The UK’s Financial Conduct Authority (FCA) has unveiled a long-awaited consultation on safeguarding requirements for UK payments firms, setting the stage for substantial regulatory shifts in the industry.
Changing the game for UK Payments?
While the measures aim to enhance consumer protection, they also present significant challenges for payments firms, particularly smaller entities and those with complex, multicurrency business models.
What Are the Safeguarding Rules?
Safeguarding requirements are central to payments regulation, designed to ensure that customer funds are protected if a firm fails.
Payments firms must hold 100% of customer funds in a designated safeguarding account, free from third-party claims.
Other safeguarding options, such as investing in secure liquid assets or securing insurance coverage, are limited.
Unlike funds held in banks, which are protected by the Financial Services Compensation Scheme (FSCS) for up to £85,000, payments firms’ customers rely on safeguarding to ensure their funds can be quickly identified and returned in insolvency scenarios.
However, the FCA has raised concerns about the adequacy of current arrangements, citing insufficient transparency and high-level rules that are difficult to enforce.
End State Rules: Industry Disruption Ahead
The FCA’s proposed “end state rules” represent a fundamental shift in safeguarding practices, with far-reaching implications:
- Direct Safeguarding Account Deposits: Firms must receive customer funds directly into safeguarding accounts. For multicurrency wallet providers, this hampers their ability to perform currency conversions efficiently. Similarly, card scheme acquirers relying on intraday credit lines face operational challenges, as secured credit arrangements on non-safeguarded accounts will no longer be viable.
- International Collection Challenges: Payments firms with global operations face logistical hurdles under the proposed rules. Affiliate accounts in different jurisdictions, commonly used to collect funds, would need to be converted into safeguarding accounts. In some cases, this may require adopting agency structures, further tying up liquidity.
- Additional Permissions: Firms investing safeguarded funds in liquid assets must now obtain permissions for investment management or custody services. These permissions introduce new administrative and compliance burdens, including adherence to custody record-keeping requirements that may not align neatly with payments operations.
- Statutory Trusts: The FCA plans to introduce a statutory trust over customer funds, imposing fiduciary duties on payments firms. This change requires firms to overhaul their operations to align with the new legal framework.
Interim Rules: Tightening Compliance
The interim rules are less disruptive but will increase compliance costs.
Key changes include:
- Annual Audits: Payments firms must undergo independent audits of their safeguarding arrangements. The limited pool of qualified auditors could lead to higher costs and delays.
- Resolution Packs: Firms must maintain detailed “resolution packs” to facilitate the swift return of customer funds in insolvency scenarios. Larger firms may find the ongoing maintenance of these packs particularly burdensome.
- Monthly Reporting: Payments firms will need to submit monthly reports on safeguarded funds, requiring robust systems to extract and submit data accurately.
Broader Implications for the UK Payments Industry
The proposed rules could place the UK at odds with the EU’s less prescriptive regulations, risking the UK’s access to SEPA and undermining its position as a global payments hub.
These measures also conflict with the UK Government’s National Payments Vision, which aims to foster innovation and growth.
With feedback on the consultation due by 17 December 2024, the industry awaits the FCA’s next move in 2025.
While the proposals aim to strengthen consumer protection, they also pose existential questions for payments firms navigating these sweeping changes.
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