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CP24/20: Changes to the safeguarding regime for payments and e-money firms 

Challenges and opportunities

Mohsin Ejaz, Director, Corporate Audit
18/06/2025
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The Financial Conduct Authority (FCA) is set to introduce new safeguarding regulations aimed at strengthening customer fund protection in the e-money and payment processing sectors.

This regulatory change, prompted by reported safeguarding deficiencies and insolvency-related fund shortfalls, presents both challenges and opportunities for firms operating in this space. It is anticipated that hundreds of UK firms will be affected by these proposed changes.

The interim rules are expected to be announced by the FCA in the first six months of 2025. Once issued, it's anticipated that the FCA will give firms six months to implement them. NB. Under the interim rules, payment firms will be required to review existing third-party arrangements within three months of the rules coming into force. The final rules are expected to be released 12 months after the issuance of the interim rules.

Understanding the regulatory shift

Despite recent market growth in the segment, inadequate safeguarding practices remain prevalent. Funds held by such firms are not protected by the Financial Services Compensation Scheme (FSCS), emphasising the critical need for robust customer fund safeguarding arrangements.

The FCA reported an average shortfall of 65% in funds owed to clients by payment firms that became insolvent between 2018 and 2023. In response, they issued a consultation paper in September 2024 to strengthen and clarify safeguarding rules for payment and e-money firms, ensuring customers recover their funds swiftly if a firm fails.

Under the proposed new regulations, the current e-money safeguarding regime, enforced through Payment Services Regulations 2017 (PSRs) and the E-Money Regulations 2011 (EMRs), will be replaced with a client asset (CASS) style regime.

The regulation will be implemented in two stages: an interim phase in early 2025, followed by full adoption within a year. Key features include enhanced record-keeping, mandatory safeguarding audits, monthly regulatory returns, and the imposition of a statutory trust over relevant funds.

Implications for payments and e-money firms

Challenges

  • Increased operational costs: businesses often face rising operational costs that can impact profitability. Identifying these costs early is crucial for financial planning.
  • Staff training needs: the need for staff training is a significant challenge. Investing in employee development can enhance productivity and reduce errors.
  • Compliance framework adjustments: adjustments to existing compliance frameworks are necessary to meet regulatory changes. Staying informed can prevent legal issues.

Opportunities

  • Enhanced operational practices: regulations provide businesses the opportunity to improve their operational practices, leading to better efficiency and productivity.
  • Streamlining processes: companies can streamline their processes by adapting to new regulations, resulting in quicker turnaround times and reduced costs.
  • Strengthening market position: by leveraging regulatory changes, companies can enhance their competitive advantage and strengthen their market position.

Summary of the proposed changes

Main proposals  Interim-state  End-state (including interim-state changes) 
Improved books and records 
  • Enhanced record keeping and reconciliation requirements.
  • Requirement to maintain resolution pack.
  • Updated record-keeping and reconciliation requirements.
Enhanced monitoring and reporting
  • Requirement for firms to have safeguarding practices audited by an external auditor, with the safeguarding audit submitted to the FCA.
  • Requirement for firms to complete a monthly safeguarding regulatory return.
 
Strengthening elements of safeguarding practices
  • Requirements to exercise due skill, care and diligence in selecting and appointing third parties.
  • Requirements to consider the need for diversification Additional requirements on how Payments Firms can safeguard relevant funds by insurance or comparable guarantee.
  • Relevant funds must be received into a designated safeguarding account at an approved bank, with the exception of funds received through an acquirer or an account used to participate in a payment system.
  • Agents and distributors cannot receive relevant funds unless the principal Payments Firm safeguards the estimated value of funds held by agents and distributors in a designated safeguarding account.
  • Additional requirements when Payments Firms only safeguard relevant funds by insurance or comparable guarantee.
Holding funds under a statutory trust  
  • Payment firms will receive and hold the following under a statutory trust:
  • relevant funds
  • assets, insurance policies and guarantees used for safeguarding.

Next steps

To ensure firms are adequately prepared, we recommend that firms start taking the following actions now.

  • Undertake a GAP analysis: an assessment of the proposed changes against your current practices and identify new approaches where required.
  • Transitional arrangements: begin to implement relevant controls and system changes.
  • Upskilling: start training and upskilling staff against the requirements of the proposed rules.

How we can help

While the FCA’s safeguarding regulation presents considerable compliance challenges, it also offers a unique opportunity for firms to enhance their operational resilience and market credibility. By embracing the changes and investing in strategic advisory support, businesses can turn regulatory pressure into a platform for growth and innovation.

Crowe’s Financial Services team have strong regulatory credentials and is experienced in helping clients manage compliance, risk and technology changes. If your firm would like support on getting ahead of these changes and maximising the opportunities presented, please get in touch with Mohsin Ejaz, John Glasby or your usual Crowe contact.

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John Glasby
John Glasby
Head of Financial ServicesLondon