firms consider these and ask themselves if they have made the same mistakes.

For more information and a free one-hour consultation on any of the above contact us today

1. Many Deliverable FX firms have the wrong permissions

Most Deliverable FX firms only have permission to provide Money Remittance services. Whilst there is nothing wrong with having this, it is not enough.

They are issuing payment instruments

Deliverable FX firms generally operate via a non-face-to-face model, allowing customers to instruct payments over the phone, via email or more increasingly using online portals via the internet.

In doing this, they are actually issuing a payment instrument, which requires a specific permission under the PSRs -that of permission ‘e’ issuing payment instruments or acquiring payment transactions

To clarify, in the PSRs a Payment Instrument is defined as the following:

payment instrument” means any—

  1. personalised device; or
  2. personalised set of procedures agreed between the payment service user and the payment service provider,

used by the payment service user in order to initiate a payment order;

It is the second part, b, the personalised set of procedures, that qualify a firm as issuing a payment instrument. 

In essence, any form of non-face-to-face service will require a personalised set of procedures and therefore will qualify as issuing a payment service.

Deliverable FX AuthoriPay

They are operating a payment account

Most Deliverable FX firms will allow customers to hold funds on account until a future date and combine currency exchange transactions so that funds are pooled over one account, in the customer’s name, from which multiple remittances are made.

In regulatory terms this is known as operating a payment account, which also requires specific permission under the PSR’s – that of permissions ‘a’ and ‘b’ services enabling cash to be placed on, or withdrawn from a payment account and all of the operations required for operating a payment account.

To clarify, in the PSRs a payment account means an account held in the name of one or more payment service users (the customer/s) which is used for the execution of payment transactions. There is no requirement for this to be an actual bank account, and therefore an internal number given to a customer, which corresponds to their transaction activity (akin to a ledger balance) would qualify.

What does this mean?

For a start, if you are a Deliverable FX firm with Money Remittance permissions only, carrying out any of the above then you need to apply to the FCA for what is known as a Variation of Permission, or VOP. In addition to this, these new permissions will carry extra regulatory capital requirements which must be addressed. 

Failure to do otherwise puts you in breach of the regulations. 

Authoripay can provide detailed assistance with your safeguarding procedures including:

  • Identifying the specific permissions that you need
  • Practical assistance in applying for the Variation of Permission

2. Many Deliverable FX firms are actually issuing Electronic Money

This relates to the operating of a payment account above. Many firms will perform the currency exchange, at the instruction of the customer, but have no onward payment instructions to remit the funds to,  so will leave the funds ‘held’ on account. Customers tend to do this when exchange rates are favourable and want to profit from them before they actually have a payment to make. 

Unfortunately, in doing this Deliverable FX firms are straying into Electronic Money territory.

The issuing of Electronic Money is actually regulated under the Electronic Money Regulations (EMRs) and Regulation 2 of the EMRs defines e-money as:

Monetary value represented by a claim on the issuer that is:
  1. Stored electronically, including magnetically
  2. Issued on receipt of funds for the purpose of making payment transactions
  3. Accepted as a means of payment by persons other than the issuer
 Looking at the way funds are left held on account we can see how they meet the definition of Electronic Money:

  1. There is no physical cash involved here and the funds are literally held in electronic format, represented by a balance on their account
  2. The funds can only be ultimately used to be paid to a third party, i.e. a payment transaction
  3. The third party, who will ultimately receive these funds will naturally accept them as payment

What does this mean?

It is technically a criminal offence to issue Electronic Money without the appropriate licence. Therefore, if you are a Deliverable FX firm and are leaving funds on held status, you will have to either stop this practice or apply to the regulator to become an Electronic Money Issuer. If you chose to do the latter, you need to be aware of the additional regulatory and capital requirements that will apply

Authoripay can provide detailed assistance with your safeguarding procedures including:

  • Implementing practical solutions to ensure you don’t qualify as issuing Electronic Money
  • Assisting you with your application to the FCA to become a licenced Electronic Money Issuer

3. Many Deliverable FX firms are not Safeguarding client funds properly.

Safeguarding is a key aspect of regulation and it is a way of ensuring that customers’ money us kept safe. It is something that is taken very seriously by the regulator.

When safeguarding, most Deliverable FX firms will generally safeguard the following 2 types of funds:
  1. Funds which have been sent to them by the customer, but the currency exchange date has not yet come to value, so the amount is left on held until the date arrives and the funds are converted into another currency
  2. Currency which has been purchased by the customer, but has yet to be remitted out

Whilst this may seem like the correct thing to do, in the eyes of the regulator this is incorrect.

For the regulator, only the second set of funds (the currency purchased by the customer, but yet to be remitted) should be safeguarded as that is what will be paid out. The first set of funds (currency sent in by the customer) is actually to pay for a foreign exchange transaction.

The reason for this can be boiled down to the definitions that were applied when determining what funds should be safeguarded. The regulations state that only ‘relevant funds’ should be safeguarded, and relevant funds have been defined as:
  1. sums received from, or for the benefit of, a payment service user for the execution of a payment transaction; and
  2. sums received from a payment service provider for the execution of a payment transaction on behalf of a payment service user

Basically, relevant funds are only those that will be used in a payment transaction. For Deliverable FX, only the currency purchased will be used in an actual payment transaction, which is why only that should be safeguarded.

What does this mean?

Where a Deliverable FX firm decides to safeguard all funds, they need to review this and only identify those funds that are deemed relevant. Failure to do so is not only a breach of regulations but puts customers money at risk.

Authoripay can provide detailed assistance with your safeguarding procedures including:
  • Identifying the funds that are deemed relevant
  • Practical assistance in implementing safeguarding procedures

4. Some Deliverable FX firms are straying into MiFiD territory

UK based firms offering FX forwards without being authorised as an investment firm are urged to examine their current operating procedures to determine whether they are trading lawfully or exposing their firm and leadership team to risks of fines, industry bans or worse. The FCA has recently expressed concern at the limited number of new applications and requests to vary permissions it received post MiFiD II. As such we encourage clients to carefully consider the best course of action for themselves and their firm.

AuthoriPay can provide you with:

  • Advice on how to alter practices to ensure you fall outside the scope of MiFiD II
  • Practical assistance to become authorised under MiFID II
  • A signed opinion stating that we consider you to be exempt from the requirements of MiFiD II

For a free one hour consultation get in touch with us today.


Until recently the FCA was the sole European regulator operating under the premise that deliverable FX forwards should not be classed as investment instruments.  Article 84 (2) of the Regulated Activities Order offered UK-based firms an exemption when such contracts were exercised by a trading enterprise. The FCA deemed them as being for a commercial purpose and therefore outside of regulations whose primary purpose was to protect consumers. As such, UK payment and e-money institutions had the luxury of providing these products without falling under the Financial Services and Markets Act 2000 (FSMA).

One of the tenets of the Payment Service Directive is to create a level playing field throughout Europe for commerce and consumer alike. So it was a bone of contention that elsewhere in Europe, such firms faced a greater regulatory burden.

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In an attempt to harmonise the situation the European Commission chose to supplement the 2014 legislation with Acts that clarify the term commercial purpose.

To meet the new commercial purpose exemption a forward contract must meet both of the following criteria.

  • The currency is deliverable;
  • The trade is specifically to facilitate payment for identifiable goods and services.

Where the FX provider is shown an invoice or instructed to pay the counterparty directly then there is little ambiguity that such a transaction falls outside of MiFiD. The FCA has indicated that firms can accept what the client tells them at face value without necessarily requesting evidence (e.g. an invoice) unless there are clear indications to the contrary.
For FX spots, there are some small changes too with the FCA prescribing a maximum 2 trading days for settlement of FX majors.The European Commissions designation of FX majors: AUD, BGN, CAD, CHF, CZK, DKK, EUR, GBP, HRK, HUF, HKD, JPY, MXN, NOK, NZD, PLN, RON, SGD, USD

For non-majors the FCA, following pushback at the consultation phase, relented with a settlement timeframe of whatever the market accepts as standard delivery.

The difficulty arises when one considers deliverable FX forward contracts where the currency is non-deliverable or the purpose of the trade is not to pay for specific goods / services.
In such a situation firms must balance the cost of authorisation against the benefits of offering what will be classed as Non-Deliverable Forwards (NDFs).

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Deliverable FX AuthoriPay

Key considerations for SMEs:

Deliverable FX AuthoriPay
  • The liquidity challenge of not being allowed to use margin from retail clients to fund bank positions on a match principal basis.
  • The initial and ongoing cost of transactional reporting in compliance with EMIR and MiFIR. Such reporting itself is fairly labour-intensive with around 80 fields to complete each day.
  • Meeting the ongoing capital adequacy requirement of €125,000;
  • Undertaking quarterly COREP reporting;
  • The creation and implementation of procedures on suitability, best execution and product disclosure;
  • Compliance with CASS requirements to protect client funds
  • Employing qualified staff who are competent in assessing suitability (if providing advised sales) and appropriateness (for execution only) and the compliance personnel to oversee the arrangements
Another liquidity issue to mindful of is that some financial auditors expect investment firms to protect the ‘in the money’ position of all derivatives (See CASS 7.16.32). Given that FX forwards are more concerned with hedging than generating income this may seem rather counterintuitive but if your auditor disagrees it can be highly problematic.

For a free one hour consultation on your business contact us today

Get in touch

    AuthoriPay Ltd, Milton Hall,  Ely Road, Cambridge,   CB24 6WZ.