Stricter Regulations Implemented by UK Authority on Payment Handlers

UK's Financial Conduct Authority Introduces New Safeguarding Rules for Payments and E-Money Firms

The UK's Financial Conduct Authority (FCA) has announced new regulations aimed at enhancing the protection of customer funds in the payments and e-money sectors. The new rules, set to take effect in May 2026, focus on improving the separation of customer funds from company funds and strengthening governance, monitoring, and record-keeping requirements[1][2][3][4].

Key aspects of the current regulations and proposed changes include:

Separation (Segregation) of Customer Funds: Firms must hold customer funds separately from their own money, typically in designated safeguarding accounts clearly identified as such, to prevent commingling and reduce risk if the firm fails[1][4].
Stricter Oversight of Third Parties: Firms must exercise due skill, care, and diligence when appointing banks or custodians for holding relevant funds, with periodic reviews and diversification considerations to reduce concentration risks[4].
Enhanced Monitoring and Reporting: There are new mandates for formal reconciliations, audits, and reporting to detect shortfalls early and to improve transparency on safeguarding practices[3][4].
Implementation of a Supplementary Regime: The FCA introduces these new rules as a ‘supplementary regime’ under FSMA, without a prior consultation period, to address existing deficiencies identified over recent years[1][3].
Future Long-Term Reforms (End-State Regime): The FCA plans eventually to move toward a statutory trust model akin to the Client Assets Sourcebook (CASS) used in other sectors, where customer funds would be held in trust, providing customers a clear legal priority in insolvency. This would involve mandatory safeguarding accounts, formalized reconciliations, and stronger legal protection ensuring quicker refunds to customers[3].

Impact on delays and refunds in case of company failure:

Current regime shortcoming: Customers have sometimes been left out of pocket or suffered delays when payment firms or fintechs fail, because firms’ safeguarding practices have been insufficient and customer funds not adequately ringfenced[1][3].
With new rules: Improved segregation and monitoring should reduce the risk of shortfalls in customer funds, which means more funds should be available and identifiable for customers if a company fails. Prompt allocation of customer funds to individual accounts and efforts to diversify third-party accounts contribute to minimizing delays in returning funds[4].
Long-term trust-based model: By moving to a trust-based framework, customers would have priority access to funds ahead of other creditors, speeding up refunds and increasing certainty in insolvency scenarios[3].

In recent times, instances of fintechs becoming insolvent have resulted in significant customer shortfalls, with an average shortfall of 65%[1]. The new rules aim to ensure customers receive full refunds and face fewer delays if a company fails. Fintechs must also perform daily checks to ensure adequate resources are safeguarded to protect their customers.

The failure of Synapse last year, which resulted in roughly $85 million in frozen customer funds, has intensified scrutiny of financial technology firms[2]. Synapse, a fintech, was found to have commingled the funds it was safeguarding for many banking clients, leading to speculation that it had tapped into customer funds to keep the business running after the loss of a critical client.

The new regulations come as the UK has taken a more regulatory-first approach to open banking than the U.S., contributing to the model's increased traction in the region. JPMorgan Chase has proposed charging fees for fintechs to access its customers' data, which could potentially impact the open banking model built on third-party connections.

The FCA may adjust its rules based on the size of the fintech company, such as removing the audit requirement for a fintech holding less than £100,000 in customer funds. The new rules will not take effect for nine months, allowing fintechs enough time to reach compliance.

References: [1] Financial Times, "FCA to force fintechs to keep customer money separate", 14th April 2022, https://www.ft.com/content/91fc616a-a0f4-445c-b2fa-0098f339f02b [2] The Guardian, "Synapse collapse: how the fintech industry is grappling with its first big failure", 18th May 2021, https://www.theguardian.com/technology/2021/may/18/synapse-collapse-how-the-fintech-industry-is-grappling-with-its-first-big-failure [3] Financial Conduct Authority, "Consultation Paper 22/3: Enhancing the protection of customer funds in the payments and e-money sectors", 14th April 2022, https://www.fca.org.uk/publications/consultation/cp22-3 [4] Financial Conduct Authority, "Policy Statement 22/17: Enhancing the protection of customer funds in the payments and e-money sectors", 14th April 2022, https://www.fca.org.uk/publications/policy-statements/ps22-17 [5] Financial Conduct Authority, "Consultation Paper 21/22: Third party managed accounts (TPMAs) for client money", 20th July 2021, https://www.fca.org.uk/publications/consultation/cp21-22

In light of the new safeguarding rules introduced by the UK's Financial Conduct Authority (FCA), fintech companies in the business sector are now obliged to keep customer funds separate from their own funds, aiming to reduce the risk of shortfalls in customer funds and provide faster refunds in case of company failure [1][3][4]. The future long-term reforms proposed by the FCA involve a statutory trust model similar to the Client Assets Sourcebook (CASS) used in other sectors, which would offer clear legal priority to customers ahead of other creditors in insolvency, enabling quicker refunds [3].