Safeguarding Using Secure Liquid Assets Under Fire From FCA

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3 weeks ago

Executive Summary

Safeguarding is the bedrock obligation for UK payment institutions (PIs) and e-money institutions (EMIs). The FCA requires firms to segregate customer money and either:

Hold it in a designated safeguarding account with an authorised credit institution (or the Bank of England),
Invest it in secure, liquid assets held with an authorised custodian, or
Protect it via insurance or a comparable guarantee.

The objective is clear: if a firm fails, safeguarded money must be promptly available for return to customers.

In recent years, difficulty obtaining safeguarding bank accounts and a higher-rate environment have pushed many firms to rely more on secure liquid assets—most commonly money market funds (MMFs). These investments aligned with FCA permissions to invest in assets “approved by us as being secure and liquid,” which included UCITS MMFs that invest solely in eligible low-risk assets. In practice, most MMFs used by UK firms have been domiciled in Ireland and Luxembourg.

Brexit changed the marketing route for overseas funds. The Overseas Funds Regime (OFR) creates a long-term pathway for certain EEA UCITS to be recognised for UK retail distribution, but money market funds are explicitly excluded. EU-domiciled MMFs cannot currently rely on the OFR. TMPR allows their temporary marketing until end-2026, and the Government is designing a separate access regime for overseas MMFs. Firms relying on EU-domiciled MMFs therefore face a strategic and compliance headache.

In parallel, the FCA has finalised major enhancements to the safeguarding regime (PS25/12), including daily reconciliations, new reporting, and independent safeguarding audits for larger firms. The regulatory bar has risen sharply.

A transition is emerging: the UK is updating its domestic MMF regime and UK-domiciled MMFs are developing to meet safeguarding requirements without OFR constraints. Firms should now re-assess governance, review bank safeguarding options, and map feasible UK-domiciled MMF or other secure-asset alternatives.

2) What the FCA Requires: How Payment Services and E-Money Firms Must Safeguard Funds

There are two permitted safeguarding methods:

A) Segregation Method

If funds are held beyond the end of the business day after receipt, the firm must:

Deposit them in a separate account with an authorised credit institution (or the Bank of England), or

Invest them in secure, liquid assets approved by the FCA, and place the assets in a separate account with an authorised custodian.

Safeguarding accounts must be designated for safeguarding, used only for safeguarding purposes, and supported by formal acknowledgement letters. Firms must maintain accurate records, distinguish each customer’s entitlement, and carry out reconciliations frequently—daily where discrepancies may arise (e.g., valuation changes for invested assets).

B) Insurance or Comparable Guarantee

The policy or guarantee must provide primary liability to pay out and ensure fast distribution on firm failure. Proceeds must sit outside the firm’s insolvent estate, and documentation must be watertight.

Enhanced FCA Expectations (2020–2025)

Weaknesses identified in Dear CEO letters and multi-firm reviews.
PS25/12 introduces enhanced monthly reporting, annual safeguarding audits for larger firms, daily checks where appropriate, and formal templates in the Handbook.
Direction of travel: faster fund return, stronger records, more independent assurance.

In Summary: the FCA expects strict separation, rapid return of funds, robust controls, and—if investing—conservative, highly liquid assets with authorised custodians and daily reconciliations where required.

3) Why Firms Are Pivoting Toward Secure, Liquid Assets

a) Difficulty Obtaining Safeguarding Accounts

Banks face risk, cost and operational burdens in providing safeguarding accounts. Many firms struggle to open or retain accounts. Recent Final Notices show banks withdrawing safeguarding accounts, forcing rapid remediation.

b) Higher Interest-Rate Environment

Higher rates increased the opportunity cost of zero-yield balances, making MMFs attractive while still offering daily liquidity and conservative risk.

As a result, UK PSPs and EMIs have commonly used UCITS MMFs investing exclusively in FCA-approved low-risk assets—most of which are EU-domiciled.

4) FCA Rules on Secure Liquid Assets and Authorised Custodians

Where safeguarded funds are invested:

Assets must be “approved by us as being secure and liquid.”
Eligible assets include instruments with a 0% CRR risk charge and UCITS investing solely in those items.
Assets must be held with authorised custodians.

Governance Requirements

Diversification, liquidity strategy, and credit policy.
Independent assurance, MI, annual safeguarding audits, monthly returns, daily checks.
Updated acknowledgement letters with mandated wording.
Movement toward a more CASS-style regime.

Practical takeaway: If you invest, operate with CASS-level discipline—documentation, reconciliation, oversight, audit.

5) The UK Overseas Funds Regime (OFR): What It Does and Why EU-Domiciled MMFs Are Out of Scope

What the OFR Is

A long-term route for overseas funds to market to UK retail investors when HMT grants equivalence. The FCA set the operational rules in PS24/7.

Where MMFs Sit

Official FCA/HMT materials confirm:

MMFs are not in scope of the UK’s equivalence determination.
EU UCITS MMFs may continue under TMPR until end-2026.
Government is designing a separate access route for overseas MMFs and may extend TMPR for MMFs to avoid cliff-edges.

Implication for Safeguarding

EU-domiciled MMFs cannot use the OFR as a route to be approved/recognised for UK retail marketing. TMPR is temporary. Long-term reliance on EU MMFs is therefore risky.

6) The Practical Problem: Safeguarding Has Relied on EU-Domiciled MMFs

Around 90% of sterling MMF assets are domiciled in the EU (Ireland and Luxembourg). UK investors have historically allocated heavily to these funds due to their maturity and scale.

Because:

FCA rules allow investment only in assets approved as secure and liquid.
OFR excludes MMFs from equivalence.
TMPR is temporary.

This creates a structural mismatch. EU-domiciled UCITS MMFs cannot be considered FCA-approved for retail marketing under OFR.

Implications for Firms

Safeguarding strategies dependent on EU-domiciled MMFs carry regulatory continuity risk.
Supervisory scrutiny will increase, especially where firms lack transition plans to UK-domiciled alternatives.

7) Enforcement Risk: What the FCA Has Said and Done

What the FCA Has Said

Since 2019, repeated warnings: separate, label, reconcile, document, and ensure swift return on failure. Weak safeguarding has been an FCA priority.

What the FCA Has Done

There are ~630 UK PIs/EMIs. Over 95% use segregation. Approx. 15% (~95 firms) are already under supervisory attention for safeguarding issues.

Given increasing complexity around EU-domiciled MMFs, this proportion is likely to grow.

What We Have Not Yet Seen

No public case specifically penalising post-OFR use of EU-domiciled MMFs. But given OFR exclusions, TMPR timelines and rising safeguarding expectations, continuing without a transition plan is high-risk.

8) What Firms Should Do Next (and How AuthoriPay Can Help)

1. Re-Validate Your Safeguarding Method and Documentation

Confirm assets fall within FCA-approved categories and are held with authorised custodians.
Refresh acknowledgement letters; ensure no set-off/charge; confirm safeguarding designation.
Review reconciliation timetables (daily where valuation/FX movement arises).

2. Assess Reliance on EU-Domiciled MMFs

Map all MMF exposures (fund, domicile, share class, liquidity, underlying assets, custodian).
Flag all EU MMFs in TMPR and document their post-2026 status.

3. Develop a UK-Compliant Alternative

Track development of UK-domiciled MMFs emerging under CP23/28.
Consider hybrid safeguarding (bank + UK-domiciled MMFs).
Due diligence remains essential.

4. Prepare for the Strengthened Regime

Build early to May 2026 standards: monthly returns, safeguarding audits, daily checks, governance.
Ensure MI and reporting are joined up.

5. Test Wind-Down and Insolvency Pathways

Validate speed of asset liquidation.
Test reconciliations under FX and valuation stress.

AuthoriPay’s Role

AuthoriPay supports PSP/EMI authorisations, safeguarding design and audits, banking access, and regulatory reporting. We can:

Review your safeguarding model.
Support transition away from EU-domiciled MMFs.
Help select and implement UK-compliant alternatives.
Prepare you for PS25/12 reporting and assurance.
Introduce liquidity managers and UK authorised custodians developing UK-domiciled MMFs suitable for safeguarding.

9) Conclusions

Safeguarding remains a non-negotiable FCA priority.
Industry has relied heavily on EU-domiciled MMFs, which now conflict with OFR structure.
EU-domiciled MMFs are out of scope of OFR equivalence; TMPR is temporary.
FCA expectations have sharply increased, and firms should expect rising scrutiny.
Early transition planning to UK-domiciled MMFs or compliant alternatives reduces regulatory and operational risk.

10) References (Key Sources – Accessed August 2025)

FCA – “Payment Services and Electronic Money: Our Approach” (2017; Chapter 10).

FCA/HMT – “Roadmap to implementing the Overseas Funds Regime” (1 May 2024).

FCA – OFR updates and PS24/7 (2024).

FCA – “PS25/12: Changes to the safeguarding regime” (Aug 2025).

FCA – “CP24/20: Supplementary/Post-Repeal safeguarding regime.”

FCA – “CP23/28: Updating the regime for Money Market Funds” (Dec 2023).

FCA – “DP22/1: Resilience of Money Market Funds” (May 2022).

Investment Association – “Investment Management in the UK 2023-24.”

Industry commentaries on UK MMF reform.

Author’s Note

This white paper was written by Andrew Aitken, Founder & CEO of AuthoriPay (authoripay.co.uk).

Acerca de AuthoriPay

AuthoriPay is a specialised consultancy providing regulatory compliance support to UK firms in the Fintech and NPPS sectors. With over 40 years of combined experience, the team has deep expertise across safeguarding audits, remediation, and regulatory engagement. AuthoriPay consultants are members of the Association of Professional Compliance Consultants.