Key takeaways
- A shortfall means the firm holds less in safeguarding than it owes customers. An excess means it holds more.
- Under CASS 15, a shortfall must be funded from the firm's own money and an excess withdrawn by close of business on the day the reconciliation is performed.
- Most shortfalls come from operational causes: settlements not swept, bank charges taken from safeguarding accounts, and refunds or chargebacks recorded late.
- An excess is not harmless. Leaving the firm's own money in safeguarding mixes it with customer funds and breaks the segregation the rules require.
- If a firm cannot correct a shortfall or excess, it must notify the FCA without delay.
What a shortfall and an excess are
Every reconciliation day, a UK payment or e-money firm compares its safeguarding requirement, the money it owes customers, with its safeguarding resource, the money it holds for them. Our guide to CASS 15 reconciliation explains how each figure is built.
If the resource is lower than the requirement, the firm has a shortfall: some customer money is not protected. If the resource is higher, the firm has an excess: some of the firm's own money is sitting in an account that should hold only customer funds. Both are breaks that must be explained and corrected.
The correction deadline
CASS 15 requires the firm to determine the reason for the difference and to fund any shortfall or withdraw any excess as soon as possible, and no later than close of business on the day the reconciliation is performed. A shortfall is funded from the firm's own money, not from another customer pool. A firm that runs both e-money and unrelated payment services cannot use a surplus in one pool to cover a shortfall in the other.
The deadline is the same day, not the next day. In practice this means the reconciliation point must be early enough that treasury can move funds before banks close. A 17:00 reconciliation point with a 17:30 payment cut-off leaves very little room. Where funds are held in a different currency from the one owed, exchange rate moves create shortfalls of their own; see safeguarding in more than one currency.
The most common causes
Most shortfalls and excesses are operational, not deliberate. The table below shows the causes seen most often and how each is corrected.
| Cause | Result | Correction |
|---|---|---|
| Card or processor settlement received into an operating account and not swept | Shortfall | Move the amount into safeguarding; fix the sweep |
| Bank charges debited from a safeguarding account | Shortfall | Top up from own funds; ask the bank to debit charges elsewhere |
| Fees earned by the firm left in safeguarding | Excess | Withdraw the fees to the firm's own account |
| Refund or chargeback paid out but not yet recorded in the ledger | Apparent excess | Record the item; confirm the position on the next reconciliation |
| Foreign currency balances valued at the wrong rate or time | Shortfall or excess | Revalue at the reconciliation point; fix the rate source |
| Customer balance created in the ledger before funds were received | Apparent shortfall | Confirm the receipt date; correct the ledger entry |
Worked example: an excess that needs withdrawing
A payment institution's internal reconciliation on a Thursday shows a requirement of £12,640,300.00 and a resource of £12,652,780.00, an excess of £12,480.00. The investigation traces it to transaction fees the firm earned that week, which were deducted from customer payments but never moved out of the safeguarding account.
The fees belong to the firm. The firm withdraws £12,480.00 to its operating account before close of business, records the cause, the approver and the transfer reference, and changes the daily process so earned fees are swept out each day. The following day's reconciliation shows no difference.
The same logic runs in reverse for a shortfall. If the bank had debited £12,480.00 of charges from the safeguarding account, the firm would pay £12,480.00 in from its own funds the same day and ask the bank to take future charges from another account.
When the FCA must be notified
The firm must notify the FCA without delay if it is unable to fund a shortfall or withdraw an excess, unable to perform an internal or external reconciliation, or unable to resolve a discrepancy found in the external reconciliation. A firm that corrects a difference on time and records why it happened does not need to notify for that reason alone, but the monthly safeguarding return reports reconciliation outcomes, so the pattern remains visible to the FCA. See our guide to the REP027 safeguarding return.
What good practice looks like
Good practice is a record for every difference that shows the amount, the pool, the cause, the person responsible, the approval and the time the correction reached the bank. Recurring causes should be fixed at source, not corrected by hand every day. An auditor reviewing a year of reconciliations will look for the same cause appearing week after week, because it shows the control is not working.
Safeheld calculates the requirement and resource for each pool on every reconciliation day, flags any shortfall or excess the moment it appears, and records the investigation, approval and correction against it. See safeguarding breach detection and Safeheld reconciliation.
Frequently asked questions
What is a safeguarding shortfall?
A safeguarding shortfall is when the money a firm holds in safeguarding is less than the money it owes customers at the reconciliation point.
Is a safeguarding excess a breach?
An excess must be withdrawn by the same deadline as a shortfall is funded, because it means the firm's own money is mixed with customer funds.
How fast must a shortfall be corrected under CASS 15?
As soon as possible and no later than close of business on the day the reconciliation is performed.
Can a surplus in the e-money pool cover a payment services shortfall?
No. The two pools are calculated and corrected separately.
When must the FCA be notified?
Without delay if the firm cannot fund a shortfall or withdraw an excess, cannot perform a reconciliation, or cannot resolve an external discrepancy.
References
- FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms
- FCA, Policy Statement PS25/12 (full text)
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
- FCA Handbook, SUP 16.14A Safeguarding return
- 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.