The FCA has published a Consultation Paper (“CP24/20”) on proposed significant changes to the safeguarding regime for payments and e-money firms. With these changes, the FCA aims to strengthen its framework to ensure consumer protection and mitigate the risks associated with firm failures. The Consultation Paper outlines interim and long-term reforms to address shortcomings in the current regime. These proposals are designed to enhance the protection of consumers and promote market integrity within the growing payment and e-money sectors.
Background
Payments firms, including payment institutions, e-money institutions and credit unions, handle significant sums of consumer money daily. These funds must be safeguarded under the Payment Services Regulations 2017 (“PSRs”) and the E-Money Regulations 2011 (“EMRs”), ensuring that in the event of firm insolvency, consumers’ funds can be returned without any shortfall or delay.
The FCA has raised how firms’ safeguarding practices have not reached the Regulator’s standards and safeguarding issues have been widespread, highlighting a significant gap in compliance. These findings, along with the increase in the number of firms and consumers relying on payments and e-money services, prompted the FCA’s decision to reform the safeguarding regime.
The FCA’s goals in proposing the changes in the regime are to:
- strengthen protections for consumer funds;
- improve monitoring and enforcement mechanisms;
- align safeguarding practices with those of the Client Assets Sourcebook (“CASS”) regime used in other financial sectors; and
- address legal ambiguities that surfaced from recent court cases.
Key Proposals
New supplementary Safeguarding Rules
In order for the FCA’s objectives to materialise, the Regulator is proposing to introduce new supplementary safeguarding rules. The changes will be implemented in two stages: the interim stage and the end-state.
In the interim stage, existing PSRs and EMRs safeguarding provisions will remain in place but will be supplemented by new rules designed to improve compliance, record-keeping and monitoring. In the end-state, the current safeguarding rules will be replaced entirely by a CASS-style regime.
Recordkeeping
Under the proposed rules, payments firms will be required to enhance their internal recordkeeping processes to distinguish clearly between firm and consumer funds. This will involve daily internal and external reconciliations to ensure that the correct sums are safeguarded at all times. As is the case in the CASS regime, firms will also need to maintain a resolution pack; that is a set of records that can be accessed within 48 hours in case of insolvency, helping administrators return funds to consumers swiftly.
Enhanced Reporting and Auditing
The Consultation proposes new monthly reporting requirements for payments firms, replacing the current annual reporting requirements and providing the FCA with up-to-date information on firms’ safeguarding arrangements. Additionally, all payments firms, regardless of size, will be required to conduct an annual safeguarding audit, carried out by an independent third party, with the results submitted directly to the FCA.
Statutory trust over Safeguarded Funds
One of the most significant changes proposed is the introduction of a statutory trust over safeguarded funds. Under a statutory trust, the firm must hold relevant funds in trust for consumers, ensuring that these funds are not available to other creditors if the firm becomes insolvent. This will replace the current creditor-debtor relationship between firms and consumers with a trustee-beneficiary relationship, providing consumers with stronger legal protections.
What firms should do next
Firms are encouraged to reply to the FCA with their feedback on the new proposals before the consultation closes on December 17th 2024.
Complyport can help your firm understand the reform of the safeguarding regime for payments and e-money firms and make the appropriate adjustments to the firm’s processes and procedures to make sure the arrangements align with the Regulator’s expectations.
We can support your firm by providing:
- Regulatory Guidance: helping your firm understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements;
- Ongoing Support: providing ongoing support to ensure that your firm remains compliant as regulations evolve;
- Training: providing training sessions to educate staff on the practical requirements and best practices for compliance.
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