New UK payments safeguarding rules take effect with further FCA review to come

Changes to the safeguarding regime for payments and e-money firms that have come into force (7 May) complete a nine-month implementation period following a policy statement last summer setting out details of the rule changes (PS25/12). The updated rules, known as the supplementary regime, are intended to strengthen existing safeguarding requirements and address weaknesses in the current approach, helping to protect customers' funds.

Changes to the Financial Conduct Authority (FCA) Handbook reflect the supplementary regime taking effect. The majority of the new rules and guidance are found in chapters 10A and 15 of the Client Assets, or CASS, sourcebook, which contains the detailed requirements of the safeguarding regime that apply to regulated payments and electronic money institutions. Changes to the Supervision sourcebook, or SUP, reflect new obligations on auditors. Alongside these new rules and guidance provisions, the FCA's payments approach document has also been updated to reflect the enhanced safeguarding regime.

More fundamental reforms, labelled the "post-repeal regime" as they would follow the government potentially repealing existing payments and e-money legislation, have been deferred until at least next year. The industry has expressed concerns about these proposals, in particular imposing a statutory trust and receiving relevant funds directly into a designated safeguarding bank account.

FCA's verdict?

Once the supplementary regime has bedded in and a full audit period has been completed, the regulator will review its implementation and assess its effectiveness.

Two measures will inform the FCA's assessment. Is there a decline over time in the percentage of shortfalls of relevant funds held by failed payments firms, which are driven by non-compliance with safeguarding requirements? And is there an overall decline in supervisory cases relating to deficient safeguarding, with fewer formal interventions being required?

The FCA expects that cases may increase in the short term, as firms and auditors become more apt to report deficiencies and the regulator applies closer scrutiny.

Depending on the outcome of this assessment, the FCA will consult on further proposals if changes are deemed necessary. 

Further reform?

The regulator has signalled that it will not progress the post-repeal regime, with its more substantial reforms, without further consideration and consultation. Exactly what the post-repeal regime could look like and when it would take effect will in any case depend on the government's approach to revoking and replacing existing payments and e-money legislation.

Osborne Clarke comment

Since the publication of the FCA's policy statement last summer, when we assessed the  changes being introduced as part of the supplementary regime, the industry has worked hard to ensure compliance by the 7 May deadline. Firms will now be keen to resolve early implementation issues, bearing in mind the regulator's increased supervisory focus on safeguarding, as well as its planned review of the supplementary regime's effectiveness.

Whether the FCA concludes that the supplementary regime has successfully enhanced the safeguarding framework will directly influence the possibility of more significant change ahead.

With the implementation period behind them and the FCA's formal audit requirement on the horizon, firms will be turning their attention to audit readiness and ensuring that their policies, records and controls can withstand scrutiny. Our team is well placed to support firms at each stage, whether that involves reviewing current implementation or helping to prepare for the audit process. Please contact our experts for further information.