The Financial Conduct Authority (FCA)’s planned changes to how payment and e-money firms protect customer funds is expected to take effect later this year. These changes outlined in CASS 15 will bring some uniformity to how customer funds are handled in the industry.

Why these changes matter

As our experts highlighted in our recent webinar, these changes were triggered by several payment firm failures where safeguarded funds couldn't be accounted for‍—‌leading to significant customer losses.

Payment and e-money firms in the UK currently hold approximately £23 billion of customer money. Unlike bank deposits, these funds aren't protected by the Financial Services Compensation Scheme (FSCS) and with more consumers using these services every day, the FCA is taking action to ensure customer money remains protected even if a firm fails.

A phased approach

The FCA has chosen a sensible two-step approach. The interim rules will strengthen existing requirements, while the end-state rules will establish a completely new framework modelled after the investment sector’s client money rules.

According to the consultation published in September 2024, the proposed rules are:

Interim rules

• Assign safeguarding responsibility to a specific individual
• Conduct independent annual audits by qualified auditors
• Submit monthly reports to the FCA
• Implement detailed daily reconciliations
• Maintain comprehensive records
• Obtain formal acknowledgment letters from banks
• Develop a "resolution pack" for emergencies
• Consider diversification across multiple banking partners

End-state rules

• Hold all customer funds under statutory trust
• Receive customer money directly into designated safeguarding accounts
• Allow firms to use their own funds as a buffer to prevent shortfalls
• Define clear rules about when safeguarding begins and ends
• Create a single asset pool for simpler fund recovery
• Establish process for gifting unclaimed money to charity

The final set of interim rules are expected to be published in the first half of 2025.

Practical safeguarding challenges for payment firms

Our recent webinar with industry experts also highlighted several practical challenges firms should prepare for:

• Setting up appropriate safeguarding bank accounts isn't a quick process‍—‌banking partners have their own due diligence requirements, and the account setup can take months. With hundreds of firms seeking these arrangements simultaneously, early movers will avoid bottlenecks.
• Many smaller payment firms currently use manual reconciliation processes that will need automation to meet the daily requirements of the new rules. Building these systems and dedicating resources to manage them will require careful planning.
• The new requirement for designated responsibility mirrors aspects of the Senior Managers Regime‍—‌potentially signalling the FCA's direction for the payments sector. Payment firms will now need to identify and hire individuals with the right skill set to manage the safeguarding process.

Getting ready for change

These changes represent the most significant overhaul of safeguarding requirements since the original regulations were introduced. Firms that start planning early will not only ensure compliance but also gain a competitive advantage by demonstrating their commitment to customer protection.

The new requirements will demand changes to operational processes, banking relationships, and governance structures. Fintechs should begin assessing their current safeguarding arrangements against the proposed rules to identify gaps that need addressing.

For smaller payment firms with limited compliance resources, this regulatory shift could be particularly challenging. However, with the right preparation and support, these changes should ultimately benefit the entire industry by building in greater trust.

The improved transparency and stronger safeguarding will boost customer confidence. The alignment with investment firm rules may also help payment firms access banking services more easily, as banks become more comfortable with the standardised approach.

Watch our webinar for some more insights on how to prepare your payment firm or get in touch to chat about your safeguarding needs.