The Financial Conduct Authority (FCA) is moving forward with significant changes to the safeguarding regime for Payment and E-Money Firms.
On 25 September 2024, the FCA published a detailed consultation paper outlining its plans to strengthen consumer protections and improve compliance with the existing statutory safeguarding regime.
These proposals follow growing concerns about the effectiveness of the current rules, which are intended to ensure that customer funds are secure if a payment firm fails.
Background and Current Issues
Payment institutions, e-money issuers, and credit unions (collectively known as Payment Firms) handle substantial sums of customer money.
Under current regulations, Payment Firms must safeguard “relevant funds” to ensure they are available to meet customer claims in case of insolvency.
The Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs) provide the framework for safeguarding, but recent failures among Payment Firms have highlighted gaps in compliance.
A review of 12 Payment Firms that failed between 2018 and 2023 revealed an average shortfall of 65% in the return of customer funds.
In two cases, shortfalls exceeded £20 million, with some customers waiting more than three years to receive their funds.
The growing popularity of e-money accounts, which increased from 1% of consumers in 2017 to 7% in 2022, has added urgency to the FCA’s push for reforms.
In 2023, the FCA opened supervisory cases involving 15% of Payment Firms due to concerns about their safeguarding arrangements.
With £18 billion held in e-money safeguarding accounts in 2023, and Payment Firms accounting for another £5 billion, the risks posed by safeguarding failures are substantial – especially given that 40% of e-money account holders are classified as vulnerable.
Key Proposals in the FCA’s Consultation
The FCA’s proposed changes aim to address these risks through a two-step process: interim rules and end-state rules.
1. Interim Rules
The interim rules, expected to come into force by mid-2025 following a six-month transitional period, will introduce several key changes:
Enhanced Record-Keeping: Payment Firms will be required to maintain accurate records and accounts to distinguish between relevant and other funds. Reconciliations must be performed daily, and any discrepancies must be resolved immediately. Additionally, Payment Firms will be required to notify the FCA if they fail to reconcile their accounts or if material differences in safeguarded funds arise.
Resolution Pack: To facilitate the return of customer funds in the event of insolvency, firms will be required to maintain a resolution pack containing key information to expedite the process.
Strengthened Segregation: Payment Firms will be required to segregate relevant funds from their own accounts immediately upon receipt and ensure they are moved to designated safeguarding accounts within a day (D+1). They must also assess the creditworthiness of safeguarding account providers and consider diversifying across multiple providers to manage risk.
Monthly Reporting: Firms will need to submit monthly safeguarding reports to the FCA, detailing the amounts safeguarded, reconciliation results, and any breaches or shortfalls.
2. End-State Rules
The FCA’s end-state rules, which will replace the current safeguarding regime after a 12-month transitional period, introduce even stricter requirements:
Direct Safeguarding of Funds: Under the new regime, Payment Firms will be required to receive all relevant funds directly into a designated safeguarding account, ending the D+1 period for most firms. This move is intended to reduce the risk of funds being misallocated or lost before being safeguarded.
Statutory Trust: The FCA will impose a statutory trust over relevant funds, ensuring that they are held in trust for the benefit of payment service users. This trust will extend to secure liquid assets, proceeds from insurance claims, and any other assets related to safeguarding obligations. The introduction of a statutory trust aims to ensure that customer funds are prioritised over other creditors if a firm becomes insolvent.
Addressing Industry Concerns
While the proposed changes are designed to improve safeguarding and enhance consumer protection, the FCA recognises that they may impose additional costs on firms.
For example, the requirement to deposit all funds directly into safeguarding accounts could be operationally challenging for some Payment Firms, especially those handling cash or working with merchant acquirers.
To address these concerns, the FCA has proposed limited exceptions to the direct receipt rule and is consulting with stakeholders to refine the final rules.
Next Steps
The consultation will close on 17 December 2024, after which the FCA will finalise the interim and end-state rules.
Payment Firms are encouraged to review the proposals carefully and provide feedback before the deadline.
With changes likely to come into force by mid-2025, Payment Firms should begin preparing to update their safeguarding processes and ensure compliance with the new regime.
As the payments industry continues to grow and evolve, the FCA’s proposals represent an important step toward improving consumer protection and reducing the risks associated with Payment Firm insolvencies.
The post FCA proposes major changes to safeguarding regime appeared first on Payments Cards & Mobile.