Why is the FCA Consulting?
The FCA is reviewing safeguarding practices to strengthen consumer protection in case of a payment or e-money firm’s insolvency.
Issues in current safeguarding practices have led to significant consumer harm, with firms often failing to fully protect consumer funds as required under the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs).
What is Safeguarding?
Safeguarding refers to the requirements for payment institutions, e-money institutions, and credit unions to protect funds received from consumers. This ensures that, if a firm fails, consumers can recover the maximum value of their funds swiftly and completely.
Effective safeguarding helps avoid fund shortfalls, reduces costs, and minimises delays in fund recovery during insolvency.
Current Issues and Proposed Changes
The FCA has observed widespread safeguarding issues in the industry, with many firms failing to adhere to regulatory standards. A review revealed a 65% average shortfall in funds safeguarded by firms that became insolvent between 2018 and 2023.
In response, the FCA proposes a phased approach to improve safeguarding through “interim” and “end-state” rules, modelled after the Client Assets Sourcebook (CASS) regime:
• Interim Rules: These will improve compliance, enhance record-keeping, and introduce more robust reporting requirements to better monitor safeguarding practices.
• End-State Rules: The aim is to 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, thus giving consumers beneficial ownership of funds, with the firm acting as trustee.
See the summary below (extracted from the FCA consultation document)
Main Proposals | Interim-state proposals | End-state proposals (in addition to interim-state proposals) |
Improved books and records | 1. Enhanced record-keeping and reconciliation requirements 2. Requirement to maintain resolution pack | Updated record-keeping and reconciliation requirements |
Enhanced monitoring and reporting | 1. Firms are required to have safeguarding practices audited by an external auditor, with the safeguarding audit submitted to the FCA. 2. There is a further requirement for firms to complete a monthly safeguarding regulatory return. | |
Strengthening elements of safeguarding practices | 1. Requirements to exercise due skill, care and diligence in selecting and appointing third parties. 2. Requirements to consider the need for diversification. 3. Additional requirements on how Payments Firms can safeguard relevant funds by insurance or comparable guarantee. | 1. Relevant funds must be received into a designated safeguarding account at an approved bank, with the exception of funds received through an acquirer or an account used to participate in a payment system. 2. Agents and distributors cannot receive relevant funds unless the principal Payments Firm safeguards the estimated value of funds held by agents and distributors in a designated safeguarding account. 3. Additional requirements when Payments Firms only safeguard relevant funds by insurance or comparable guarantee |
Holding funds etc., under a statutory trust | Payment firms will receive and hold the following under a statutory trust: 1. Relevant funds; and 2. Assets, insurance policies and guarantees used for safeguarding |
Who Will Be Affected?
These changes apply to authorised payment institutions, e-money institutions, small e-money institutions, and credit unions in the UK. Certain small institutions may voluntarily comply.
Consumers, consumer groups, auditors, insolvency practitioners, and others with a role in safeguarding are undoubtedly going to be impacted.
Goals and Expected Outcomes
The FCA aims to:
- Minimise fund shortfalls in cases of firm failure.
- Ensure timely and cost-effective fund recovery for consumers.
- Strengthen legal certainty for consumers by applying trust principles to safeguarded funds.
Implementation
The FCA proposes to set detailed rules in its Handbook, particularly in the CASS and Supervision Manual (SUP). Interim rules will take effect first, followed by end-state rules replacing safeguarding provisions in PSRs and EMRs.
Next Steps
The consultation will guide the final safeguarding rules, which the FCA intends to implement in stages, working alongside HM Treasury to transition relevant PSRs and EMRs provisions into the FCA Handbook.
Insolvency Protocols
The FCA also plans to establish rules to ensure efficient fund distribution if a payment firm enters insolvency outside the Payments and Electronic Money Special Administration Regime (PESAR). These proposals will undergo further consultation before end-state rules are implemented.
Recommendation
We recommend that businesses likely to be affected read the draft consultation paper and assess
- what will impact them,
- could potentially cause adverse consequences and
- the key challenges they will face from the proposed changes.
Any comments should be provided by 17 December 2024 via the FCA’s online response form.
For more information please contact one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2024