According to a 2022 survey, there has been a five-fold increase in the use of current accounts from e-money institutions since 2017.  However, the FCA says it continues to see poor safeguarding practices from firms.

Funds held by payments and e-money firms are not directly protected by the Financial Services Compensation Scheme (FSCS). Instead, firms must safeguard funds which can mean customers lose money or experience delays to funds being returned if the firm fails. The current safeguarding requirements are set out in the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs).

The FCA wrote to payment and e-money institution CEOs in March 2023 about their safeguarding and wind-down arrangements. It was concerned that many payment firms do not have sufficiently robust controls and that as a result some firms present an unacceptable risk of harm to their customers and to financial system integrity. It considered that the risk of customer harm is heightened by the tightening economic conditions and the cost-of-living crisis. It has since opened supervisory cases relating to approximately 15% of firms that safeguard, to address its concerns.

It is now consulting on proposals to make safeguarding rules stronger and clearer for payment and e-money firms, so customers get as much of their money back as quickly as possible if the firm goes out of business. Under the FCA’s proposals, the existing e-money safeguarding regime will be replaced with a client assets (CASS) style regime designed to work with payment firms’ business models. It will also publish strengthened interim safeguarding rules for firms by the middle of next year.

The FCA wants to improve the safeguarding regime to ensure that: 

  • funds received in exchange for issued e-money or received for the execution of a payment transaction are held safely and securely by payment firms at all times or are covered by appropriate insurance policy or comparable guarantee;
  • the right amount of funds is segregated from the firm’s own funds;
  • the funds are clearly held on behalf of consumers;
  • the claims of e-money holders or payment service users can be met from the asset pool and that these claims take priority over other creditors; and
  • safeguarded funds can be returned to consumers as quickly, and as whole, as possible if a payment firm fails.

The FCA proposes to make changes to the safeguarding regime in two stages – the interim and end-state – and are consulting on rules and guidance for both stages of its proposed regime.

The interim rules aim to

  • support a greater level of compliance with existing safeguarding requirements as set out in the EMRs and PSRs;
  • support more consistent record keeping; and
  • enhance reporting and monitoring requirements to identify shortfalls in relevant funds, and improve supervisory oversight.

The end-state rules will 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. This second stage aims to address remaining shortcomings of the regime when the revocation of the safeguarding requirements in the PSRs and EMRs by the Financial Services and Markets Act 2023 is commenced.

The consultation ends on 17 December 2024.