Key takeaways
- Small payment institutions (SPIs) in the UK are not required to safeguard customer funds, but may choose to.
- An SPI that opts in must then comply with CASS 15 in full, including daily reconciliation and monthly reporting.
- Opting in gives customers protection on insolvency and can make it easier to win bank accounts and business partners.
- The decision should be made deliberately and documented, because it is difficult to reverse in practice once customers rely on it.
What a small payment institution is
A small payment institution is a UK firm registered, rather than authorised, by the FCA to provide payment services, with average monthly payment transactions below a set threshold. Registration has lighter requirements than full authorisation, including no initial capital requirement and no obligation to safeguard customer funds. Firms that outgrow the threshold must become authorised payment institutions, which do have to safeguard.
Opting in to safeguarding
An SPI may choose to safeguard funds voluntarily. Once it does, it is a safeguarding firm for the purposes of CASS 15 and the rest of the regime introduced by PS25/12. That means daily internal and external reconciliations, same-day correction of shortfalls, the monthly safeguarding return, a resolution pack, and an annual safeguarding audit if it safeguards more than £100,000 at any point in the previous 53 weeks.
Opting in is therefore not a light step. It brings the full operational burden of safeguarding, and the FCA will expect it to be met from the first day.
An SPI that opts in should also expect its banks to treat it as a safeguarding firm. It will need designated accounts, acknowledgement letters and a reconciliation process from the start, and the bank may ask for evidence of each before opening accounts.
| Requirement | SPI not opted in | SPI opted in |
|---|---|---|
| Segregate or insure customer funds | No | Yes |
| Daily CASS 15 reconciliations | No | Yes |
| Monthly safeguarding return | No | Yes |
| Resolution pack | No | Yes |
| Annual safeguarding audit above £100,000 | No | Yes |
Why an SPI might opt in
The main reason is customer protection. If an SPI that has not opted in fails, its customers are unsecured creditors and may recover little. Opting in gives them the same protection as customers of an authorised firm. The second reason is commercial. Banks, card schemes and enterprise customers increasingly ask payment partners whether customer funds are safeguarded, and a firm that can answer yes, with evidence, finds those conversations easier. The third is preparation: an SPI expecting to become authorised can build its safeguarding operation early, when volumes are small.
How to decide
The decision turns on three questions. Does the firm hold customer funds for long enough that their loss would cause real harm? Do its partners or customers expect safeguarding? Can it run daily reconciliation and monthly reporting reliably with its current team and systems? If the first two answers are yes and the third is not yet, the firm should build the capability before opting in rather than opt in and fail the requirements.
Whatever it decides, the firm should record the decision, the reasons and the date in its governance records. Safeheld gives smaller firms the same daily reconciliation and reporting capability as larger ones, which removes the main operational reason not to opt in. See CASS 15 reconciliation and payment institution safeguarding.
Frequently asked questions
Do small payment institutions have to safeguard?
No, but they may opt in voluntarily.
What happens if an SPI opts in to safeguarding?
It must comply with CASS 15 in full, including daily reconciliation, monthly reporting and, above £100,000, an annual audit.
Why would an SPI opt in?
To protect customers on insolvency, to meet the expectations of banks and partners, and to prepare for authorisation.
Should the decision be documented?
Yes, with the reasons and the date, in the firm's governance records.
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
- 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.