Safeguarding best practices: Insights from the FCA, PwC & more

Posted: 15/12/2023 | Read time: 6 minutes


In this blog, we share insights from the FCA, PwC, fscom, Privat3 Money, and our Global Payments Lead Nick Botha on safeguarding practices.

Failing to comply with safeguarding regulations carries serious implications. Fines are increasing year-on-year and the FCA is cracking down on firms not doing enough to protect customer funds.

But the details on how exactly to safeguard customer funds are (at the moment) lacking. The only way we’ve seen how the regulation works in practice is when firms have failed.

To help you understand how safeguarding works, we recently hosted a webinar in collaboration with the Payments Association. AutoRek’s Nick Botha was joined by FCA Payments Policy Manager Natalie Zorzella, fscom Director Alison Donnelly, Privat3 Money Chief Compliance Officer Paul Whelan, and PwC Director James Cameron.

This blog summarises key points from the webinar and answers some frequently asked questions. So you can better understand how the regulations impact your daily processes.

What are the FCA’s views on safeguarding?

The FCA’s current view on safeguarding is that consumers do not get all of those funds back. And it’s taking a long time to get back to them, Natalie says.

“Over the last couple of years, seven of the 12 payments and e-money firms that have failed have had shortfalls of over 50% in terms of the customer funds that are available for distribution,” she says.

“Of the six cases where funds have now been distributed to customers, it’s taken over two years on average for a first distribution to be made.

“And many of you will know that it’s taken several high-profile applications to reach the current legal understanding of the regime.”

Alison notes that, when there have been court cases, “judges have taken a very pro-customer position and their aim is to get as much money back to the customer as possible.”


Is there a boilerplate safeguarding policy we can use?

No. Because you need to work through the safeguarding policies and procedures for your business model.

Safeguarding “is something that has to be done case by case,” Natalie says.

“You need to work through how money flows through your business and determine where the edges are,” she advises. For example, in how you receive money, deal with mixed remittances, or deal with international currency payments.


What happens if we don’t safeguard properly?

If safeguarding is inadequate, customers may have to go to court to submit their claims against relevant funds. It also means insolvency practitioners must undertake far more detailed investigations.

“That impacts the timing – but also the cost of the insolvency process,” says James, “which ultimately is borne by the customers because of the lack of FSCS protection in place.”

You need to ensure that there are adequate data records for customers and the funds which are held, as well as the completion and standards of the reconciliations being completed.

“All of that – alongside safeguarding – has the direct ability to impact the timely return of funds.”


Do we need to reconcile our data every day?

If you have a “beautiful system” with no FX and no fees, then there’s “scope to not do a reconciliations every day,” says Alison.

But you need to reconcile more often “if you’re doing FX conversion or safeguarding in a different currency to the funds received. Or if there’s any other possibility that the funds might get mixed up.”


We’re a start-up. Can we use manual processes?

Yes, Paul says. But with one big caveat: “You have to have the resources and it has to be consistent with your risk profile.”

A manual system will creak if you have multiple currencies, banks providing safeguarding and payment channels, he says. And an automated solution is less labour-intensive and less “mind-numbing” for those doing the work.

You also have to be on top of your reconciliations daily – sometimes multiple times a day.

“Because you have to make sure that when you’re sending funds and sweeping funds from one place to another, they’re arriving in the required time.

“So you’re checking and checking and checking again.”

If you’re considering automating your reconciliations, check out our safeguarding solution here.


Tips for safeguarding customer funds

The key to safeguarding customer funds? Having your policy and procedure in place and robust and tested and regularly reviewed, says Paul.

You need to set out:

  • Your processes
  • Who’s responsible and who will take over when that person is on holiday or sick,
  • Who’s got sign-off responsibilities
  • Who’s supervising
  • Who’s reviewing it

Alison also warns that putting too much money in your safeguarding account is as bad as not having enough. “It has to be very precise. Down to the penny.”

And Nick adds that moving towards real-time reconciliations is the best approach. “The nature of payments is moving towards real-time, so that’s where your heads should be going. How do we do this more in real-time?”


Are safeguarding audits being enforced?


“The FCA will occasionally ask for what audits you have done,” Paul says. “My advice to every company is you should be planning your safeguarding for this year to be done early next year.

“Get it boxed off and done and have your audit subcommittee review the responses of that audit. So you have appropriate remediations. And when changes come, you’ll be better provisioned.”


Tips for preparing for safeguarding audits

The key to safeguarding? Consistency, regularity, and correction, Paul says.

Paul’s advice is to:

  • Automate your reconciliations as far as possible
  • Keep an open line of communication with the FCA, particularly your case officer
  • Make safeguarding part of the board agenda for every board meeting and ensure they back it
  • Focus on the culture of your business so you know who’s doing what, what system you’re taking the reports from, whether you’ve tested the system, and if there’s a better way to safeguard
  • Do due diligence on your safeguarding providers

And remember, “no one can take the small firm exception.”


How will safeguarding regulations change?

“I can safely confirm that the general direction of travel will see is looking at something a bit more detailed and rules-based like the CASS approach,” says Natalie.

And a “key feature” of safeguarding regulations will be “implementing a statutory trust because we’re going to lose that statutory insolvency protection that exists under the current PSR.”

“So we need to replace that insolvency protection under our own rules and [have] a bit more prescription around those edges.”

We can expect the FCA to announce changes to safeguarding regulations in the first half of 2024.

Are you preparing for your safeguarding audits? Head to our blog: How to prepare for safeguarding audits: A guide for payments firms.

And you can watch the full webinar here.