The FCA has taken aim at E-money firms segregating through secure liquid assets

The problems and how to address them
Author: Andrew Aitken, Founder & Safeguarding Director of AuthoriPay

Table of Contents

Executive summary
What the FCA requires: how payment services and E-money firms must safeguard relevant funds
Why firms are pivoting toward secure, liquid assets
FCA rules on secure liquid assets and authorised custodians
The UK Overseas Funds Regime (OFR): what it does — and why EU-domiciled MMFs are out of scope
  What is the OFR?
  Where do MMFs sit?
  Implication for safeguarding
The practical problem: UK safeguarding has leaned on EU-domiciled MMFs
  What this means for firms
Enforcement risk: what the FCA has said and done (and what we have not yet seen)
  What the FCA has said
  What the FCA has done
  What we have not (yet) seen publicly
What firms should do next (and where AuthoriPay can help)
  Re-validate your safeguarding method and documentation
  Assess reliance on EU-domiciled MMFs
  Develop a UK-compliant alternative
  Prepare for the strengthened regime
  Test wind-down and insolvency pathways
  AuthoriPay’s role
Conclusions
References (key sources – accessed August 2025)
Author’s note
About AuthoriPay
Contact AuthoriPay

1) Executive summary

Safeguarding is the bedrock obligation for UK payment institutions (PIs) and E-money institutions (EMIs). The FCA’s approach document and subsequent policy statements set out that firms must segregate customer money and either (i) hold it in a designated safeguarding account with an authorised credit institution (or the Bank of England), (ii) invest it in secure, liquid assets held with an authorised custodian, or (iii) protect it via insurance or a comparable guarantee. The aim is simple but strict: if the firm fails, safeguarded money must be promptly available for return to customers.

Over the past few years, a combination of difficulty obtaining safeguarding bank accounts and a higher-rate environment has pushed many firms to rely more on secure liquid assets—most commonly money market funds (MMFs). That practice aligned with the FCA’s long-standing permission to invest relevant funds in assets “approved by us as being secure and liquid,” including units in UCITS that invest solely in eligible low-risk assets. In practice, the Money Market Funds that most UK firms could access at scale have traditionally been domiciled in Ireland and Luxembourg.

Brexit changed the marketing route for overseas funds. The Overseas Funds Regime (OFR) now creates a permanent pathway for certain EEA UCITS to be recognised for UK retail marketing. However, money market funds are explicitly out of scope of the Government’s equivalence determination—meaning EU-domiciled MMFs cannot use the OFR route into the UK retail market. For now, EU MMFs recognised under the Temporary Marketing Permissions Regime (TMPR) can continue to be promoted until end-2026, and the Government has stated it is designing a separate access route for overseas MMFs (and may extend TMPR for MMFs to avoid a cliff-edge). This creates a strategic and compliance headache for UK payments and E-money firms that have been relying on EU MMFs for safeguarding.

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, and a more “CASS-style” discipline over time. Supervisory messages since 2020 emphasise that poor safeguarding practices are a priority for intervention. While there is no public case squarely about “use of EU MMFs post-OFR,” recent Final Notices show that where safeguarding controls fall short, enforcement is real and swift. The risk profile for firms that continue to lean on out-of-scope assets without a credible plan is therefore materially higher.

The path forward is emerging: the UK is updating its domestic MMF regime (CP23/28), and the market is beginning to develop UK-domiciled MMFs that can provide similar liquidity profiles without the OFR constraint. Firms should re-assess arrangements now: tighten governance, revisit bank options, and map feasible UK-domiciled MMF (or other secure-asset) alternatives that meet the FCA’s rules on eligibility, diversification, and custody.

2) What the FCA requires: how payment services and E-money firms must safeguard relevant funds

The FCA’s Approach Document explains, with Chapter 10 in particular, how safeguarding must be done. In short: there are two methods—(A) the segregation method and (B) the insurance or comparable guarantee method.

Under the segregation method, if funds are still held at end of the business day after receipt, the firm must:

1 – 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 in either case, place the deposit or the assets in a separate account with an authorised custodian.

Accounts must be designated for safeguarding, used only for that purpose, and subject to formal acknowledgement letters. Firms must maintain accurate records, keep ledgers that distinguish each customer’s entitlements, and carry out reconciliations with sufficient frequency—daily where discrepancies may arise (for example because of valuation movements when investing).

Where the insurance/guarantee method is used, the policy or guarantee must provide primary liability to pay and enable fast, reliable distribution on firm failure. Proceeds should be outside the firm’s insolvent estate (typically via trust), and documentation must be watertight.

Beyond the Approach Document, the FCA has tightened expectations repeatedly:

• 2020–2023 supervisory communications: portfolio/Dear CEO letters following multi-firm reviews identified weaknesses (acknowledgement letters, reconciliations, record-keeping, wind-down).

• 2024–2025 consultations and policy: PS25/12 confirms enhanced monthly reporting, annual safeguarding audits for larger firms, daily checks where appropriate, and formalisation of templates and records (e.g., in CASS 15 and related Handbook modules).

Key takeaway: the FCA expects separation, speed of return, robust controls, and—if investing—conservative, highly liquid assets held with authorised custodians under clear documentation and reconciled daily where needed.

3) Why firms are pivoting toward secure, liquid assets

Two industry realities have nudged many firms away from purely bank-deposit safeguarding toward MMFs and similar instruments.

a) Difficulty obtaining/retaining safeguarding accounts. Banks face compliance burdens, low margins and risk concerns when providing safeguarding accounts, and firms frequently report that opening—and keeping—such accounts is challenging. The FCA’s supervisory work highlights operational frictions (e.g., the need for formal safeguarding acknowledgement letters), and recent Final Notices show concrete cases where banks withdrew safeguarding accounts, forcing firms to scramble to re-paper or change business models.

b) The interest-rate environment. Higher rates increased the opportunity cost of holding zero-yield balances and made MMFs comparatively attractive—while still offering daily liquidity and conservative risk. The FCA/BoE/HMT have been reforming MMF resilience (UK CP23/28), acknowledging that sterling MMFs are widely used as short-term cash vehicles and that resilience requirements should rise (e.g., daily/weekly liquidity thresholds).

In practice, many UK PSPs/EMIs turned to UCITS MMFs that invest only in the narrow, FCA-approved asset classes for safeguarding. Historically, the majority of sterling and EU MMFs used by UK investors have been domiciled in EU states (notably Ireland and Luxembourg), reflecting the scale and maturity of those fund hubs.

4) FCA rules on secure liquid assets and authorised custodians

If a firm chooses to invest safeguarded funds instead of using a bank account, the assets must be “approved by us as being secure and liquid” and then placed in a separate account with an authorised custodian. The FCA expressly approves (i) items with a 0% specific risk capital charge under the Capital Requirements Regulation and (ii) UCITS units that invest solely in those items. The credited vehicles must be held with authorised custodians (firms authorised to safeguard/administer investments).

Today’s governance overlay is materially stronger than a few years ago:

• Diversification, liquidity strategy, and credit policy. Where firms invest relevant funds, they must diversify appropriately, manage FX/credit risk, and document a clear liquidity strategy to ensure money is ready to return at speed.

• Independent assurance & MI. Expect annual safeguarding audits (for firms above thresholds), monthly regulatory returns, daily checks/reconciliations as appropriate, and clear SMF accountability.

• Acknowledgement letters & documentation. Updated rules require formal acknowledgement letters for both bank and asset accounts. Template wording is embedded in the updated Handbook.

• Toward a CASS-style end-state. The FCA’s consultation and policy materials indicate a trajectory toward CASS-like clarity: clearer records, quicker return of funds, and (proposed) statutory trusts over relevant funds and the assets bought with them. Some trust-related changes will be sequenced over time.

Practical takeaway: if you invest, invest conservatively and operate like a CASS firm—with the same level of documentation, reconciliation, oversight and audit you’d expect for client money/custody assets.

5) The UK Overseas Funds Regime (OFR): what it does — and why EU-domiciled MMFs are out of scope

What is the OFR?

The OFR is the UK’s long-term pathway for overseas funds to market to UK retail investors if HMT grants equivalence for a defined class of funds. After consultation (CP23/26), the FCA set the rules in PS24/7; the FCA’s website provides operational detail.

Where do MMFs sit?

Money market funds are not in scope of the Government’s equivalence decision for EEA UCITS. The official FCA/HMT “Roadmap to implementing the OFR” states: “money-market funds (MMFs) are not in scope of the Government’s equivalence determination.” It also explains that as long as the TMPR remains in place, EEA UCITS MMFs recognised under TMPR can continue to be promoted; TMPR for all EEA UCITS (including UCITS MMFs) is due to close at the end of 2026; and Government is designing a more permanent access route for overseas MMFs, having consulted in December 2023. Government will consider extending TMPR as necessary to avoid cliff-edges.

Implication for safeguarding

The OFR does not provide a route for EU-domiciled MMFs to be recognised for UK retail marketing. That does not mean EU MMFs are universally and permanently unmarketable—TMPR still applies in the interim for those already in TMPR—but it does mean that relying on EU-domiciled MMFs as a long-term solution is risky. Absent a new MMF access regime, EU MMFs will not have a retail marketing route via the OFR.

6) The practical problem: UK safeguarding has leaned on EU-domiciled MMFs

In practice, UK APIs/EMIs seeking secure, liquid assets have relied heavily on EU-domiciled MMFs. The FCA’s discussion paper on MMF resilience (DP22/1) notes that around 90% of sterling MMF assets are in EU-domiciled MMFs (mainly Ireland and Luxembourg). That reflects the size and operational maturity of those domiciles’ liquidity markets. Industry data from the Investment Association also show that UK investors allocate extensively to Ireland/Luxembourg-domiciled funds, consistent with that picture.

The graph below, albeit from several years ago, highlights the problem. There are considerably more EU-domiciled MMFs available for safeguarding than there are UK-domiciled MMFs:

As a result, OFR’s exclusion of MMFs creates a genuine tension:

• The FCA’s approach permits investing safeguarded funds in certain UCITS (that in turn invest only in approved 0%-risk assets).

• The FCA put great emphasis on only being able to use assets “approved by us as being secure and liquid”

• But EU-domiciled UCITS MMFs cannot use the OFR to be recognised for UK retail marketing; TMPR is temporary and slated to close for non-MMFs by December 2026 (with potential extension for MMFs while HMT designs a separate MMF route).

• Therefore, this creates a situation where EU-domiciled UCITS MMFs cannot be considered to be approved by the FCA for the purpose of safeguarding

What this means for firms

• If your safeguarding relies on EU-domiciled MMFs, you face regulatory continuity risk: once TMPR ceases (or if your funds fall out of TMPR), those MMFs will not be marketable to UK retail under OFR.

• The FCA has also raised the bar on controls for firms that invest safeguarded funds (diversification, liquidity, reconcilement, audit). Expect supervisory scrutiny of any MMF-based safeguarding strategy that does not show meticulous compliance and a forward plan to UK-domiciled or otherwise compliant structures.

7) Enforcement risk: what the FCA has said and done (and what we have not yet seen)

What the FCA has said

From 2019 onward, the FCA repeatedly called out weak safeguarding in Dear CEO letters, multi-firm reviews, and portfolio priorities. The messages are consistent: separate, label, document, reconcile, and ensure a swift return in insolvency. Many firms have had to improve acknowledgement letters, clarify custodial rights (no set-off/charge), and enhance MI and governance.

What the FCA has done

The table below demonstrates the current situation. There are approximately 630 PIs and EMIs in the UK. Over 95% of those firms use the segregation method for safeguarding. Presently, the FCA has placed approximately 15% of those firms under supervision for issues relating to safeguarding:

Summary Table

• Number of firms authorised (PIs and EMIs): 630 firms in the UK overall (PIs and EMIs combined)

• Percentage using segregation (broadly defined, may include SLAs): Over 95% of firms

• Firms under supervisory attention for safeguarding issues: Approximately 15% of firms, equating to approximately 95 firms

This demonstrates the significant attention the FCA has placed on safeguarding and with the increasing issues surrounding EU-domiciled MMFs the number of firms under supervision is likely to grow.

What we have not (yet) seen publicly

We have not identified a public FCA enforcement case specifically penalising a firm for “using an EU-domiciled MMF post-OFR.” However, given (i) OFR’s explicit exclusion of MMFs, (ii) the temporary nature of TMPR for MMFs, and (iii) the FCA’s increasingly stringent safeguarding expectations, continuing to rely on EU-domiciled MMFs without a credible transition plan is high-risk. If use falls foul of the marketing/recognition framework or if the assets/custody setup fails to meet the secure, liquid, authorised custodian tests in practice, firms should expect regulatory challenge and potential enforcement.

8) What firms should do next (and where AuthoriPay can help)

1. Re-validate your safeguarding method and documentation

• If you invest, confirm the assets are within the FCA-approved perimeter and are held with an authorised custodian, supported by robust diversification, liquidity and credit policies.

• Re-read Chapter 10 and your reconciliations timetable (daily where discrepancies can arise, e.g., where FX or asset valuations move).

• Refresh acknowledgement letters (bank and asset accounts), ensure no right of set-off/charge, and that accounts are designated as safeguarding accounts.

2. Assess reliance on EU-domiciled MMFs

• Map all MMF exposures (fund, domicile, share class, liquidity terms, underlying asset mix, custodians).

• Flag EU MMFs in the scope of TMPR and record their post-2026 status. The OFR does not provide a retail route for these funds; Government is working on a separate MMF access regime.

3. Develop a UK-compliant alternative

• Track the development of UK-domiciled MMFs as the UK finalises its domestic MMF reforms (CP23/28).

• Speak to liquidity managers operating UK authorised funds capable of meeting your safeguarding needs. Selection remains your responsibility against the secure, liquid tests.

• Consider whether a hybrid approach (e.g., partial bank safeguarding; partial UK-domiciled funds) is optimal for liquidity and operational risk.

4. Prepare for the strengthened regime

• Build to the May 2026 standards now: monthly returns, annual safeguarding audits (where applicable), daily checks and clear SMF accountability.

• Integrate reporting and MI so you can evidence compliance at short notice.

5. Test wind-down and insolvency pathways

• Under stress, can you return funds quickly?

• Is asset liquidation frictionless?

• Have you tested reconciliations under FX/valuation volatility?

• The FCA’s multi-firm work emphasises wind-down realism.

AuthoriPay’s role.
AuthoriPay specialises in PSP/EMI authorisations, safeguarding design and audits, banking access, and regulatory reporting. We can (i) review your current safeguarding model, (ii) navigate transition away from EU-domiciled MMFs, (iii) help select and implement UK-compliant alternatives, and (iv) ready you for PS25/12 implementation (returns, audits, daily checks, governance).

We also can introduce you to MMF industry experts who can talk you through your options for safeguarding. In addition to this, we work closely with UK authorised custodians who have begun to provide UK-domiciled MMFs to APIs/EMIs for safeguarding and which have been pre-approved for such a purpose by the FCA. We can, if required, provide assistance in onboarding your firm with these custodians.

9) Conclusions

• Safeguarding remains the FCA’s non-negotiable priority for payment and E-money firms: segregate, invest only in secure, liquid assets with authorised custodians, reconcile frequently, and ensure funds can be returned swiftly on failure.

• The market reality—harder bank access plus higher rates—has driven firms toward MMFs. Historically these have been EU-domiciled, which now clashes with the UK’s OFR structure.

• EU-domiciled MMFs are not in scope of OFR equivalence for retail marketing. TMPR continues in the interim and may be extended for MMFs while Government designs a separate overseas MMF route, but relying on that indefinitely is unsafe from a compliance planning perspective.

• The FCA has escalated expectations (PS25/12), and where safeguarding falls down, enforcement is tangible—even if the specific scenario of “EU MMF use post-OFR” has not yet yielded a public case. Firms should assume higher scrutiny and move to UK-domiciled or otherwise compliant structures.

• Action now—with robust due diligence, documentation, and transition planning—reduces regulatory, operational, and reputational risk. AuthoriPay can help you chart and execute that transition.

10) References (key sources – accessed August 2025)

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

FCA/HMT – “A roadmap to implementing the Overseas Funds Regime” (1 May 2024): confirms MMFs are not in scope of equivalence; TMPR timelines and intention to design an overseas MMF route.

FCA – “Overseas Funds Regime: Update for firms” (30 April 2024) and PS24/7 (31 July 2024).

UK-domiciled MMFs: 17 funds/sub-funds (FCA/BoE Discussion Paper DP22/1, Q3-2021). EU-domiciled MMFs: 471 funds at end-2021 (sum of ESMA’s per-country counts in FR, LU, IE, NL, BE, DE, IT, PT, ES, HU, SI, FI; excludes Liechtenstein). See ESMA chart SR-MMF-S.2 “Number of MMFs.”

FCA – “PS25/12: Changes to the safeguarding regime for payments and E-money firms” (15 Aug 2025) and Press Release (7 Aug 2025).FCA – “CP24/20: Supplementary/Post-Repeal safeguarding regime” consultation (2024).

FCA – “CP23/28: Updating the regime for Money Market Funds” (6 Dec 2023).FCA – “DP22/1: Resilience of Money Market Funds” (May 2022): notes c.90% of sterling MMF assets are domiciled in the EU (mainly Ireland/Lux).

Investment Association – “Investment Management in the UK 2023-24” (Oct 2024) and IA response to DP22/1: UK investors’ use of Ireland/Luxembourg-domiciled funds/MMFs.

Bank/industry commentary on UK MMF reform (e.g., SSGA, 10 Feb 2025).

Author’s note

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

About AuthoriPay

AuthoriPay is a specialised consultancy firm providing regulatory compliance support to UK firms in the Fintech and NPPS sectors. The co-founders have over 40 years combined experience working directly for regulated firms and the consultancy practitioners that they rely on. AuthoriPay has significant experience in providing a wide range of safeguarding services, from audits to remediation work following reviews from regulators. AuthoriPay is fully versed in all matters of safeguarding compliance. AuthoriPay and its consultants are members of the Association of Professional Compliance Consultants and Advisory member of the Canadian MSB association. AuthoriPay is a Leader of the UK Payments Association.