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The FCA’s Safeguarding consultation explained

Author: ICAEW Insights

Published: 27 Sep 2024

The FCA has this week released its long-awaited consultation on Safeguarding. ICAEW’s Polly Tsang walks through some of the key proposals contained within it.

More detailed record-keeping and enhanced monitoring and reporting are among the measures being proposed by the Financial Conduct Authority (FCA) as it looks to beef up the protections in place for funds issued by payment institutions, e-money institutions and credit unions

Following the collapse of Lehman Brothers and the 2007/08 financial crises, new rules were introduced in the UK designed to keep customers' money and assets safe in the event of a regulated financial firm going under. Essentially, the Client Assets Sourcebook (CASS) rules state that the customers’ money and assets should be sufficiently segregated from the firm’s assets at all times, in case of insolvency. 

Safeguarding – what is it? 

Broadly speaking, safeguarding aims to do something similar, but for payment institutions, e-money institutions and credit unions that issue e-money. 

Current safeguarding requirements are set out in the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs), but the FCA has flagged up sub-standard practices across the industry due to poor implementation of the regulatory framework. 

FCA supervision teams have seen an increase in the number of firms with safeguarding issues. The regulator says that for firms that became insolvent between Q1 2018 and Q2 2023, there was an average shortfall of 65% in funds owed to clients – that is, the difference between funds owed and funds safeguarded.

The current consultation is on changes to the existing safeguarding regime to make it more effective by establishing additional rules and guidance for safeguarding obligations for payments and e-money firms.

Key proposals

Most of the proposed rules will be set out in a new Chapter 15 of the Client Asset Sourcebook and in amendments to the Supervision Manual (SUP), and aim to help bring the regime in line with existing CASS rules. 

New requirements are expected to apply in a two-stage approach to minimise disruption – interim state and end state.

In the interim state, the rules will supplement current safeguarding requirements in PSRs and EMRs. In the end state, the new rules will replace existing PSRs and EMRs, once revoked. 

The proposed implementation period is six months for interim-state rules and 12 months for end-state rules. 

Key features of interim-state proposals:

Improved record-keeping

  • More detailed record-keeping and reconciliation requirements, similar to CASS 7 for investment firms; and
  • Requirement to maintain a resolution pack and submit a monthly safeguarding regulatory return.

Enhanced monitoring and reporting

  • Strengthened external audit requirements, including mandatory assurance in standard audit report format;
  • Requirement for the safeguarding audit report to be submitted to the FCA; and
  • Designation of an individual responsible for overseeing compliance.

Strengthening safeguarding practices

  • Additional safeguards for investments in secure liquid assets;
  • Requirements for diversification of third-party relationships and due diligence; and
  • More detailed guidelines on safeguarding via insurance or guarantees.

Key features of end-state proposals:

Robust safeguarding requirements

  • Mandatory segregation and handling of relevant funds;
  • Direct receipt of funds into designated accounts at approved banks to prevent a shortfall in relevant funds (prudent segregation); and
  • Restrictions on agents/distributors receiving funds unless adequately safeguarded.

Statutory trust

  • Establishment of a statutory trust over relevant funds and associated assets; and
  • Clarification on when safeguarding obligations commence and when funds are subject to the trust.

Proposals are based on regulatory experiences from other sectors and insights from supervisory work in the payments sector. ICAEW’s Financial Services Faculty CASS Working Party contributed to pre-consultation discussions and we look forward to responding to the current consultation.

The consultation is open for comments until 17 December 2024.

Financial Services Faculty

This article was created by the Financial Services Faculty. Join the Faculty to gain digital access to practical guidance, expert analysis and professional development support across the financial services industry.

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