The FCA is taking action to strengthen customer protection when payment and e-money firms go out of business.

With the growing use of payment and e-money firms, the Financial Conduct Authority (FCA) has raised concerns over inadequate safeguarding practices within the industry.

Unlike traditional banks, funds held by payment and e-money firms aren’t covered by the Financial Services Compensation Scheme (FSCS). Instead, these firms are required to safeguard customer funds. However, if a firm fails, this can result in customers losing money or experiencing delays in having their funds returned.

In March 2023, the FCA issued a letter to CEOs of payment and e-money firms, addressing issues related to safeguarding and wind-down plans. Since then, the FCA has opened supervisory cases for about 15% of firms with safeguarding obligations, reflecting serious concerns over their compliance.

Matthew Long, Director of Payments and Digital Assets at the FCA, commented:

“We are consulting on proposals to enhance and clarify safeguarding rules for payment and e-money firms. Our goal is to ensure that customers can recover as much of their funds as quickly as possible if a firm goes out of business.”

Under the FCA’s proposals, the current e-money safeguarding framework will be replaced with a regime similar to the client assets (CASS) model, tailored to fit the business models of payment firms. By mid-next year, the FCA will also introduce strengthened interim safeguarding rules.

Additionally, the FCA’s cost-benefit analysis (CBA) for these proposals has been reviewed by the newly established independent CBA Panel.

Firms have until December 17, 2024, to respond to the FCA’s consultation.