Business Insight

New FCA Rules to Strengthen Safeguarding of Customer Funds by Payments and E-Money Firms

spiral background

    The FCA has launched a consultation on a major overhaul of the safeguarding regime for payments and e-money firms, aiming to enhance consumer protection and ensure quicker returns of funds in case of firm failures. The proposals, which consist of so-called interim and end-state proposals, would significantly increase the compliance burden and scrutiny on these firms.

    Timing and implementation

    The consultation closes on 17 December 2024 and covers both stages of the proposed regime. In the interim-state, in advance of legislative change, the FCA's proposed rules will supplement the current safeguarding requirements in the PSRs and EMRs. In the end-state, the rules will replace the current safeguarding requirements in the PSRs and EMRs.

    The FCA will publish the interim safeguarding rules for firms by mid- 2025. The FCA wants to give firms time between the rules being published and coming into force so they can make the necessary arrangements:

    • 6 months for the interim rules; and
    • 12 months for the end-state rules.

    What does this mean for firms?

    The proposed changes will require these firms to make significant changes to their segregation arrangements, reconciliations, control frameworks, and documentation and may have a fundamental impact to their operating models. The FCA will also enhance its supervision and oversight of the new rules, which will require more detailed and frequent reporting and auditing. Firms should prepare in advance and conduct a comprehensive gap analysis against the existing systems and controls to accurately assess the impact to their operating model.

    Background

    The consultation closes on 17 December 2024 and covers both stages of the proposed regime. In the interim-state, in advance of legislative change, the FCA's proposed rules will supplement the current safeguarding requirements in the PSRs and EMRs. In the end-state, the rules will replace the current safeguarding requirements in the PSRs and EMRs.

    The current safeguarding requirements are set out in the PSRs and the EMRs, and the FCA has also issued guidance on these provisions in its Approach Document. However, the FCA is concerned about the gaps and inconsistencies in the current regime and the lack of clarity and certainty for consumers and insolvency practitioners. Therefore, the FCA proposes to replace the existing e-money safeguarding regime with a CASS style regime designed to work with payments firms' business models.

    The FCA notes that the use of payments and e-money firms has grown in recent years, but the regulator continues to see poor safeguarding practices from these firms. Funds held by these firms are not directly protected by the Financial Services Compensation Scheme (FSCS). Instead, firms must safeguard funds, to avoid customers losing money and minimise delays in getting their money returned if the firm fails. The FCA's supervision teams have seen an increase in the number of firms with safeguarding issues, with supervisory cases that have been opened relating to approximately 15% of firms subject to safeguarding requirements in 2023. The FCA recently published a portfolio letter communicating its concerns.

    Key proposals

    The interim-state proposals aim to improve books and records, enhance monitoring and reporting, and strengthen elements of the safeguarding regime. Some of the key proposals include:

    • Detailed requirements on performing internal and external reconciliations.
    • Maintaining a resolution pack to assist insolvency practitioners in distributing client funds.
    • Appointing a senior manager with responsibility for overseeing compliance with the safeguarding requirements.
    • Stricter requirements on annual audits conducted by an external auditor.
    • Submitting a new monthly regulatory return to the FCA.
    • Requirement to exercise due skill, care and diligence in selecting and appointing third parties holding client funds and assets.
    • Additional conditions where firms intend to use insurance to safeguard relevant funds or invest those funds in secure liquid assets.

    The end-state proposals aim to introduce a statutory trust structure and update record-keeping and segregation requirements. Some of the key proposals include:

    • Requiring all funds, assets and insurance policies/guarantees used for safeguarding to be held on trust in favour of clients.
    • Clarifying when the safeguarding obligation begins and ends with more prescriptive rules and guidance.
    • Requiring payments firms to receive relevant funds directly into an appropriately designated account at an approved bank, except where funds are received through an acquirer or an account used to participate in a payment system.
    • Requiring agents and distributors to deposit any client funds directly into the principal firm's safeguarding client account or requiring principal firms to segregate the maximum value of estimated funds likely to be held by agents or distributors, in their own designated safeguarding account.
    • Setting out more stringent criteria that need to be satisfied by insurance or comparable guarantee as a safeguarding method and ensuring the policy is written in trust.
    • Restricting the use of fixed term accounts, applying additional safeguards where funds can only be withdrawn with 31 to 95 days' notice.

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