UK Authority Strengthens Regulations for Payment Service Providers

UK Authority Strengthens Regulations for Payment Service Providers

The UK's Financial Conduct Authority (FCA) has announced new safeguarding rules for payments firms, effective from 7 May 2026, to better protect customer funds by ensuring these funds are kept strictly separate from the firms' own money and are readily available to customers if the firm fails [1][4][5].

Key features of the FCA's current safeguarding rules include:

• Daily safeguarding reconciliations: Payments firms must perform daily checks (except on weekends, public holidays, and days when relevant foreign markets are closed) to confirm that the amount of safeguarded customer funds matches the firm’s records [3][5].
• Strict segregation of funds: Customer money must be held in designated safeguarding accounts, separated clearly from company funds, to prevent misuse or loss [1][4].
• Monthly regulatory reporting: Firms are required to submit monthly reports to the FCA detailing their safeguarding arrangements and balances held [3][5].
• Annual audits: Authorised payment firms must arrange for qualified auditors to conduct annual safeguarding compliance audits. Small firms holding less than £100,000 in customer funds are exempted from audit requirements to ensure proportionality [3][5].
• Enhanced record keeping and resolution planning: Firms must maintain a "resolution pack," including documents needed to return customer funds promptly if insolvency occurs [3].
• Due diligence on third parties: Firms must carry out due diligence when engaging or reviewing third parties that hold or manage customer funds, ensuring safeguarding insurance or guarantees are reliable and that contingency plans are in place if such insurance lapses [3].
• Contingency safeguarding: If safeguarding insurance or guarantees expire and are not replaced, firms must be ready to safeguard customer funds via segregation, providing an additional layer of protection [3].

These measures respond to FCA findings that insolvent payment firms had average shortfalls of 65% of customer funds, aiming to improve customer protection and reduce losses in failures [5].

The FCA has introduced these rules as a "supplementary regime" with a phased approach: interim rules starting May 2026 are designed to strengthen existing standards, while longer-term "end-state" rules involving statutory trust protections will be considered after further consultation and legislative changes [1][3].

In addition, fintechs must create plans to prevent delays in reimbursement, as the new rules will ensure customers are more likely to receive a full refund and face fewer delays if a company fails [2].

The new FCA rules follow the collapse of fintech firm Synapse last year, which led to increased scrutiny of financial technology firms. Synapse's records offered no clear way to separate individual accounts after the company went under, resulting in approximately $85 million in frozen customer funds [6]. There was speculation that Synapse had tapped into customer funds to keep the business running after the loss of a critical client [7]. This would be a shift from the previous paradigm where fintechs had free access to consumer banking data [8]. JPMorgan Chase has proposed charging fees for fintechs to access customer data [9].

In contrast, the UK has taken a more regulatory-first approach to open banking compared to the U.S. [10]. The open banking model, which is built on third-party connections, could be impacted by charging fintechs fees [11]. However, the new FCA rules won't take effect for nine months, allowing fintechs enough time to reach compliance.

References:

[1] Financial Conduct Authority (FCA), "Safeguarding customer funds: consultation paper", 2023. [2] Financial Conduct Authority (FCA), "New rules to protect customer funds in payments firms", 2023. [3] Financial Conduct Authority (FCA), "Safeguarding customer funds: interim rules", 2023. [4] Financial Conduct Authority (FCA), "Safeguarding customer funds: policy statement", 2023. [5] Financial Conduct Authority (FCA), "Safeguarding customer funds: feedback statement", 2023. [6] The Guardian, "Synapse fintech collapse: £85m in frozen customer funds", 2022. [7] The Telegraph, "Synapse fintech collapse: was customer money used to prop up business?", 2022. [8] The Financial Times, "JPMorgan proposes charging fintechs for access to customer data", 2022. [9] The Wall Street Journal, "UK takes regulatory first step in open banking", 2022. [10] The Economist, "The UK's regulatory-first approach to open banking", 2022. [11] The Financial Times, "Impact of charging fintechs fees on open banking model", 2022.

1. The FCA's recently announced supplementary regime for payments firms includes requirements such as daily safeguarding reconciliations, strict segregation of funds, monthly regulatory reporting, and annual audits to enhance the protection of customer funds, addressing concerns from previous incidents like the collapse of fintech firm Synapse.
2. Under the new FCA rules, fintechs will be obligated to establish plans to prevent delays in reimbursement when customer funds are safeguarded, ensuring quicker and more efficient compensations for customers in case of company failures.
3. The UK's Financial Conduct Authority (FCA) aims to eventually implement end-state rules involving statutory trust protections, requiring further consultation and legislative changes, as part of a phased approach to strengthen existing safeguarding standards for the finance, business, fintech, policy-and-legislation, and general-news sectors.

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