FCA unveils changes to safeguarding rules for payment services and e-money firms

This summary aims to provide an overview of new requirements, updates to existing regulations, and potential impacts and implications for industry actors.

The protection of relevant funds (funds received in connection with payment transactions or in exchange for e-money issued) is the objective of the regulatory framework for payment and e-money firms. Proposed changes outlined in CP24/20 are designed to enhance the protection of these funds, ensuring greater trust in the financial system. It also aims to clarify regulatory rules and guidance, improving compliance among payment and e-money firms.

The FCA proposes to make changes in two stages:

• Interim stage – primarily focussed on ensuring compliance with the current safeguarding requirements. The proposed interim safeguarding rules will be published by mid-2025.
• End-state stage – will replace the current requirements.

Firms will be provided a transition period of 6 months for interim-state rules and 12 months for full implementation of end-state rules. Additionally, existing safeguarding arrangements will need to be reviewed by payment and e-money firms within 3 months of rules coming into force.

Key Highlights

• CASS-style regime: A transition to a client assets regime, bringing safeguarding rules into the CASS framework as CASS 15. This is to address weaknesses in the current safeguarding approach and ensure consumer money is safe, and regulations closely aligned to the more established CASS regime.
• Monthly regulatory returns: Firms would be required to submit monthly returns to the FCA like the CMAR under the current CASS regime.
• Resolution pack: Firms would be required to maintain a resolution pack similar to the investment firms under the CASS regime.
• Acknowledgement letters: Firms would now be required to use the FCA template for acknowledgement letters.
• Prudent segregation: Firms would be allowed to pay their own funds into the safeguarding account to prevent shortfalls
• Annual Audits Report submission: Submission of Annual Audit reports to the FCA by the external auditors within 4 months of the end of the period under review. Audit reports are currently submitted to firms.
• Safeguarding Assurance Standard: A new audit standard for safeguarding audits will be produced by the FRC and auditors will need to specify the standard and guidance used for their audit engagements.
• Compliance oversight individual: Firms will be required to allocate oversight of compliance with the safeguarding requirements to an individual in the Payments Firm.
• Firms will be required to create a single asset pool to aid the easy distribution of assets. Additionally, firms will be required to consider diversification of third parties where they hold, deposit, insure or guarantee relevant funds required for safeguarding and due diligence requirements.
• Clarity on when safeguarding obligation starts (when relevant funds should be held under trust) and ends.
• Agent and distributor segregation to be implemented where firms use agents or distributors. Agents and distributors cannot receive relevant funds unless their principal Payments Firm safeguards sufficient funds in designated safeguarding accounts to cover the funds expected to be received and held by their agents or distributors. (End-state stage)
• Statutory Trust: Relevant funds, Assets, insurance policies and guarantees used for safeguarding will be required to be held under statutory trust. Imposition of a statutory trust over relevant funds held by a Payments Firm, and relevant assets, insurance policies/guarantees and cheques. This is to ensure the priority of customer funds claims in the event of insolvency. (End-state stage)

Updates to existing regulations

• Segregation of Funds: Relevant funds would now need to be paid directly into a safeguarding account instead of into the segregated account and then safeguarded the next day, per current requirements. Firms must ensure that customer funds are segregated from their own funds. (End-state stage)
• Reconciliations: Internal and external reconciliations would now need to be performed daily as against when determined reasonable under current rules. This would enhance the accuracy and integrity of records of relevant funds.

Considerations for payment services and e-money firms

• Review current safeguarding arrangements (including assessment of current safeguarding controls) against proposed changes and note areas for enhancements.
• Ensure safeguarding risks are robustly identified, assessed and documented with risks accurately mapped to mitigating controls. Firms should consider a review sign-off of completeness and accuracy risk and controls mapping by those charged with safeguarding governance.
• Considerations around appointing an SMF for safeguarding. The appropriate person should have the right skills, experience and expertise to oversee safeguarding arrangements.
• Enhanced insurance or comparable guarantee rules may significantly increase costs associated with those arrangements.
• Cost of training and upskilling staff to ensure the firm is prepared for full compliance.
• Firms can consider early adoption of rules by enhancing controls ahead of the full implementation of changes.
• Increase in technological and operational costs to ensure compliance with regulation.
• Familiarisation costs such as legal fees, audit fees, third-party arrangements and system implementation costs should be taken into account.

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