Financial Services Compliance Blog - Thistle Initiatives

Safeguarding Series: the UK

Written by Thistle Initiatives - Compliance consultancy | Sep 10, 2024 1:06:33 PM

As any payment service firm knows, safeguarding is a critical area for the FCA and other regulatory bodies around the world. Due to past instances where firms had significant shortfalls in safeguarded funds and slow processes for returning money to customers, the FCA is looking to implement tighter regulations, more aligned with the Client Asset Sourcebook (CASS) standards. With these changes, the regulator aims to improve transparency, enforce risk management and ensure that firms hold sufficient funds to meet liabilities.

These changes will reflect the FCA's commitment to enhancing the safeguarding regime to better protect customers in the payment services sector. By enforcing stricter rules and improving transparency, the FCA aims to mitigate risks and ensure that firms can promptly return customer funds when needed. As the FCA continues to refine its approach, firms must adapt to these new requirements to ensure compliance and maintain customer trust in an increasingly regulated market.

A Consultation Paper was expected in the first half of this year, with rules expected to be published in the second half of 2024. As firms wait for these changes to happen in the UK, Payment Services Manager, Alejandra Gorría Zaldivar, has launched the Safeguarding Series, which to explore how different regulators approach safeguarding across the world, and what are the key differences with the UK requirements. First stop, the UK:

The FCA’s Approach to Safeguarding

The FCA’s safeguarding requirements are designed to ensure that firms implement effective controls and systems to protect customer funds. The following are the key aspects of their approach:

1. Segregation of Funds

Firms must keep customer funds separate from their own operational money. This is often done by holding the funds in a designated safeguarding account with a bank or other authorised entity. The segregation ensures that the money is not used for the firm’s operational activities or subject to claims by creditors in case of insolvency. Firms can also opt to use an insurance policy to cover their relevant funds.

2. Daily Reconciliation

Firms are required to perform daily reconciliations of safeguarded funds. This means they must accurately track the amounts held in safeguarded accounts and match them to the value of their customer liabilities. Regular reconciliations ensure that any discrepancies are quickly identified and resolved. Firms are not allowed under any circumstances to leave non-relevant funds in their safeguarding accounts overnight.

3. Risk Management & Governance

The FCA expects firms to have robust governance and risk management frameworks in place to ensure safeguarding obligations are met. Senior management must have clear oversight of safeguarding processes, and there must be internal controls that guarantee the safeguarding regime is always adhered to.

4. Auditor Reviews

Independent audits are a critical part of the safeguarding process. Firms are required to ensure that an auditor reviews their safeguarding measures to confirm compliance. Auditors will look at how well the firm is adhering to segregation, reconciliation, and reporting requirements.

5. Disclosure to Customers

Transparency is key in safeguarding. Payment services firms must inform their customers about how their funds are protected, what safeguarding measures are in place, and the potential risks involved. This allows customers to make informed decisions about the firms they choose to trust with their money.

6. Acknowledgement of Safeguarding by Banks and Due Diligence of credit institutions

Any bank holding safeguarded funds for a payment services firm must provide a formal acknowledgement that these funds are protected. This ensures the funds remain segregated and cannot be claimed by creditors in case of insolvency. Firms are required to periodically review their credit institutions, authorised custodians, and insurers to ensure they remain appropriate. Firms need to record the grounds for this decision.

Safeguarding is a crucial element of the FCA’s regulatory framework for payment services firms in the UK. By ensuring that customer funds are segregated, reconciled, and protected from firm insolvency, the FCA helps to maintain trust in the payments’ ecosystem. For firms, compliance with these safeguarding rules is essential not only for regulatory reasons but also for maintaining customer confidence.