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.
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.
Challenges
Opportunities
Main proposals | Interim-state | End-state (including interim-state changes) |
Improved books and records |
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Enhanced monitoring and reporting |
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Strengthening elements of safeguarding practices |
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Holding funds under a statutory trust |
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To ensure firms are adequately prepared, we recommend that firms start taking the following actions now.
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.