The New Safeguarding Regulations

The New Safeguarding Regulations – What They Mean and When for Payment Firms and E-Money Institutions

Falling short of expectations

The FCA has long since recognised poor practices in the payments industry, reflected by increased supervisory intervention and more precise and prescriptive expectations in recent Dear CEO letters.

In CP24/20, the FCA noted that for Payment Firms that became insolvent between 2018 and 2023, an average shortfall of 65% of funds owed to clients existed.

Considering the sector’s growth, the emergence and continued development of e-money service providers as an alternative to more traditional payment systems, and the likelihood of such consumers exhibiting vulnerability characteristics, the interim measures described in the new consultation paper seek to prioritise shortfall risk in safeguarded balances held by firms.

So, what’s to come?

Segregation and maintaining adequate balances to transfer or distribute funds back to clients in case of firm failure is a central objective of the CASS rules. With the new Safeguarding rules adopting an equivalent approach to Client Asset Protection, the interim rules require firms to identify and reduce circumstances that give rise to shortfalls, made possible by adopting systems of control, standardised procedures, and formal policy and reinforced with reconciliation best practice.

Along with more detailed and robust rules governing books and records management, the interim stage will seek to improve fundamental areas of concern for the FCA in the short term. Since the regulator will introduce the proposed rules into new Chapters of the CASS and SUP sourcebooks, payment service firms will need to consider a concept already familiar to CASS firms, namely rule, risk, and control mapping, as well as the requirement to adapt to more invasive and prolonged audits based upon control effectiveness and substantive testing.

The interim stage will also see greater oversight and intervention by the regulator, supported by enhanced reporting, such as a monthly regulatory return, which is not unlike the current state “CMAR” return, which is in place for CASS medium and CASS large firms.

The end state

The end-state stage is anticipated to enhance client asset protection significantly. The final version of the new CASS Chapter will replace the current requirements within the Payment Service Regulations 2017 (PSRs) and E-Money Regulations (EMRs). The most significant change will be the introduction of a statutory trust held over relevant funds, which will address legal uncertainty arising from insolvency specific to the subsequent treatment of relevant funds, shortfall treatment post insolvency, and the appropriate distribution process.

This end state will seek to improve upon the FCA’s second crucial objective concerning client assets and Safeguarding: reducing costs, legal uncertainty, and delays in returning funds to customers. It is widely expected that firms will need to be compliant with interim rules by the end of 2025.

About Grath

In our forthcoming articles, we will consider aspects of CP24/20 where Grath can assist and support Payment Service and E-Money firms in respect of:

• Reconciliation & record keeping requirements for Safeguarding
• Obligations mapping the regulations to existing risk and control frameworks
• Safeguarding Resolution Packs and how more robust documentation disciplines can contribute to accurate, complete, and easily accessible records
• Enhanced reporting
• Audit engagement
• The Safeguarding Oversight officer

How Grath can help you

In the meantime, if, like our existing customers, you are an Authorised Payment Institution, E-Money Institution, or a Credit Union that issues e-money in the United Kingdom under the PSRs and EMRs, contact our team to learn more about how Grath can help you manage regulatory compliance, mitigate risk and automate Safeguarding/CASS 15 reconciliations.