On 25 September 2024 the Financial Conduct Authority (“FCA”) issued CP24/20 ‘Changes to the safeguarding regime for payments and e-money firms’. The consultation paper sets out the proposed interim and end state rules (CASS 15) which mirror the existing CASS 7 client money rules.

Why the change?

The aim of the FCA is to improve the existing safeguarding regime and to ensure that should a payments firm fail that harm to consumers is minimised. Payments firms hold approximately £5 billion on any given day, with e-money issuers holding approximately £18 billion of funds in safeguarding accounts. The number of UK consumers and safeguarded funds are increasing and the FCA are seeking to mitigate against shortfalls in safeguarded funds or a delay in the return of funds to consumers. The Financial Services Compensation Scheme (“FSCS”) does not apply where a payments firm fails and therefore currently consumers may lose money in the event of a firm failure.

What is changing?

The FCA are proposing to make changes to the safeguarding regime in two stages – interim and end-state rules. The two stage approach by the FCA is designed to firstly ensure that payments firms are compliant with the existing safeguarding regime, Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs), followed by the end-state which will replace the existing safeguarding regime when it is repealed.

The key requirements set out in CP24/20 are summarised as follows:

Interim rules

• Allocation of compliance with safeguarding requirements to an individual in the payments firm.
• The annual safeguarding audit to be undertaken by an independent, qualified auditor.
• The annual safeguarding audit report to be submitted by the payments firm’s auditor to the FCA within four months of the period end date.
• Establishment, implementation and maintenance of robust policy and procedures.
• Detailed daily internal and external reconciliations.
• Maintenance of complete and accurate books and records.
• Obtaining acknowledgement letters from banks and custodians.
• Introduction of a safeguarding resolution pack.
• New monthly return to be submitted electronically to the FCA covering safeguarding arrangements and safeguarded funds.
• Consideration of diversification and due diligence requirements in respect of selecting and appointing third parties used by payments firms.
• Enhanced considerations when selecting liquid assets.
• Detailed requirements on the use of insurance policies and guarantees.

End-state rules

• Holding relevant funds under statutory trust, including in respect of insurance policies and guarantees.
• Clarification of when safeguarding obligations commence and end.
• Receiving funds directly into a designated safeguarding account with an approved bank.
• Template acknowledgment letters reflecting that relevant funds and assets are held on trust.
• Prudent segregation to allow payments firms to use their own funds to mitigate against safeguarding shortfalls.
• Updated reconciliation and books and records requirements.
• Creation of a single asset pool.
• The gifting of unclaimed funds to charity.

The end-state rules are over and above the interim rules.

When will the changes come into force?

The CP24/20 response period ends on 17 December 2024, with the final interim rules and policy statement to be issued in H1 2025.

The date on which the end state rules will be issued and the existing safeguarding regime repealed has not yet been announced by the FCA.

How we can help

If your firm is required to obtain a safeguarding audit opinion, please do not hesitate to get in touch with myself or a member of our Financial Services team to discuss how we can support you.