FCA Wants to Tighten Grip on Regulated Firms to Better Shield Customer Cash

The UK's Financial Conduct Authority (FCA) has unveiled plans to strengthen safeguarding regulations for payments and e-money firms, aiming to better protect customers in the event of business failures.

FCA Proposes Stricter Safeguarding Rules for Payments Firms

The proposed rules come amid growing concerns over “poor safeguarding practices” in the rapidly expanding payments sector. According to the FCA's Financial Lives Survey, the use of current accounts with e-money institutions has increased five-fold between 2017 and 2022.

“Were consulting on proposals to make safeguarding rules stronger and clearer for payment and e-money firms,” commented Matthew Long, Director of Payments and Digital Assets at FCA, “so customers get as much of their money back as quickly as possible if the firm goes out of business.”

The regulator plans to replace the existing e-money safeguarding regime with a client assets (CASS) style framework, tailored to the business models of payments firms. This move follows the FCA's March 2023 letter to payments and e-money CEOs, which highlighted concerns about safeguarding and wind-down arrangements.

Since issuing that letter, the FCA has opened supervisory cases for approximately 15% of firms that safeguard customer funds, underscoring the urgency of the proposed reforms.

Unlike traditional bank accounts, funds held by payments and e-money firms are not directly protected by the Financial Services Compensation Scheme (FSCS). Instead, these firms are required to safeguard funds, a system that has proven inadequate in some cases, leading to customer losses or delays in fund recovery when firms fail.

The FCA's consultation, open until December 17, 2024, outlines both interim and long-term changes to the safeguarding regime. The interim rules aim to improve compliance with existing requirements, while the end-state proposals envision a trust-based system for holding relevant funds and assets.

In addition to the latest proposals for changes in payment market regulations, the FCA, together with the UK government, is also working to reform capital markets. This initiative includes a significant change from the existing EU-based consumer cost disclosure regulations, aiming to establish a new system better suited for the UK market.

The proposed shift involves replacing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation with a new framework known as Consumer Composite Investments (CCIs).

The CCI framework is designed to provide clearer insights into the costs and benefits of investment products. The government and the FCA are actively seeking input from the investment trust industry concerning the current cost disclosure regulations, which could significantly impact these entities.

Additionally, the FCA reported on its regulatory enforcement actions taken between April and June 2024, highlighting its efforts against firms that violated financial promotion rules and engaged in unregulated activities. During this period, the FCA corrected or withdrew 3,273 promotions by authorized firms and issued 528 alerts about unauthorized entities, with 11% of these alerts concerning clone scams that mimic legitimate businesses to deceive investors.