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Now that we have had time to digest the FCA’s ‘CP24/20: Changes to the safeguarding regime for payments and e-money firms’, Payment Services Manager, Alejandra Gorria, dives into what exactly the changes will mean for payment and electronic money firms, including the timelines, and how Thistle Initiatives can help you get ready for the changes.

The FCA aims to strengthen the safeguarding requirements to avoid consumer harm, and to ensure that firms’ records allow the safe and quick return of funds, should they fail. This will both protect consumers and build trust in the financial system.

The key objectives can be summarised in five points:

• Ensure funds are held safely and securely;
• Ensure that firms are segregating the right amount of funds;
• Ensure firms can demonstrate clear ownership of the funds held on behalf of consumers;
• Enhance transparency and accountability;
• Ensure consumer funds take priority over other creditors if a firm fails; and
• Ensure consumer funds can be quickly returned in the event of a firm’s insolvency.

The FCA expects to ‘deploy’ its new approach in two phases, the ‘interim rules’ phase and the ‘end-date’ phase.

Interim rules

The Interim rules will come to life within six months of the closure of the Consultation Paper. They will focus on improving clarity and detail around safeguarding practices. The key takeaways are explained below.

• Consistency in safeguarding standards: All Payments Firms should have adequate policies and procedures in place, ensuring that the base standard for safeguarding is consistent across the sector. Firms will need to maintain a resolution pack following the requirements in CASS 10.2.
• Stronger regulatory intervention: These rules provide regulators with stronger mechanisms to identify and intervene against firms that fail to meet safeguarding requirements. Annual audits will need to be shared with the FCA.
• Enhanced reporting: Monthly regulatory returns are introduced to monitor trends within the sector, allowing for more targeted supervision.
• Sufficiently safeguarded funds: Payments Firms must ensure that they hold the right amount of safeguarded funds at all times, with systems and controls in place to manage this effectively.
• Due diligence in fund holding: Firms must conduct proper due diligence when selecting the institutions (e.g., authorised credit institutions or custodians) where they hold relevant funds, ensuring diversification and security.

End-State

End-date rules will apply after 12 months. The end-state phase key enhancements are listed below.

• Statutory trust: A statutory trust will be imposed over relevant funds held by firms, ensuring that consumers retain legal ownership of their funds. The firm acts as a trustee, enhancing legal certainty and consumer protection in case of insolvency.
• More robust segregation: Funds will need to be received directly into designated accounts and not on D+1. This way, funds are immediately separated from the firm’s funds.
• Safeguarding of funds for Agents and Distributors: Agents and Distributors are prohibited from receiving relevant funds unless the Principal firm holds sufficient safeguarded funds in designated safeguarding accounts to cover the amounts expected to be handled by these Agents or Distributors.
• Single asset pool: Firms will be able to safeguard e-money and unrelated payment services funds together.

Conclusion: Strengthening Consumer Protection in the Payments Sector

The proposed changes to the safeguarding regime are critical for enhancing consumer protection and ensuring that consumer funds are secure at all times. By implementing interim and end-state rules, regulators aim to create a more robust safeguarding framework that ensures transparency, consistent standards, and strong oversight. With enhanced record-keeping, reporting, due diligence, and legal protections, the expectation is that consumers will have greater confidence in the financial institutions they trust with their funds. These measures also promote a level playing field for firms, ensuring that all players in the sector meet the same high safeguarding standards.

How we can help

At  Thistle Initiatives we can support your firm getting ready for the changes. Some ways we can assist are:

• Undertaking a gap analysis to ensure you clearly and promptly identify the areas where your firm safeguarding will require enhancements;
• Preparing your resolution pack and ensures it aligns with the CASS requirements;
• Assisting you with your monthly reg reports;
• Training in the new rules.

For support in these areas, please contact Alejandra Gorria, Payment Services Manager at Thistle Initiatives: alejandra.gorria@thistleinitiatives.co.uk.