Key takeaways
- E-money and payment accounts are not covered by the Financial Services Compensation Scheme; customers are protected by safeguarding instead.
- On insolvency, customer claims are paid from the asset pool of safeguarded funds in priority to all other creditors (EMRs regulation 24; PSRs regulation 23(14)).
- The costs of distributing the asset pool are deducted first, and any shortfall in the pool is shared between customers in proportion to their claims.
- The Payment and Electronic Money Institution Insolvency Regulations 2021 created a special administration regime whose first objective is to return relevant funds as soon as reasonably practicable.
- The FCA found an average shortfall of 65% in firms that failed between 2018 and mid-2023; CASS 15 and the resolution pack are designed to make shortfalls smaller and returns faster.
What are the key facts on payment and e-money firm failures?
Customers rank first against the pool of safeguarded money, but they can receive less than their full balance and may wait for it.
| Item | Position |
|---|---|
| Rules | EMRs regulation 24; PSRs regulation 23(14) to (16); Payment and Electronic Money Institution Insolvency Regulations 2021 |
| Regulator | Financial Conduct Authority, with the courts and insolvency practitioners |
| Applies to | UK payment institutions and e-money institutions |
| Customer protection | Priority claim on the asset pool; no FSCS cover for e-money or payment funds |
| Special administration | In force since 8 July 2021 |
| Last checked | 11 October 2026, against the FCA Handbook and PS25/12 |
Is customer money in a payment or e-money firm protected by the FSCS?
No: e-money and funds held by payment institutions are not deposits, so FSCS deposit protection does not apply, and customers rely on safeguarding.
That is why the FCA treats safeguarding as the central protection for customers of these firms. When it works, the money owed to customers is held apart from the firm's own money, in safeguarding accounts or approved assets, and can be returned if the firm fails. When it does not, customers share whatever is in the pool.
What is the asset pool?
The asset pool is the money and assets held for customers under the safeguarding rules, which is ring-fenced for customer claims on insolvency.
For e-money institutions, EMRs regulation 24(4) defines it to include relevant funds segregated under regulation 21(1), funds held in safeguarding accounts and relevant assets under regulation 21(2), funds received into a Bank of England settlement account in the circumstances in regulation 21(4A), and the proceeds of any safeguarding insurance policy or guarantee. PSRs regulation 23(18) gives the equivalent definition for payment institutions.
On an insolvency event, other than special administration, the claims of e-money holders or payment service users are paid from the asset pool in priority to all other creditors, and no right of set-off or security right may be exercised over the pool until they are paid, except for fees and expenses for operating the safeguarding accounts (EMRs regulation 24(1); PSRs regulation 23(14)). Those claims are not subject to the priority of insolvency expenses, except the costs of distributing the asset pool (EMRs regulation 24(2); PSRs regulation 23(15)). The same priority applies to funds a small payment institution safeguards voluntarily (PSRs regulation 23(16)).
The courts have considered how far the pool extends when a firm has not safeguarded properly. In Re Ipagoo LLP [2022] EWCA Civ 302, the Court of Appeal held that the Electronic Money Regulations do not create a statutory trust over customer funds, but that the asset pool includes amounts that should have been safeguarded, so customers' priority is not lost simply because the firm failed to segregate.
What is the special administration regime?
It is an insolvency procedure designed for payment and e-money firms, with a statutory objective to return customer funds as soon as reasonably practicable.
The Payment and Electronic Money Institution Insolvency Regulations 2021 came into force on 8 July 2021. Regulation 12 gives the special administrator three objectives, which rank equally: to ensure the return of relevant funds as soon as reasonably practicable; to ensure timely engagement with payment system operators, the Payment Systems Regulator and the authorities; and to rescue the firm as a going concern or wind it up in the best interests of creditors.
| Feature | What it does | Regulation |
|---|---|---|
| Who can apply | The firm, its directors, creditors, the FCA and others, on grounds including inability to pay debts | Regulations 8 and 9 |
| Objectives | Return relevant funds, engage with payment systems and authorities, rescue or wind up | Regulation 12 |
| Bar date | A deadline for customer claims, so distributions can start; late claims are dealt with in later distributions where practicable | Regulation 20 |
| Hard bar date | A final deadline, which needs court approval | Regulations 21 and 22 |
| Distribution | Customer claims rank ahead of others from the asset pool, after distribution costs; any shortfall is shared pro rata | Regulations 18 and 19 |
| Transfer | Customers and their funds can be transferred to another firm | Regulations 24 onwards |
| Continuity of supply | Key suppliers cannot stop supply because of the administration | Regulation 36 |
How much does a customer get back?
A customer receives a share of the asset pool after distribution costs, in proportion to their claim.
Worked example. An e-money institution enters special administration owing customers £50,000,000. The asset pool, after the administrator reconciles the safeguarding accounts and recovers amounts that should have been safeguarded, is £40,000,000. The costs of distributing the pool are £2,000,000.
| Line | Amount (GBP) |
|---|---|
| Customer claims | 50,000,000 |
| Asset pool | 40,000,000 |
| Less: costs of distributing the asset pool | (2,000,000) |
| Available for customers | 38,000,000 |
| Return rate | 76p in the pound |
| A customer owed £10,000 receives from the pool | 7,600 |
The customer can claim the remaining £2,400 as an unsecured creditor in the wider insolvency, where recovery is usually much lower. If the firm had kept its safeguarding complete, the pool would have been £50,000,000 and the customer's loss would have been limited to a share of the distribution costs. That gap, between what was owed and what was safeguarded, is what CASS 15 is designed to close.
What does the administrator do first?
The administrator secures the safeguarding accounts, establishes what each customer is owed and reconciles that against the asset pool.
In practice the first weeks follow a familiar pattern. The administrator takes control of the safeguarding accounts and any relevant assets, retrieves the resolution pack, and runs the reconciliations that CASS 15 requires after an insolvency event, by reference to the time of the event (CASS 15.8.23R and 15.8.44R). It then compares customer balances with the pool, identifies any shortfall and looks for money that should have been safeguarded but was not, which the courts have held forms part of the pool. Where a transfer of customers to another provider is possible, the administrator may pursue it under the 2021 Regulations; otherwise it sets a bar date and starts distributions. Each step moves faster when the firm's records are complete and current on the day of failure.
How long does it take customers to get their money?
Historically it has taken years, which the 2021 regime and CASS 15 are designed to shorten.
PS25/12 reports that firms entering insolvency between 2018 and mid-2023 had an average shortfall of 65% in the funds owed to customers (PS25/12, paragraph 2.3). The FCA's cost benefit analysis modelled the average time to return funds falling from 2.3 years to 1.3 years under the new rules, a figure some respondents questioned and the FCA explained by reference to experience with investment firms under CASS. The time depends mostly on the state of the firm's records: an administrator who can rely on current reconciliations and a complete resolution pack can set a bar date and distribute far sooner than one who has to rebuild customer balances.
How do the CASS 15 rules make a failure easier to resolve?
They make the records an administrator needs exist before the failure, not after it.
- Daily internal and external reconciliations mean the last confirmed position is at most one reconciliation day old.
- After an insolvency event, a reconciliation must be performed as soon as reasonably practicable by reference to the time of the event (CASS 15.8.23R and 15.8.44R).
- The safeguarding resolution pack must be retrievable within 48 hours of the administrator's appointment (CASS 10A.1.7R).
- Acknowledgement letters confirm that banks and custodians have no right of set-off over safeguarding accounts, except as the regulations allow.
- Insurance and guarantee policies must pay out on an insolvency event without onerous conditions (CASS 15.5.4R).
See the safeguarding resolution pack and the insurance and guarantee method.
Would a statutory trust change the outcome?
It would put the legal basis of customer protection beyond doubt, but it is not part of the current rules.
CP24/20 proposed a later Post-Repeal Regime under which relevant funds would be held on statutory trust. The FCA has not implemented it, and any change depends on HM Treasury amending the underlying legislation. Under the current rules, customer protection rests on the priority over the asset pool described above. See safeguarding and the statutory trust.
What should firms and their business customers check?
These checks show whether customer money would be returned quickly if the firm failed.
- Is every account that holds customer money a designated safeguarding account, covered by an acknowledgement letter?
- Do daily reconciliations show the safeguarding resource meeting the requirement, with differences corrected the same day?
- Is the resolution pack complete, current and tested by a timed retrieval drill?
- Are insurance or guarantee policies, if used, in force with renewal decisions made in time?
- Has the firm received a clean safeguarding audit opinion, or is it exempt and able to explain why?
- Is there a documented plan for the reconciliation that must follow an insolvency event?
Business customers choosing an e-money or payment provider can reasonably ask for evidence on these points as part of their due diligence, such as a summary of the latest safeguarding audit opinion, confirmation of where funds are held and how often they are reconciled, and a description of how customers would be repaid if the provider failed.
How does Safeheld help?
Safeheld keeps the daily records an administrator would need: reconciliations for each entity and currency, every break and its resolution, and a resolution pack produced on request.
See audit and regulatory evidence and our CASS 15 and PS25/12 guide.
Frequently asked questions
Is e-money protected by the FSCS?
No. E-money and funds held by payment institutions are not FSCS-protected deposits. Customers are protected by the firm's safeguarding of their funds.
What happens to customer funds if an EMI fails?
Customers' claims are paid from the asset pool of safeguarded funds in priority to all other creditors, after the costs of distributing the pool.
What is the asset pool?
The relevant funds and relevant assets held under the safeguarding rules, funds in certain Bank of England settlement accounts and the proceeds of any safeguarding insurance or guarantee.
What if the asset pool is short?
The shortfall is shared between customers in proportion to their claims, and the unpaid balance can be claimed as an unsecured creditor.
What is the special administration regime?
An insolvency procedure for payment and e-money firms under the 2021 Regulations, with an objective to return relevant funds as soon as reasonably practicable.
How long does it take to get money back?
It varies. The FCA modelled the average falling from 2.3 years to 1.3 years under the new rules, depending heavily on the quality of the firm's records.
Does a statutory trust protect customer funds?
Not under the current rules. A statutory trust was proposed for a later regime that has not been implemented.
References
- The Electronic Money Regulations 2011, regulation 24
- The Payment Services Regulations 2017, regulation 23
- The Payment and Electronic Money Institution Insolvency Regulations 2021
- FCA Handbook, CASS 10A Payment services and electronic money: resolution pack
- FCA Handbook, CASS 15.5 The insurance or guarantee method
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
- FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms (PDF)
About Safeheld
Safeheld is reconciliation and regulatory financial control software for regulated firms that hold client money. It keeps daily reconciliations, break records and the safeguarding resolution pack current, so a firm can show at any time how its customers' money would be returned. To discuss your safeguarding operations, contact us at safeheld.com/contact.
This article is general information on the UK safeguarding rules and is not legal or regulatory advice.