The UK’s Financial Conduct Authority (FCA) has put forward a set of rules aimed at enhancing consumer protection when payment firms or electronic money (e-money) institutions collapse. With the growing reliance on payment services and digital financial platforms, the FCA seeks to address concerns over poor safeguarding practices that have put customers’ funds at risk.
In recent years, payment and e-money firms have gained significant traction, providing services that allow consumers to handle money digitally and make seamless transactions. However, unlike traditional bank deposits, funds held by these firms are not covered by the Financial Services Compensation Scheme (FSCS), meaning consumers do not have automatic protection if the company fails. Instead, these companies are required to implement safeguarding measures, a responsibility many have been neglecting.
Growing Concerns in the Sector
The FCA has repeatedly expressed dissatisfaction with how many payment firms handle customer funds. In 2022, the regulator issued warnings to nearly 300 companies in the sector, citing insufficient safeguarding and wind-down planning. Of these, approximately 15% are now under closer scrutiny as part of ongoing supervisory cases.
The lack of a robust safeguarding framework has caused concerns that, in the event of a firm’s insolvency, customers could experience significant delays in recovering their money or even suffer financial losses. The FCA’s proposed rules aim to prevent this from happening by improving how payment firms protect consumers’ funds.
What the New Rules Propose
The key change under the proposed regulations is a shift from the current safeguarding regime to a client assets (CASS) style system. Under this system, funds and assets would be held in trust for the benefit of consumers. This structure, widely used in the investment industry, provides an additional layer of security by ensuring that customer funds are separated from the firm’s own assets.
According to the FCA’s Matthew Long, Director of Payments and Digital Assets, the goal is to “make safeguarding rules stronger and clearer for payment and e-money firms so customers get as much of their money back as quickly as possible if the firm goes out of business.” The FCA believes that the CASS framework will reduce the risk of delays and ensure that customers receive their funds in a timely manner.
Next Steps
The FCA has launched a public consultation on these proposals, with firms and stakeholders invited to share their feedback by 17 December. The consultation marks a significant step toward solidifying consumer protections in the payment services industry, which has become increasingly critical to the everyday functioning of the UK economy.
The proposal is part of the FCA’s broader effort to promote a stable and well-functioning financial system, where innovative firms can thrive without compromising consumer trust. If implemented, these rules could significantly change how payment firms operate, raising the bar for safeguarding practices and making the system more resilient to failures.
Conclusion
As the digital payments industry continues to grow, it is crucial that customers’ funds are properly protected. The FCA’s proposed rules aim to do just that, offering stronger protection and reducing the risk of loss or delay when firms go bust. With the consultation underway, payment firms now have the opportunity to influence the final outcome, but the message from the FCA is clear: the status quo is not enough, and reforms are needed to safeguard customers in this fast-evolving sector.