Consumer Protection Survey of Currency Exchange Firms

The collapse of Crown Currency Exchange leaving 13,000 clients £20m out of pocket has put the spotlight on protection for consumers using currency exchange companies.

With many British expats being keen users of such services, ExpatMoneyChannel took a look at some of the major independent currency exchange providers to assess what protection was in place. The exercise made for some interesting, yet potentially, confusing results (see below). All currency exchange companies we looked at were authorised by the UK’s Financial Services Authority (FSA) under the Payment Institution regulations, apart from two, both of which were in the process of becoming authorised by the FSA when we were compiling our survey. One of these firms, Halo Financial, received authorisation on the 19th October 2010.

So far so good, but in terms of compensation in the event of a collapse, customers of firms operating under these regulations are not covered by the Financial Services Compensation Scheme, although customers do have the right to refer complaints to the Financial Ombudsman Services and the FSA.

Unfortunately, consumers rightly or wrongly rely heavily on regulatory statements when choosing financial services. But often it’s not that simple. In the case of Crown Currency Exchange, the firm was registered with the FSA, which means customers could easily be forgiven in thinking that they were safe. However, there is a difference between companies that are registered with the FSA and those that are authorised. Companies that are registered, such as Crown Currency Exchange, are subject to less complex regulatory requirements than firms going for full authorisation. Sadly, this is not going to change with recent new rules brought in to regulate the sector. Under the Payment Services Directive, effective from 1 November 2009, any business providing payment services must be authorised by, or registered with, the Financial Services Authority (FSA). The distinction being that companies with payments averaging less than €3 million per month can register, whereas larger companies must go through the full authorisation process.

New brokers must be registered or authorised before they start trading, but those who were providing foreign exchange services on 25 December 2007 have until 25 December 2010 to become registered, or 1 May 2011 to become authorised.

A further complicating factor is that these new rules only cover foreign exchange firms that offer money transfer services. They do not cover over-the-counter bureaux de change, some of which offer their services online, such as TravelEx or The Post Office. However, we have included these in our survey as they offer pre-paid currency cards issued by banks, which are becoming a popular way of securing a better exchange rate deal.

Interestingly, even though pre-paid cards are backed by a bank or building society, a pre-paid currency card is considered an e-money product, and is not covered by any compensation scheme. So if the bank or building society issuing the card fails you have no rights to claim under the compensation scheme. This information is often buried deep in the terms and conditions**. In which case, check that the money on your e-card is held in a segregated account as, in theory in the worse case scenario of the bank failing, this money should be safeguarded. Also check you are comfortable with the financial strength of the bank or building society involved.

So while it is no guarantee, currency exchange firms that are authorised rather than registered have more rigid structures in place to protect your money. For example, client money must be ring-fenced, which means it is held in a separate account with a bank and protected from being used by the company. Companies must also hold a minimum amount of capital in their business. They must also be able to demonstrate that they are fit and proper to run the business. And although not a regulatory point, the reputation of a firm should not be ignored. Dealing with tried and trusted firms that have longevity, financial strength and good banking arrangements are all pluses.

Our survey only looked at the more well known names in the currency market and in terms of their regulation in the UK. Obviously some providers may be authorised in other countries so it is important to check on protection in those particular countries.

ExpatMoneyChannel checked out the websites of each provider and where necessary contacted the firms to clarify the situation. The results below reveal a hotch potch of different rules covering these firms.

The answer, as ever, is to do your research and ask the right questions. See the bottom of this page for a Guide on What to Look For When Choosing a Currency Exchange Services.

Source: ExpatMoneyChannel

*Savings held in the Investment ISA and Child Trust Fund are covered by the UK Financial Services Compensation Scheme. However, all other Post Office® savings are covered by the Irish Deposit Guarantee Scheme.

**A Prepaid Card is an electronic money product and although it is a product regulated by the Financial Services Authority, it is not covered by the Financial Services Compensation Scheme. No other compensation scheme exists to cover losses claimed in connection with the Prepaid Card.

***Travelex is also authorised by the FSA as an appointed representative for insurance purposes.

**** Halo Financial received authorisation by the FSA on 19th October 2010, well in advance of the May 2011 deadline. However, as our survey was compiled and published prior to the this date certain versions may contain the fact that Halo Financial are 'close' to authorisation.

  Also see our Guide on What to Look for When Choosing a Currency Exchange Service Firm

  If you are a victim of Crown Currency Exchange then a new action group has been set up here