On 26 September 2024, the United Kingdom’s Financial Conduct Authority (FCA), published a consultation paper (CP24/20), to address the existing lacunas and to ensure greater consumer protection in the event of firm failure. The proposed changes in the UK FCA’s consultation paper CP24/20 introduce a two-phase regime designed to address weaknesses in the current regulatory framework. The first phase consists of interim rules aimed at improving compliance with existing safeguarding regulations, while the second phase proposes the introduction of a Client Assets Sourcebook (CASS) style regime. This end-state regime will impose statutory trusts on all relevant consumer funds, offering additional legal protections and expediting the return of funds during insolvency proceedings. The consultation invites feedback from stakeholders until 17 December 2024, with the new rules expected to be implemented in mid-2025.
The safeguarding rules currently set out in the Payment Services Regulations (PSRs) and Electronic Money Regulations (EMRs) aim to protect consumer funds by ensuring they are adequately safeguarded if a firm goes out of business. However, the UK FCA has identified recurring problems with the implementation of these rules, leading to significant consumer harm when firms fail.
To address these issues, the UK FCA proposes a new safeguarding regime, transitioning from the existing framework to a “CASS” (Client Assets Sourcebook) style regime. This new framework would place relevant funds into statutory trusts, ensuring that consumer funds are held on trust and returned as quickly as possible in the event of a failure. The UK FCA’s goal is to improve compliance, reduce shortfalls in safeguarded funds, and allow faster fund recovery for consumers.
The payments and e-money sector has grown significantly in recent years, with more complex business models and a larger consumer base relying on these services for day-to-day transactions. According to UK FCA data, 7% of UK consumers used e-money accounts in 2022, an increase from just 1% in 2017. Moreover, e-money issuers held £18 billion in safeguarding accounts by 2023, highlighting the importance of consumer protection in this rapidly growing sector.
The UK FCA addresses the concern about the increasing reliance on payment institutions and e-money firms, especially given the rise in the number of vulnerable consumers using these services. Vulnerable individuals often depend on e-money accounts for accessing salaries, paying bills, and other essential services. Poor safeguarding practices in such firms could disproportionately harm these consumers, especially in cases of insolvency. The UK FCA’s proposals aim to ensure that the growing sector adheres to the highest standards of consumer protection. By improving safeguarding rules and enhancing monitoring, the UK FCA aims to reduce the risk of harm, particularly for vulnerable consumers.
The UK FCA proposes a two-stage approach to the safeguarding regime: an interim state and an end state. The interim state will supplement current safeguarding requirements under the PSRs and EMRs, while the end state will replace these regulations entirely with a CASS-style regime, where relevant funds and assets are held on trust for consumers.
Interim proposals include improved books and records, enhanced reporting requirements, and more stringent safeguarding practices. For example, firms will be required to perform daily reconciliations of relevant funds and segregated assets. They must also submit monthly regulatory returns detailing their safeguarding arrangements and undergo an annual audit of their safeguarding practices. In the end state, the UK FCA plans to introduce statutory trusts over safeguarded funds and related assets, such as insurance policies. This move will ensure that consumer funds remain protected and can be returned to consumers more efficiently during insolvency proceedings. The UK FCA’s experience with client money safeguarding under CASS rules in other sectors forms the basis for these proposed changes.
The new rule proposes enhancement of record-keeping requirements as many firms lack robust procedures to consistently identify and safeguard relevant funds. Inadequate record-keeping can lead to delays in identifying safeguarded funds during insolvency and may reduce the amount of money returned to consumers.
Under the interim rules, firms will be required to maintain detailed books and records that distinguish between relevant and non-relevant funds at all times, including daily reconciliations of internal records with third-party data, such as bank statements. Firms must also maintain a resolution pack, a set of documents that will help insolvency practitioners distribute safeguarded funds more quickly. In the end state, these requirements will be expanded to align with the statutory trust regime. The statutory trust framework will introduce additional governance and organisational requirements to ensure that firms properly safeguard consumer funds throughout their operations.
The UK FCA’s proposals introduce stronger monitoring and reporting mechanisms to enhance oversight and improve the protection of consumer funds. Under the interim rules, firms will need to submit monthly regulatory returns detailing the amount of safeguarded funds, the methods used for safeguarding, and the results of their internal and external reconciliations.
Firms will also be required to undergo an annual safeguarding audit, carried out by an independent auditor, and submit the results to the UK FCA. The introduction of regular reporting and independent audits will allow the UK FCA to monitor safeguarding practices more effectively and intervene earlier in cases of non-compliance. The end-state rules will refine these reporting requirements, incorporating the statutory trust arrangements. This will allow for more robust monitoring of how funds are held and managed under the new safeguarding regime.
To further improve the protection of consumer funds, the UK FCA proposes enhancements to safeguarding practices including stricter requirements for segregating relevant funds from firms’ own money and ensuring that funds are placed in designated safeguarding accounts as soon as they are received.
The UK FCA also plans to introduce additional safeguards for firms that invest safeguarded funds in secure, liquid assets, such as government bonds. Firms will need to adopt policies for spreading investment risks and managing foreign exchange exposures. These changes aim to ensure that consumer funds are always accessible, even in the event of large-scale redemptions or market disruptions. In the end state, relevant funds will be held under statutory trusts, which will provide greater legal protection and help speed up the return of funds in cases of insolvency.
The introduction of a statutory trust is proposed by the FCA in the new rules. Under the new rules, all safeguarded funds will be held in trust to ensure that consumers are the primary beneficiaries. This move follows legal uncertainties raised by recent court rulings, including the Ipagoo LLP case, which clarified that the current safeguarding regime does not create a statutory trust over e-money holders’ funds. By imposing a statutory trust, the FCA intends to provide greater certainty about the legal status of safeguarded funds and improve consumer protection in the event of insolvency. The statutory trust will also help reduce insolvency costs by eliminating the need for courts to resolve disputes about the ownership of safeguarded funds.
To facilitate a smooth transition, the FCA proposes a six-month implementation period for the interim rules, starting from mid-2025. During this time, firms will need to update their record-keeping systems, implement new reconciliation processes, and prepare for the introduction of the statutory trust framework. The end-state rules will be introduced later, allowing firms more time to adjust to the new safeguarding requirements.
The consultation paper includes a detailed cost-benefit analysis (CBA) of the proposed changes, which highlights the anticipated costs and benefits for firms and consumers. The FCA also provides a list of questions for stakeholders, inviting feedback on specific aspects of the proposals. The consultation invites feedback from stakeholders until 17 December 2024, with the new rules expected to be implemented in mid-2025.
(Source: https://www.fca.org.uk/publication/consultation/cp24-20.pdf, https://www.fca.org.uk/news/press-releases/proposed-new-rules-better-protect-customers-payments-firms, https://www.fca.org.uk/publications/consultation-papers/cp24-20-changes-safeguarding-regime-payments-and-e-money-firms)
