FCA listens to payment industry as it sets out its path on 'safeguarding' in the UK

The Financial Conduct Authority (FCA) has published its long-anticipated policy statement on changes to the safeguarding regime for payments and e-money firms (PS25/12) with feedback on its consultation launched in December 2024 (CP24/20).

The policy statement sets the FCA's path on safeguarding over the next couple of years. Safeguarding is critical to the protection of customers' funds held by payments and e-money firms so it is both a key regulatory requirement and a significant compliance burden.

Good news

The good news is that the FCA has listened to the industry, reflected, and responded with a more considered, pragmatic, and proportionate approach. While it is full steam ahead for the interim state rules (with some helpful modifications), the end-state proposals (the introduction of a statutory trust and the receipt of funds directly into designated safeguarding accounts) are being kicked down the road for at least two years.

The proposals for the interim state (now called the "supplementary regime"), will be implemented largely as proposed, with some modifications. The supplementary regime will come into effect on 7 May 2026, reflecting an increase in the proposed implementation period, from six to nine months.

Significant 'win' in the deferral of end-state proposals

In a significant win for the industry and a clear example of the FCA listening, the end-state proposals – now called the "post-repeal regime" – have been deferred for the foreseeable period (two years), until at least the fourth quarter of 2027. 

These proposals included the introduction of a statutory trust and a requirement for payment firms to receive funds directly into designated segregated accounts (DSAs). 

The FCA has said that this deferral is primarily to allow for a review of the implementation of the supplementary regime after a full audit period has been completed, following its commencement on 7 May 2026. This review will consider and assess whether the new regime is achieving the intended outcomes or if further changes are needed. Only then will the FCA consult on a post-repeal regime if changes are still considered necessary. This means that the earliest the FCA will consult on the post-repeal regime is the fourth quarter of 2027.

Any transition from the supplementary regime to the post-repeal regime will also be dependant on legislation being introduced by HM Treasury. The FCA acknowledges that the timing, nature, and feasibility of transitioning to the post-repeal regime would ultimately depend on HM Treasury's approach to revoking the Payment Services Regulations and Electronic Money Regulations.

The change in the FCA's language is notable, reflecting that the new requirements will "supplement" existing rules and guidance without any need for legislative change, and that there isn’t necessarily an "interim" and "end" state.

Moderations to the interim state (now the supplementary regime) proposals

While the core proposals remain largely unchanged, the FCA has made several modifications based on feedback to its consultation. The most significant changes relate to audits and reconciliation requirements. 

In relation to audits, the FCA has:

• Introduced a threshold of £100,000 of "relevant funds" below which payment firms will not be required to arrange an annual external safeguarding audit – this threshold cannot be exceeded at any point in the previous 53 weeks, functioning like a "high-water mark".
• Removed the requirement for a limited assurance engagement where a payments firm claims not to have been required to safeguard relevant funds during the audit period. The FCA has instead introduced guidance clarifying that failing to safeguard relevant funds will usually be of material significance so should be communicated to the FCA by statutory auditors under existing notification requirements.
• Extended the timing of submission for the first audit to six, rather than four, months following the end of the firm's audit period. Subsequent audits must be submitted within four months of the end of the audit period.
• Confirmed it is working with the Financial Reporting Council on the introduction of an auditing standard and is seeking to align timelines as far as possible.

In relation to reconciliations, the FCA has:

• Simplified internal reconciliation rules by introducing a higher-level comparison of relevant funds that should be held, against actual account balances, requiring firms to remedy any shortfall using relevant or own funds (this replaces the proposal for a more complex relevant funds deposit resource and requirement reconciliation).
• Confirmed that reconciliations do not need to be performed at weekends or on bank holidays and days on which relevant foreign markets are closed.
• Introduced rules permitting a non-standard method of internal safeguarding reconciliations, provided an independent auditor reviews and confirms in a written report that the proposed method meets the firm's obligations. Although all firms must adhere to the FCA's requirements on frequency of reconciliations without deviation, this will allow firms to undertake reconciliations at an aggregate level, rather than on a client-by-client basis.

The FCA has also:

• Amended the monthly safeguarding return to make it simpler for payment firms to complete.
• Agreed to include additional guidance in its approach document on when the safeguarding obligation starts and ends.

Osborne Clarke comment

All in all, this policy statement is really good news. Osborne Clarke, alongside Linklaters, helped prepare the UK Finance detailed response to the FCA's CP24/20 initial consultation. While broadly accepting the proposed interim state rules, the response raised many complex, operational, and technical issues with the proposed end-state rules, specifically the introduction of a statutory trust and the receipt of customer funds directly into DSAs. 

We also argued that these end-state rules may not be needed if the proposed interim-state rules had their desired effect and achieved the intended outcomes, namely stronger safeguarding compliance.

It is also great to see the FCA has committed to educating and embedding these changes, tacitly accepting that new rules need to be given a chance to work first before more fundamental changes are considered. In this respect, the change in the FCA's language is notable, reflecting that the new requirements will "supplement" existing rules and guidance without any need for legislative change, and that there isn’t necessarily an "interim" and "end" state.

Osborne Clarke will also continue to support UK Finance as regards connected matters, in particular the review of PESAR (Payment and Electronic Money Institution Insolvency Regulations 2021).

We will be digesting the policy statement in more detail and expect to publish further materials shortly.