The UK’s
Financial Conduct Authority (FCA) has unveiled plans to strengthen safeguarding
regulations for payments and e-money firms, aiming to better protect customers
in the event of business failures.

FCA Proposes Stricter
Safeguarding Rules for Payments Firms

The proposed
rules come amid growing concerns over “poor safeguarding practices” in the
rapidly expanding payments sector. According to the FCA’s Financial Lives
Survey, the use of current accounts with e-money institutions has increased
five-fold between 2017 and 2022.

“We’re
consulting on proposals to make safeguarding rules stronger and clearer for
payment and e-money firms,” commented Matthew
Long, Director of Payments and Digital Assets at FCA, “so customers get as much
of their money back as quickly as possible if the firm goes out of business.”

The
regulator plans to replace the existing e-money safeguarding regime with a
client assets (CASS) style framework, tailored to the business models of
payments firms. This move follows the FCA’s
March 2023 letter to payments and e-money CEOs, which highlighted concerns
about safeguarding and wind-down arrangements.

Since
issuing that letter, the FCA has opened supervisory cases for approximately 15%
of firms that safeguard customer funds, underscoring the urgency of the
proposed reforms.

Unlike
traditional bank accounts, funds held by payments and e-money firms are not
directly protected by the Financial Services Compensation Scheme (FSCS).
Instead, these firms are required to safeguard funds, a system that has proven
inadequate in some cases, leading to customer losses or delays in fund recovery
when firms fail.

The FCA’s
consultation, open until December 17, 2024, outlines both interim and long-term
changes to the safeguarding regime. The interim rules aim to improve compliance
with existing requirements, while the end-state proposals envision a
trust-based system for holding relevant funds and assets.

FCA’s Latest Regulatory
Actions in The UK

In addition to the latest proposals for changes in payment market regulations, the FCA, together with the UK government, is also working to reform capital markets. This
initiative includes a significant change from the existing EU-based consumer
cost disclosure regulations, aiming to establish a new system better suited for
the UK market.

The
proposed shift involves replacing the Packaged Retail and Insurance-based
Investment Products (PRIIPs) Regulation with a new framework known as Consumer
Composite Investments (CCIs).

The CCI
framework is designed to provide clearer insights into the costs and benefits
of investment products. The government and the FCA are actively seeking input from the investment trust industry concerning the current cost disclosure regulations, which could significantly impact these entities.

Additionally,
the FCA reported on its regulatory enforcement actions taken between April and
June 2024, highlighting its efforts against firms that violated financial
promotion rules and engaged in unregulated activities. During this period, the
FCA corrected or withdrew 3,273 promotions by authorized firms and issued 528
alerts about unauthorized entities, with 11% of these alerts concerning clone
scams that mimic legitimate businesses to deceive investors.