Key takeaways
- UK payment and e-money firms can protect customer funds either by segregating them in safeguarding accounts or by covering them with an insurance policy or a comparable guarantee.
- The insurer or guarantor must not be part of the firm's own group, and proceeds must be payable into a designated account if the firm becomes insolvent.
- Cover must be at least equal to the relevant funds it protects, so the firm must track the covered amount daily against its balances.
- Insurance and guarantees are not subject to the external safeguarding reconciliation, but the internal reconciliation must still include the cover in force.
The two methods of safeguarding
The Electronic Money Regulations 2011 and the Payment Services Regulations 2017 allow two ways to safeguard customer funds. The segregation method keeps funds separate from the firm's own money, in designated safeguarding accounts or in approved secure liquid assets. The insurance or guarantee method lets the firm keep the funds in its own accounts, but covers them with an insurance policy or a comparable guarantee that pays out if the firm becomes insolvent.
Firms choose the insurance or guarantee method mainly for liquidity. It allows customer funds to sit in operating accounts, which can simplify payment flows. In exchange, the firm pays a premium or fee and takes on the work of keeping cover aligned with balances.
The conditions
The policy or guarantee must come from an authorised insurer or a credit institution that is not part of the same group as the firm. It must cover the relevant funds it protects, and its proceeds must be payable, on an insolvency event, into a separate account held by the firm that is designated for that purpose. The FCA also expects the terms to be clear that the cover will respond when needed, without conditions that could delay or prevent payment.
Under CASS 15, the cover must be included in the daily internal safeguarding reconciliation as part of the firm's safeguarding resource. Because there is no third-party balance statement for an insurance policy, insurance and guarantees are not subject to the external reconciliation. Our guide to CASS 15 reconciliation explains both checks.
Worked example: cover that falls behind growth
An e-money institution covers its relevant funds with a guarantee of £25.0 million. When the guarantee was arranged, relevant funds averaged £20.0 million. Over the following months the firm grows quickly. On a Friday before a bank holiday weekend, relevant funds reach £26.4 million.
On that reconciliation day, £1.4 million of customer funds is not covered. The firm must close the gap the same day, by moving £1.4 million into a segregated safeguarding account or by increasing the guarantee before close of business. A firm using this method should monitor the gap between cover and balances every day and arrange extra headroom ahead of known peaks.
| Line | Amount (GBP millions) |
|---|---|
| Relevant funds at the reconciliation point | 26.4 |
| Guarantee in force | 25.0 |
| Uncovered relevant funds | 1.4 |
| Action | Segregate £1.4m the same day or increase cover |
Choosing between the methods
The segregation method costs less in fees but ties customer money into designated accounts and requires daily external reconciliation with each bank. The insurance or guarantee method gives more flexibility but carries premium costs, renewal risk and the daily work of matching cover to balances. Many firms combine the two: segregation for core balances and cover for peaks or specific flows. Whichever method is used, the policy must say which funds are protected by which method. See our safeguarding policy template.
Safeheld includes cover in force in the daily safeguarding calculation and flags any day where relevant funds exceed it. See PS25/12 safeguarding and Safeheld reconciliation.
Frequently asked questions
Can UK payment firms safeguard with insurance?
Yes. The regulations allow an insurance policy or comparable guarantee, from an insurer or credit institution outside the firm's group, as an alternative to segregation.
Does insured cover need to be reconciled?
The cover must be included in the daily internal reconciliation. Insurance and guarantees are not subject to the external reconciliation.
What happens if relevant funds exceed the cover?
The uncovered amount must be protected the same day, by segregating it or by increasing cover.
Can a firm use both methods?
Yes, provided the policy states clearly which funds are protected by which method.
References
- FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
- The Electronic Money Regulations 2011
- The Payment Services Regulations 2017
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.