Safeguarding 101: Everything payments and e-money firms need to know

For the past two years, the payments industry has been rapidly scaling and innovating. 

While the use of e-money and digital payments has increased over the last decade, the pandemic caused demand to explode – and changes to regulation quickly followed. 

In July 2020, the Financial Conduct Authority (FCA) published temporary guidance on safeguarding and prudential risk to offset pandemic-induced disruption by bolstering firms’ safeguarding arrangements. It made this permanent in November 2021 to better protect customers. 

The regulator also issued a Dear CEO letter in May 2021. It emphasised the importance of communicating with customers about ‘how their money is protected through safeguarding’. 

The FCA and Bank of England will continue to focus on the expanding payments sector. This means firms will face greater scrutiny. So it’s crucial to keep on top of requirements. 

But there is one major challenge firms are facing: unlike CASS, safeguarding is not prescriptive. I.e. the FCA does not specify how organisations should implement requirements. 

To provide greater clarity around safeguarding and help you stay ahead of the curve, the experts at AutoRek have put together an essential guide. You’ll learn: 

  • What safeguarding is 
  • FCA recommendations 
  • How to prepare for audits 
  • Why reconciliations are a critical aspect of safeguarding 

What is safeguarding? 

True to its name, safeguarding simply means taking steps to protect client assets. 

Safeguarding measures were first introduced in 2011, with the launch of the Electronic Money Regulation 20. This was updated in 2017 with the Payment Services Regulation 23. 

The FCA requires authorised payment institutions (PIs) and electronic money institutions (EMIs) to take action to protect customer funds as soon as they are received. 

Unlike commercial banking, e-money is not state-backed, so protecting clients from unnecessary risk is critical. It also minimises risk to the payments industry as a whole. 

FCA recommendations for safeguarding: 

  • Maintain records that demonstrate compliance with the requirements. Every decision they make regarding safeguarding processes must be recorded; systems and controls must be documented 
  • Appoint an appropriate individual to oversee procedures 
  • Exercise due skill, care and diligence in selecting, appointing and periodically reviewing credit institutions, custodians and insurers 
  • Keep records of any relevant segregated funds, relevant funds placed in an account with an authorised credit institution and assets placed in a custody account 
  • Keep records that distinguish what relevant funds and assets are held for each client and that distinguish these funds from their own 
  • Be able to explain transactions concerning relevant funds and assets 

What to expect from an audit 

The FCA expects payments and e-money institutions to undergo an annual safeguarding audit. It involves a full review of policies and procedures to assess both good existing practices and areas of risk.  

Interviews will examine how far this guidance is embedded within an organisation’s practices, values and culture. 

How to prepare for audits: 

  • Stay on top regulations and make changes when required. Include them in safeguarding proposals 
  • Ensure every measure is taken to identify relevant funds  
  • Communicate clearly with partners, regulators and internal staff  
  • Modernise reconciliations procedures – it’s the glue that holds safeguarding together 

What reconciliations do firms need to perform? 

The FCA requires payments organisations to conduct both external and internal reconciliations: 

  • External reconciliations – this uses the total actual balance held in safeguarding accounts, including non-relevant funds in the form of fees accrued 
  • Internal reconciliations – this is done by comparing the aggregate funds owed to clients with the aggregate funds it believes it holds in its safeguarding account 

Both reconciliations should be completed as often as necessary and as soon as possible. To assess frequency, firms should consider business risks it is exposed to.  

Any discrepancies – and reasons for discrepancies – must be promptly identified and corrected. This will involve paying the shortfall or withdrawing excess unless discrepancies can be attributed to timing differences.  

Where differences cannot be easily resolved, firms should assume greater amounts to cover a payment or withdrawal. 

Why are reconciliations important?  

Reconciliations are mandatory – and for good reason. They enable firms to check the accuracy of records by comparing internal customer balances with their own record of customer funds held in the safeguarding account.  

As safeguarding regulations change and evaluations become more rigorous, meeting requirements will become an increasingly important part of a firm’s back-office operations. Any existing cracks in DIY or ill-suited reconciliation systems will be placed under even greater pressure.  

Reconciliations are the backbone of the safeguarding process. We’d recommend using a fully capable automated solution, such as AutoRek’s dedicated solution for EMI, PIs and credit unions. By streamlining the reconciliations process, including any FX transaction involved, it will ensure accurate, efficient reporting.

To delve deeper into safeguarding, download our in-depth whitepaper by clicking here

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