The FCA's final interim rules and policy statement on the safeguarding regime for payments and e-money firms are expected to be published in H1 2025.
Background
The proposals, which were set out in the FCA's consultation paper CP 24/20, were published against the backdrop of longstanding concerns held by the FCA in relation to safeguarding and wind-down arrangements of payments and e-money firms.
To tackle these concerns, the FCA is proposing to implement changes to the current safeguarding regime in two stages: in the first instance, the FCA will create interim rules (explained further below) to address concerns around current safeguarding practices; the second stage will involve the creation of "end-state rules" which will replace the existing safeguarding requirements under the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs).
The FCA's consultation paper closed on 17 December 2024.
Who this affects
The safeguarding rules will apply to:
- authorised payment institutions;
- e-money institutions;
- small e-money institutions; and
- credit unions who issue e-money in the United Kingdom under the PSRs and EMRs.
In addition, small payments institutions will be able to opt-in to safeguarding requirements, and small e-money institutions and credit unions that are required to safeguard funds in exchange for e-money will be able to continue to opt-in to the safeguarding requirements.
The rules will also apply to EEA firms in supervised run-off under the financial services contracts regime.
Interim rules
The aim of the interim rules is to complement the existing requirements under the PSRs and EMRs to improve compliance with those requirements; support more consistent record keeping; and enhance reporting and monitoring to more easily identify shortfalls in relevant funds and improve supervisory oversight.
These new rules will mostly be implemented under CASS 15, a new chapter in the FCA's Client Assets Sourcebook, along with a new subchapter under SUP 16, the FCA's Supervision Sourcebook.
What are the proposed interim rules?
Key features of the proposed interim proposals are:
- improve books and records:
- requiring more detailed record keeping and reconciliation requirements for safeguarding; and
- introducing a requirement to maintain a resolution pack;
- enhance monitoring and reporting:
- requiring safeguarding practices to be audited annually by an external auditor;
- introducing a monthly regulatory safeguarding return; and
- requiring the allocation of safeguarding compliance oversight to an individual in the firm;
- strengthen elements of safeguarding practices:
- requiring additional and more detailed safeguards; and
- introducing the requirements to consider diversification of third parties with which the firm holds, deposits, insures of guarantees safeguarded funds.
When will the interim rules apply?
In the consultation paper, the FCA confirmed its intention to give firms a transition period of six months to implement the changes in the interim rules from when the final version of those rules is published.
End-state proposals
The new end-state rules will replace safeguarding requirements in the PSRs and the EMRs once HM Treasury commences their repeal under the Financial Services and Markets Act 2023. The end-state proposals are to replace existing rules with a new CASS style regime.
What are the proposed end-state rules?
The end-state rules will aim to:
- Strengthen safeguarding practices:
- introducing more robust requirements for segregating and handling relevant funds; and
- requiring principal firms to safeguard sufficient cover funds before an agent or distributor can receive relevant funds;
- Holding funds under a statutory trust:
- imposing a statutory trust over relevant funds, relevant assets, insurance policies/guarantees and charges, such that consumers remain the beneficial owners; and
- providing additional detail around when safeguarding obligations begin and funds become subject to the trust.
When will the end-state rules apply?
The FCA will publish its final end-state rules when revocation of the safeguarding requirements under the PSRs and EMRs is commenced. Firms will have a 12 month transition period to implement the end-stage rules following publication of the final rules.
Our Comments
The need for improved consumer protection will be welcomed by consumers but will place significant burdens on in-scope firms to comply, particularly given recent calls for a new, more streamlined, approach to regulation to facilitate growth.
If you are interested in understanding what these changes will mean for you in practice, please contact us.