The Financial Conduct Authority (FCA) is taking significant steps to ensure that consumer funds in the payments and e-money sectors are better protected. Through their consultation on CP24/20, the FCA is proposing new rules designed to improve the safeguarding regime for payment services firms, e-money institutions, and credit unions. The goal is to make sure that consumer money is secure, especially in cases where payment or e-money institutions fail.
Here’s a breakdown of some of the key improvements being suggested.
Areas of improvement
The FCA’s proposed measures aim to ensure that funds received by payment firms in exchange for issued e-money or for payment transactions are managed securely and responsibly. These improvements include:
- Firms will need to ensure that funds received for e-money issuance or payment execution are either held securely at all times or backed by an appropriate insurance policy or guarantee.
- The right amount of consumer funds must be separated from a firm’s own operational funds, ensuring that consumer money remains intact in case of financial failure.
- Firms must clearly communicate that consumer funds are held on behalf of e-money holders or payment service users.
- In cases where firms experience financial difficulties, the claims of e-money holders and payment service users will take priority over other creditors, meaning consumers are better protected in recovering their funds.
- The new rules ensure that safeguarded funds can be returned to consumers as quickly and as whole as possible in the event of a firm’s collapse.
Who does this affect?
These proposed rules apply to a range of entities within the UK’s financial ecosystem, including:
- Authorised Payment Institutions
- E-Money Institutions
- Small E-Money Institutions
- Credit Unions issuing e-money under the Electronic Money Regulations (EMRs) and Payment Services Regulations (PSRs). Notably, small payment institutions will have the option to opt-in to comply with these regulations.
Interim and end-state proposals
The consultation outlines both interim and end-state measures for improving safeguarding practices.
- Improved books and records: Firms will need to enhance how they record and track safeguarded funds, ensuring full clarity on how much of a firm’s holdings are tied to consumer funds.
- Enhanced monitoring and reporting: Firms will be required to submit more robust reports on their safeguarding activities to the FCA, ensuring regulatory oversight is maintained.
- Strengthened safeguarding practices: By reinforcing existing practices, firms can align more closely with the requirements outlined in the EMRs and PSRs.
- Statutory trusts: In the end-state proposal, firms will be required to hold consumer funds under a statutory trust, meaning that consumer assets will legally belong to them, and not the firm.
The goal is to transition from the safeguarding requirements under EMRs and PSRs to a CASS-style regime, where relevant funds and assets are held on trust for consumers. This model has been successfully applied in other financial sectors, offering increased protection for client money.
Have Your Say
Firms are encouraged to provide feedback on the FCA’s consultation. You can share your views via the online response form or by emailing cp24-20@fca.org.uk. The deadline for submissions is 17 December 2024.
The FCA aims to publish the final interim rules along with an accompanying policy statement in the first half of 2025.
How Neopay can help
This consultation marks an important step towards enhancing consumer protection in the financial services industry. For firms in this space, staying compliant and prepared for the upcoming changes is key. At Neopay, we provide the expertise and support needed to navigate these regulatory shifts.
If you need assistance in reviewing your safeguarding practices or want help in preparing feedback for the FCA, don’t hesitate to reach out. We’re here to help you ensure that your compliance framework is robust and efficient. Contact us here.
