New FCA payments safeguarding rules to protect UK consumers due in May 2026

The Financial Conduct Authority's  long-anticipated policy statement changes to the safeguarding regime for payments and e-money firms (PS25/12) includes feedback on the consultation launched in December 2024 (CP24/20), together with the final rules and guidance for the FCA's improved and enhanced safeguarding regime.

The policy statement outlines the FCA's strategy for safeguarding over the next few years and sets out the new safeguarding requirements that will apply to payments and e-money firms. Safeguarding is critical for protecting customer funds held by payments and e-money firms. This makes safeguarding a key regulatory requirement and a significant compliance responsibility.

The FCA has proposed a supplementary regime and post-repeal regime. It has largely retained the proposals for the interim state, now referred to as the supplementary regime, with some modifications. The proposals for the end-state, now referred to as the post-repeal regime, have been deferred for the foreseeable future.

What are the aims of the supplementary regime?

The FCA has identified that payments and e-money firms currently lack sufficiently robust safeguarding practices, posing an unacceptable risk to consumers and market integrity. To address these concerns, the supplementary regime aims to strengthen the safeguarding framework and rectify existing weaknesses. The objectives of the supplementary regime are:

• supporting higher levels of compliance to existing safeguarding requirements in the Electronic Money Regulations 2011 and the Payment Services Regulations 2017;
• ensuring more consistent and accurate record-keeping practices; and
• enhancing reporting and monitoring requirements to identify shortfalls in relevant funds and improve supervisory oversight.

When does the supplementary regime come into force?

The supplementary regime will become effective in nine months' time on 7 May 2026.

The FCA will actively engage with industry throughout the implementation period to ensure a clear understanding of the new requirements, provide clarity where possible, and assess any initial impacts.

What changes are being introduced by the supplementary regime?

Improved books and records

Reconciliations

Frequency

Internal and external safeguarding reconciliations must be performed at least once each day, excluding weekends, public holidays and days when relevant foreign markets are not open. For many firms, this represents an increase in frequency, as existing guidance suggests that reconciliations should be done as often or as regularly as necessary. In circumstances where there is the risk of discrepancies, the current guidance is aligned with the frequency provided for in the supplementary regime, mandating that reconciliations occur no less than once during each business day.

Method

The supplementary regime enhances and codifies existing guidance on the method of reconciliation.  Internal reconciliation should be a comparison of relevant funds that should be held in accounts (segregation requirement) against the balance of those accounts (segregation resource). If the resource is lower than the requirement, the firm will need to remedy the shortfall using relevant funds, or, if that's not possible, using its own funds. Firms can use a non-standard method of internal reconciliation if it documents how its obligations to clients under the safeguarding rules are met and if an independent and qualified auditor reviews the proposed method and confirms in writing that the method meets the firm's obligations. Firms cannot deviate from requirements on frequency of reconciliation.

Resolution packs

Firms must prepare and maintain a resolution pack containing key documents and records that would help achieve a "timely return" of relevant funds to customers should the firm enter into an insolvency procedure. The documents and records required to be included in the resolution pack must be able to be retrieved by the firm or an insolvency officer within 48 hours. Firms must review the content of the resolution pack on an ongoing basis to ensure that it remains accurate (and must correct any inaccuracies promptly). The governing body must receive a report on the firm's compliance with the resolution pack requirements at least annually.

Recording of unallocated and unidentified funds

Relevant funds should be recorded in the firm's books and records as "unallocated relevant funds" pending allocation to an individual client. If the funds cannot be immediately identified as relevant funds they must be recorded in the firm's books and records as "unidentified relevant funds" pending identification of the funds as relevant funds or funds. The concept of "unidentified relevant funds" is new and firms may need to update their processes and systems to ensure that funds they cannot immediately identify as relevant funds are recorded as such.

Enhanced monitoring and reporting

Annual audits

• Firms must arrange annual audits of their safeguarding compliance, carried out by an independent, qualified auditor. The appointed auditor must possess the required skill, resources and experience to perform their functions effectively. Firms are not required to appoint the same auditor for their safeguarding audit and their statutory audit, although they may choose to do so.
• Firms are exempt from the audit requirement if they have not been required to safeguard more than £100,000 of relevant funds at any time during a 53-week period. Senior management of exempt firms must continuously assess whether the firm remains eligible for this exemption.
• Small payment institutions, payment initiation service providers and credit unions that issue e-money are also exempt from the audit requirement.
• The auditor must submit an annual audit report to the FCA in a prescribed format. The period covered by the audit report must not end more than 53 weeks after the period covered by the previous report or after the firm becomes subject to the rules. The audit period does not need to align with the firm's financial year end.
• The audit report must be submitted to the FCA four months following the end of the firm's audit period, except for the first audit report, which must be submitted six months following the end of the firm's audit period.
• The FCA is working with the Financial Reporting Council on the introduction of an auditing standard.

Safeguarding return

Firms must submit a new monthly regulatory return to the FCA relating to their safeguarding arrangements.  The return asks amongst other things for the name of the firm's safeguarding auditor, details of the safeguarding method used, the banks with which safeguarding accounts are held, the highest and lowest safeguarding amounts held over the relevant period, the safeguarding requirement and resource at the end of the relevant period, and also the number of clients for which safeguarded funds are held.  It also asks for confirmation that any notifiable breaches of the safeguarding requirements have been notified.

Safeguarding individual

A director or senior manager of a firm is required to oversee the firm's safeguarding compliance. This individual must also report on their oversight to the firm's governing body.

Strengthening elements of safeguarding

Due diligence

Firms must exercise due skill, care and diligence when selecting, appointing and periodically reviewing third parties that provide accounts where relevant funds or assets are either received or deposits, manage relevant assets or provide insurance on comparable guarantees.

Diversification

Firms must consider the need for diversification as part of the due diligence process in the selection, appointment and periodic review of third parties, as well as in the arrangements for holding or protecting relevant funds. The FCA has given guidance on points a firm should have regard to when periodically reviewing whether diversification (or further diversification) is appropriate. The appropriate frequency for reviewing the need for diversification will depend on the type of firm and the third party in question.

Secure liquid assets

Firms will be able to invest in the same range of secure, liquid assets as they can now. However, they will be subject to additional requirements when selecting assets. Firms must ensure that there is a suitable spread of investments, assets are selected in line with an appropriate liquidity strategy and credit risk policy, and any foreign exchange risks are prudently managed. 

Insurance and comparable guarantees

There must be no condition or restriction on the prompt paying out of the insurance or guarantee, except certification of an insurance event. Firms must have a contingency plan in place at least three months before the expiry of an insurance policy or comparable guarantee; otherwise they must be ready to safeguard relevant funds through the segregation method.  

How should firms prepare for the supplementary regime?

• Review PS25/12 and the new FCA rules and guidance to fully understand the changes to the existing safeguarding regime;
• familiarise themselves with the FCA's timeline for implementation, identify key milestones, and plan accordingly;
• identify any practical steps needed to meet the new rules and prepare for implementation; and
• keep up to date with FCA communications regarding implementation and compliance guidance, and identify key dependencies that may affect your preparation.

How will the FCA measure success?

The FCA has said that it will consider the supplementary regime to be successful if there is a decline in:

• the percentage of shortfalls of relevant funds held by failed payment firms which are driven by non-compliance with the safeguarding requirements; and
• supervisory cases relating to deficient safeguarding, with fewer formal interventions, such as restrictions being imposed based on safeguarding failures.

The FCA suspects that supervisory cases relating to deficient safeguarding may increase in the short term. This indicates that the FCA is expecting that firms or their auditors will be reporting deficiencies which perhaps previously they might not have done (for example, because of a more robust approach to what is "material") and that the FCA will be more closely scrutinising how effectively firms implement the supplementary regime, including the monthly returns.

Osborne Clarke comment

While the FCA has decided to delay some of the more contentious proposals in the post-repeal regime – such as the imposition of a statutory trust and the requirement for customer funds to settle directly into designated segregated accounts – firms should not underestimate the impact of the supplementary regime.

The postponement of the post-repeal regime provides a temporary respite for firms. However, it is crucial to recognise that the new rules under the supplementary regime still carry significant implications.

The final rules and guidance in PS25/12 do not represent a seismic change from the supplementary regime the FCA consulted on, but they may necessitate system changes for both firms and their safeguarding banks, posing potential implementation challenges. Moreover, as noted above, the FCA will clearly be increasing its supervisory activity with respect to safeguarding.

The FCA has indicated that the delayed implementation of the post-repeal regime is intended to allow for a thorough review of the implementation of the supplementary regime after a full audit period. This review will assess whether the supplementary regime is achieving its intended outcomes or if further changes are needed. Firms therefore need to ensure they get the implementation of the supplementary regime right to best avoid the possibility of more wholesale changes in the future.

We are committed to supporting firms in navigating the complexities of the FCA's new safeguarding regime. Our deep understanding of the payments and e-money industry, together with our expertise in regulatory compliance and safeguarding practices ensures that firms partnering with us receive tailored advice and practical solutions to be fully prepared and compliant with the enhanced safeguarding regime by May 2026.

Contact us today to learn more about how we can assist you.