FCA’s Proposed Changes to Safeguarding: What Payments and E-Money Firms Need to Know in 2025

In response to growing concerns about safeguarding practices in the payments and e-money sector, the Financial Conduct Authority (FCA) has published a detailed consultation paper (CP24/20), proposing significant changes aimed at enhancing consumer protection, raising industry standards, and reducing risks across the sector. This initiative follows concerning findings of safeguarding shortfalls, which have led to substantial consumer losses, particularly in cases of insolvency. Firms and professionals operating in these spaces must pay close attention to the new proposals, as they will soon face more stringent regulations.

Why the Changes Matter

The FCA has identified critical gaps in the current safeguarding regime, primarily under the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs). Poor safeguarding practices have resulted in firms failing to protect relevant consumer funds effectively. Notably, during firm insolvencies between 2018 and 2023, an average shortfall of 65% in funds owed to clients was recorded. The new proposals aim to address these issues by introducing a more robust regulatory framework, ultimately protecting consumer funds and ensuring quicker, more cost-effective returns.

Key Changes and Proposals

1. Enhanced Record-Keeping and Reporting: Payment firms will face stricter requirements for maintaining accurate records of safeguarded funds. They must carry out daily internal and external reconciliations to ensure that consumer funds are properly identified and protected. Firms will also be required to submit a monthly safeguarding return to the FCA, providing better oversight and proactive risk management.
2. Strengthening Safeguarding Practices: The FCA is advocating for more rigorous practices around the segregation of funds. Firms will be required to deposit consumer funds into dedicated safeguarding accounts with approved banks or invest them in secure, liquid assets. Third-party providers that hold relevant funds for payment institutions will be subject to stricter due diligence and oversight, with an expectation that firms diversify their custodians.
3. Statutory Trust over Safeguarded Funds: One of the most significant proposals is the introduction of a statutory trust over safeguarded funds. This trust will legally protect consumer funds from being included in the firm’s general estate in cases of insolvency, ensuring that these funds are distributed to consumers as a priority. This change also eliminates legal ambiguities that arose from previous rulings such as the Ipagoo LLP case.
4. Improved Monitoring via Safeguarding Audits: Firms will now be required to conduct annual external audits of their safeguarding practices, with the findings submitted to the FCA. These audits will help identify potential weaknesses in firms’ safeguarding arrangements and provide both firms and the FCA with a clear view of compliance. Small e-money institutions, previously exempt from such audits, will now also be subject to this requirement, levelling the playing field across the sector.
5. Increased Focus on Vulnerable Consumers: The FCA’s proposal underscores the need to protect financially vulnerable consumers, who may rely heavily on e-money services for daily transactions. Many of these consumers lack the financial resilience to absorb even small losses, making it critical that firms adopt safeguarding practices that prioritise the timely return of funds.
6. Introduction of Interim and End-State Rules: The FCA is proposing a two-stage implementation of the safeguarding regime. In the interim stage, firms must comply with enhanced requirements under existing PSRs and EMRs. The end-state will introduce a more robust system aligned with the FCA’s Client Assets Sourcebook (CASS), incorporating the statutory trust and codifying practices previously outlined in guidance.

Industry-Wide Implications

These changes represent a major regulatory shift that could transform the operations of payments and e-money firms. By improving transparency and tightening compliance, the FCA aims to foster greater confidence in the sector, minimise risks of contagion, and ultimately provide better protection for consumers.

However, these changes will also bring increased operational costs and compliance burdens for firms. The introduction of monthly returns, audits, and statutory trusts will necessitate new systems and processes to ensure compliance. Despite the short-term pressures, these costs are viewed as necessary investments to prevent the high financial and reputational costs of failure in this sector.

The Bottom Line for Senior Managers

For senior managers in regulated payments and e-money firms, now is the time to review safeguarding practices and ensure they meet the FCA’s evolving standards. Firms that fail to comply with the new requirements risk regulatory action, significant penalties, and reputational damage. With the consultation open until 17 December 2024, and final rules expected to take effect in early 2025, the window for feedback and preparation is narrow.

In this dynamic regulatory landscape, it is essential for senior management to proactively understand these changes and how they will impact day-to-day operations. Assessing the adequacy of internal controls, preparing for external audits, and ensuring safeguarding accounts are compliant will be key to navigating this transition smoothly.