UK Financial Conduct Authority Consults on Changes to the Safeguarding Regime for Payments and E-Money Firms

The U.K. Financial Conduct Authority had published a consultation on proposals to address weaknesses in the safeguarding regime for payments and e-money firms. The FCA explains that there remain poor practices across the industry due to poor implementation of the regulatory framework. For firms that became insolvent between Q1 2018 and Q2 2023, there was an average shortfall of 65% in funds owed to clients (difference between funds owed and funds safeguarded). In developing the safeguarding proposals, the FCA has adapted the approaches in the existing CASS rules to reflect payment services.

The FCA proposes to make changes to the safeguarding regime in 2 stages, the interim and end-state, and is consulting on rules and guidance for both stages of the proposed regime. The interim rules aim to: (i) support a greater level of compliance with existing safeguarding requirements in the E-Money Regulations and Payment Services Regulations; (ii) support more consistent record keeping; and (iii) enhance reporting and monitoring requirements to identify shortfalls in relevant funds, and improve supervisory oversight. The proposed end-state rules 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. This second stage will address remaining shortcomings of the regime when the revocation of the safeguarding requirements in the PSRs and EMRs by the Financial Services and Markets Act 2023 is commenced. The deadline for comments is December 17, 2024. The FCA plans to publish final interim rules with an accompanying policy statement within H1 2025. The FCA recognizes that some of these proposals are a significant shift in how payments firms safeguard their relevant funds, and so proposes to give firms a transition period of 6 months to implement the changes in the interim rules from when the final version is published and 12 months to implement the final end-state rules.

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