FCA proposes changes to the safeguarding regime for payments and e-money firms
FCA proposes changes to the safeguarding regime for payments and e-money firms
On the 25 September 2024, the FCA issued its consultation paper (CP24/20) on the proposed rules to improve the safeguarding regime and ensure consumer money is safe.
The consultation is due to close on 17 December 2024.
Current safeguarding requirements are set out in the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs) and further detailed guidance issued in the FCA’s Approach Document (November 2021) version 5, as well as various further publications through Dear CEO letters and the relatively more recent (March 2023) FCA Priorities for Payment Firms. The FCA has identified that there still remains “poor practice" across the industry and an increased number of supervisory matters related to safeguarding. The FCA has identified:
1. Interim rules - to support greater compliance with existing requirements as set out in the PSRs/EMRs through supporting more consistent record keeping and enhanced reporting and monitoring to identify and correct shortfalls in relevant funds.
2. End state rules - these will replace the existing safeguarding requirements of the EMRs and PSRs with a ‘CASS’ regime.
In the end state, the FCA propose to amend the rules in Chapter 15 of CASS which will replace the safeguarding requirements as set out in legislation (PSRs/EMRs), whilst also undertaking consequential amendments to the Approach Document to reflect the removal of Chapter 10.
The proposals add new rules to the FCA’s Supervision Manual (SUP) including new audit requirements for both reasonable and limited assurance engagements (SUP 3A) and the introduction of a new monthly regulatory return.
New rules are also proposed for where a Payment firm fails and enters an insolvency procedure other than Payments and Electronic Money Special Administration Regime (PESAR). These rules will specify how to distribute funds to consumers with the aim to mitigate the impact of the failure of the third party used for safeguarding purposes. This will be undertaken through a separate consultation at a later stage but before implementing the end state rules.
Summary of changes
The consultation paper outlines changes to safeguarding rules for firms, key items are summarised below:
Interim rules
The consultation is due to close on 17 December 2024.
Background
Payment institutions, e-money institutions and credit unions that issue e-money are required to protect funds received in connection with making a payment or in exchange for e-money issued (relevant funds). These requirements are there to protect consumers if a Firm were to fail, and effective safeguarding processes and controls reduces, the risk of shortfalls in relevant funds, delays and difficulties in identifying consumer entitlements.Current safeguarding requirements are set out in the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs) and further detailed guidance issued in the FCA’s Approach Document (November 2021) version 5, as well as various further publications through Dear CEO letters and the relatively more recent (March 2023) FCA Priorities for Payment Firms. The FCA has identified that there still remains “poor practice" across the industry and an increased number of supervisory matters related to safeguarding. The FCA has identified:
- An increasing number of supervisory cases relating to safeguarding issues - c15%
- For firms that became insolvent between Q1 2018 and Q2 2023, there was an average shortfall of 65% in funds owed to customers (i.e., the difference between the amount safeguarded and the amount owed to customers).
- minimising shortfalls in safeguarded relevant funds
- ensuring these funds are returned as cost-effectively and quickly as possible on insolvency
- strengthening the FCA’s ability to identify and intervene in firms that do not meet their safeguarding expectations to ensure these outcomes are met.
1. Interim rules - to support greater compliance with existing requirements as set out in the PSRs/EMRs through supporting more consistent record keeping and enhanced reporting and monitoring to identify and correct shortfalls in relevant funds.
2. End state rules - these will replace the existing safeguarding requirements of the EMRs and PSRs with a ‘CASS’ regime.
Timelines
The FCA proposes to give firms time between the rules being published and coming into force, so the necessary arrangements can be implemented:- 6-month transition period to implement the changes in the interim rules for when the final version is published (expected H1 2025)
- An additional 12-month from the publication of the final-end state rules (with the FCA acknowledging more significant changes are likely needed for firms to implement these)
In the end state, the FCA propose to amend the rules in Chapter 15 of CASS which will replace the safeguarding requirements as set out in legislation (PSRs/EMRs), whilst also undertaking consequential amendments to the Approach Document to reflect the removal of Chapter 10.
The proposals add new rules to the FCA’s Supervision Manual (SUP) including new audit requirements for both reasonable and limited assurance engagements (SUP 3A) and the introduction of a new monthly regulatory return.
New rules are also proposed for where a Payment firm fails and enters an insolvency procedure other than Payments and Electronic Money Special Administration Regime (PESAR). These rules will specify how to distribute funds to consumers with the aim to mitigate the impact of the failure of the third party used for safeguarding purposes. This will be undertaken through a separate consultation at a later stage but before implementing the end state rules.
Summary of changes
The consultation paper outlines changes to safeguarding rules for firms, key items are summarised below:
Interim rules
- Improved books and records: Introduction of comprehensive rules to ensure firms carry out accurate and consistent reconciliations, including introduction of a resolution pack.
- Enhanced monitoring and reporting: Requirement to complete annual audits of compliance with safeguarding requirements and the requirement to submit a new monthly safeguarding regulatory return.
- Strengthening elements of the safeguarding regime: Additional requirements to consider the firm’s approach to diversification and ensuring appropriate due diligence is undertaken on 3rd parties. Additional guidance on the use of an insurance/comparable guarantee and where firms invest relevant funds in secure, liquid assets.
- Strengthening elements of the safeguarding regime: More robust requirements on the segregation of relevant funds for both firms and agents/distributors and the use of template acknowledgement letters
- Holding funds under a statutory trust: Imposition of a statutory trust and additional details around the start and end point of the safeguarding obligation and unclaimed relevant funds.
How can we support you?
It is expected that following the publication of the interim consultation response (H1 2025) firms will have a 6-month implementation period before the interim rules are expected to be in place. As such firms should begin considering the structural changes needed for implementation in 2024 to ensure ability to meet the interim expectations. Some ways we can support you with this are:- Perform independent, annual required safeguarding audit, in line with expected scope
- Perform health check and GAP analysis against new requirements to ensure firms can quickly and clearly identify enhancements in the current safeguarding controls and process.
- Support in remediation of deficiencies identified in annual safeguarding audits.
- Provision of training on new rules and what they mean for you.
- Assisting in support with the preparation of the resolution pack and monthly regulatory returns.