The UK’s financial ecosystem is evolving rapidly, and with it comes the need for robust safeguarding measures to protect consumer funds. The Financial Conduct Authority (FCA) recently released its consultation document on proposed changes to the safeguarding regime for payments and e-money firms. These changes aim to address persistent issues in safeguarding practices and enhance consumer protection.
In this blog, we’ll break down the FCA’s proposals, why they matter, and what payment and e-money firms need to know.
Why safeguarding matters
Safeguarding ensures that funds received by payment and e-money firms are protected. Whether it’s money held in connection with payment services or in exchange for e-money, these funds must be safeguarded immediately upon receipt.
The goal? To minimise the risk of shortfalls, delays, or difficulties in identifying consumer entitlements if a firm becomes insolvent. This is especially critical as the FCA reports that between 2018 and 2023, insolvent firms had an average shortfall of 65% in client funds.
These shortcomings have highlighted the need for clearer rules and stricter oversight, forming the basis of the FCA’s new proposals.
The FCA’s two-stage approach to safeguarding
Interim-state proposals
The FCA plans to supplement existing safeguarding requirements under the Payment Services Regulations 2017 (PSRs) and the E-Money Regulations 2011 (EMRs). Key features include:
- Improved record-keeping
- Firms must maintain detailed records and reconciliation processes akin to those in the FCA’s CASS 7 framework for investment firms.
- A “resolution pack” will be required, including critical documents for managing safeguarding risks.
- Enhanced oversight
- Monthly regulatory returns to the FCA detailing safeguarding arrangements.
- Annual safeguarding audits conducted by an external auditor, with findings submitted to the FCA.
- Clear assignment of safeguarding compliance to an individual within the firm.
- Strengthened safeguarding practices
- Firms will be required to diversify their safeguarding arrangements, reducing the risk associated with relying too heavily on a single third party.
- Enhanced rules for safeguarding through insurance or comparable guarantees.
End-state proposals
Building on the interim measures, the FCA proposes:
- Robust segregation of funds
- Relevant funds must be received directly into designated safeguarding accounts at approved banks, with limited exceptions.
- Agents and distributors may only handle funds if their principal firm adequately safeguards the expected amount in designated accounts.
- Statutory Trust Over Funds
- Safeguarded funds, assets, and guarantees will be held under a statutory trust.
- This ensures clear prioritisation and protection of consumer funds during insolvency.
Implications for payments and e-money firms
These changes reflect the FCA’s focus on aligning safeguarding requirements with the complexity of the modern financial landscape. Firms must prepare to:
- Upgrade systems and processes: Enhanced record-keeping and reconciliation will require operational adjustments.
- Strengthen governance: Assigning safeguarding oversight to a specific individual underscores the need for accountability. This person will need to actively monitor compliance, identify risks, and take corrective actions when necessary.
- Engage with auditors: Annual safeguarding audits and regular reporting will demand collaboration with third-party auditors and regulators. Firms will need to ensure they are audit-ready throughout the year.
- Review third-party agreements: The emphasis on diversification and due diligence means firms must reassess their relationships with banks, insurers, and other third-party providers to ensure compliance with the new standards.
What’s next?
The FCA’s consultation provides a roadmap to better safeguarding practices and consumer protection. However, firms must act now to assess their current practices and plan for compliance with these proposals.
At Neopay, we specialise in compliance solutions for payments and e-money firms. From safeguarding audits to operational improvements, we’re here to support your journey toward compliance.
Need support navigating these changes? Contact Neopay today to learn how we can help your business stay ahead of compliance requirements.
