FCA guidance on safeguarding regime for payments and e-money firms
Here we summarise new guidance from the FCA, plus the key points in their Consultation Paper CP24/20 on safeguarding and the implications for payments and e-money firms.
Fresh guidance on outbound and inbound payments
In the Autumn, the FCA issued guidance and is in the process of implementing further new rules under the Payment Services (Amendment) Regulations 2024. These changes are primarily aimed at enhancing consumer protection and mitigating risks associated with payment fraud and financial stability within the payment services sector.
Effective from 22 November 2024, Payment service providers (PSPs) will be permitted to delay outbound payments when there are ‘reasonable grounds to suspect’ fraud. This aims to curb authorised push payment (APP) fraud, allowing PSPs more time to investigate suspicious transactions before processing them.
This guidance has been added to the Approach Document, along with guidance on delaying inbound payments where a PSP suspects fraud, how PSPs should use the payment window and obligations if PSPs delay.
Safeguarding consultation
The FCA’s consultation on safeguarding practices for payments and e-money firms closed on 17 December 2024.
Why did the FCA consult?
The FCA wants to review safeguarding practices to strengthen consumer protection in case of a payment or e-money firm’s insolvency.
Issues in current safeguarding practices have led to significant consumer harm, with firms often failing to fully protect consumer funds as required under the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs).
What is safeguarding?
Safeguarding refers to the requirements for payment institutions, e-money institutions, and credit unions to protect funds received from consumers. This ensures that, if a firm fails, consumers can recover the maximum value of their funds swiftly and completely.
Effective safeguarding helps avoid fund shortfalls, reduces costs, and minimises delays in fund recovery during insolvency.
Current issues and proposed changes
The FCA has observed widespread safeguarding issues in the industry, with many firms failing to adhere to regulatory standards. A review revealed a 65% average shortfall in funds safeguarded by firms that became insolvent between 2018 and 2023.
In response, the FCA proposes a phased approach to improve safeguarding through “interim” and “end-state” rules, modelled after the Client Assets Sourcebook (CASS) regime:
- Interim rules: These will improve compliance, enhance record-keeping, and introduce more robust reporting requirements to better monitor safeguarding practices.
- End-state rules: The aim is to replace the safeguarding requirements of the EMRs and PSRs with a ‘CASS’ style regime where relevant funds and assets are held on trust for consumers, thus giving consumers beneficial ownership of funds, with the firm acting as trustee.
See the summary below (extracted from the FCA consultation document):
Who will be affected?
These changes apply to authorised payment institutions, e-money institutions, small e-money institutions, and credit unions in the UK. Certain small institutions may voluntarily comply.
Consumers, consumer groups, auditors, insolvency practitioners, and others with a role in safeguarding are undoubtedly going to be impacted.
Goals and expected outcomes
The FCA aims to:
- Minimise fund shortfalls in cases of firm failure.
- Ensure timely and cost-effective fund recovery for consumers.
- Strengthen legal certainty for consumers by applying trust principles to safeguarded funds.
Implementation
The FCA proposes to set detailed rules in its Handbook, particularly in the CASS and Supervision Manual (SUP). Interim rules will take effect first, followed by end-state rules replacing safeguarding provisions in PSRs and EMRs.
Next steps
The consultation, which closed on 17 December 2024, will guide the final safeguarding rules that the FCA intends to implement in stages. In doing so it will work alongside HM Treasury to transition relevant PSRs and EMRs provisions into the FCA Handbook.
It is anticipated these next steps from the FCA are likely:
- Interim rules and a policy statement will be published in the first half of 2025.
- The interim rules will then be implemented over a six-month period.
- The FCA will publish final rules (end state) for which firms will then have 12 months to implement.
Insolvency protocols
The FCA also plans to establish rules to ensure efficient fund distribution if a payment firm enters insolvency outside the Payments and Electronic Money Special Administration Regime (PESAR). These proposals will undergo further consultation before end-state rules are implemented.
Recommendation
We recommend that businesses likely to be affected read the draft consultation paper and assess:
- what will impact them,
- could potentially cause adverse consequences; and
- the key challenges they will face from the proposed changes.
For more information, please contact one of our specialists.
