As the Financial Conduct Authority (FCA) has proposed significant changes to the e-money and payment companies’ safeguarding regime, there are fears among many firms about the effects the new regulations will have on their businesses. The new regulations, to be rolled out in two stages—an interim state and an end-state regime—are aimed at enhancing safeguarding compliance, enhancing reporting, and introducing a statutory trust model.
To give us an overview of these upcoming changes, we talked to Nigel Reed, Neopay’s Chief Operating Officer, who has taken more than 100 businesses through FCA authorisation and still advises businesses on compliance issues. In this Q&A, Nigel clarifies the new safeguarding obligations and offers practical guidance on how businesses can get ready.
Safeguarding requirements under the FCA have been in the pipeline for some time. Can you give us an overview of the key proposed changes?
Nigel Reed: Yes. The FCA has identified weaknesses in the existing safeguarding regime and is adopting a two-phase approach to enhancing it. The interim rules aim to enhance firms’ adherence to existing safeguarding obligations. This includes stricter record-keeping, more robust reporting requirements, and a requirement for an independent safeguarding audit. The goal is to improve transparency, oversight, and risk management.
The end-state rules bring about a significant change by replacing the existing safeguarding requirements with a statutory trust model, similar to the FCA’s Client Assets Sourcebook (CASS). This will make sure- that applicable funds and assets are kept in trust for consumers, affording greater protection in the event of firm failure.
Let’s break it down. What are the key areas that companies must address during the interim phase?
Nigel Reed: There are three things to keep in mind:
- Better Books and Records: Companies will need to enhance their record-keeping and reconciliation so that all safeguarded funds are properly recorded. The FCA is also introducing a resolution pack requirement, which will detail the exact documentation and records companies must keep.
- Enhanced Monitoring and Reporting: There will be a new monthly regulatory return where firms will have to report on safeguarding arrangements. Firms will also be required to conduct an annual safeguarding audit, which they will have to submit to the FCA.
- Governance and Oversight: Businesses will have to assign explicit responsibility for overseeing to an individual. This will lead to clearer accountability, and businesses will need to ensure they possess the appropriate in-house expertise to make it happen.
And looking forward to the end-state model, what are the most significant changes?
Nigel Reed: Most significant is the creation of a statutory trust. This will mean that all safeguarded money will legally belong to customers, and will not be part of the firm’s assets. There will also be more stringent requirements on segregation, so that money is held directly in a designated safeguarding account at an approved bank. Payments firms will be required to receive relevant funds directly into these designated accounts, except in cases where the funds are received via an acquirer or through an account used to participate in a payment system.
Another significant change is the agent and distributor requirement for supervision. Agents will not be allowed to receive applicable funds unless their principal firm has an equivalent amount in a designated account. This provides assurance that even in the event if agents fail, customer funds are still protected.
How can businesses begin preparing for these changes today?
Nigel Reed: Preparation is the answer. Companies must begin by reviewing their safeguarding arrangements in relation to interim and final end-state rules. In particular, they should:
- Simplify their reconciliation and documentation processes to comply with the improved record-keeping obligations.
- Screen their safeguarding policies and partners, making sure they have the right due diligence and diversification controls. This includes conducting thorough due diligence on the third parties they use to hold, deposit, insure, or guarantee safeguarded funds, and ensuring appropriate diversification to mitigate concentration risk.
- Prepare for new audit expectations requirements by actively seeking out and addressing any weaknesses in their safeguarding arrangements.
- Ensure your team members have the right safeguarding training and somewhere to go for help and advice if they need it.
Apart from the regulatory changes, businesses are still subject to safeguarding audits. What can they expect from these audits?
Nigel Reed: Safeguarding audits are thorough, and businesses must be in good shape. Auditors will look at several key areas, including:
- Identification of applicable funds—so that companies sufficiently record when and how the applicable funds are earned and are appropriately safeguarded.
- Method of safeguarding—companies must show compliance with their chosen method of safeguarding, whether segregation or insurance.
- Internal and external reconciliations—ensuring firms regularly review their safeguarding records to identify and resolve discrepancies.
- Oversight and governance—firms should have open policy regarding safeguarding oversight as well as which personnel is in charge of monitoring.
- Training and awareness—making appropriate personnel, including senior management, aware of their safeguarding responsibilities and are prepared to answer auditor queries.
The FCA is increasing scrutiny on safeguarding, and firms that fall short could face regulatory action. Being proactive and ensuring compliance now will help firms avoid potential issues.
As the FCA increases its focus on protection, how can Neopay help guide businesses through the changes?
Nigel Reed: At Neopay, we deliver bespoke compliance solutions which help businesses to meet the FCA’s increasing safeguarding requirements. We provide:
- Safeguarding audits to evaluate current practices and identify areas for improvement.
- Workshops and training for staff to learn and apply the new requirements effectively.
- Ongoing advisory support to help firms align with the interim rules and transition smoothly to the end-state framework.
The FCA’s increased focus on safeguarding means firms need to act now to ensure compliance. If anyone is uncertain about their current approach or needs support, we’re here to help.
Contact Neopay today to learn how our safeguarding solutions can support your business.
