FCA’s Pragmatic Shift Aims to Solve the 65% Customer Fund Shortfall Crisis

The Financial Conduct Authority (FCA) has introduced a revised safeguarding regime for payments and e-money firms to enhance consumer protection and ensure the prompt return of funds in the event of a firm’s insolvency. The changes, outlined in the FCA’s PS25/12 policy statement, mark the first phase of a broader regulatory transformation aimed at strengthening the prudential oversight of firms operating under the Payment Services Regulations 2017 and the Electronic Money Regulations 2011. These reforms are expected to take effect by 7 May 2026, following a period of consultation and engagement with the industry [2].

The new regime, referred to as the “Supplementary Regime,” includes a set of requirements designed to improve the accuracy and transparency of safeguarding practices. These include the need for firms to maintain detailed records, prepare resolution packs to assist insolvency practitioners, and undergo annual audits. The FCA has also extended the compliance deadline and reduced the scope of mandatory audits for smaller firms that have not safeguarded significant volumes of funds in the past 53 weeks. These adjustments reflect a more proportionate approach to regulation, balancing the need for robust safeguards with the practical constraints faced by different types of firms [2].

A key concern addressed by the FCA is the historical shortfall in customer funds following the failure of payments firms. According to internal reports, the average shortfall between Q1 2018 and Q2 2023 was 65%. The new rules aim to reduce this risk by ensuring that relevant funds are held in designated safeguarding accounts and that firms demonstrate a clear rationale for relying on a small number of banks for these purposes. This approach allows for flexibility while encouraging diversification where appropriate [2].

The FCA has also taken a pragmatic stance on certain contentious proposals that were part of its earlier consultation, such as the creation of a statutory trust over relevant funds. The decision not to implement this measure aligns with legal precedents, including the 2022 Ipagoo case, which clarified that no such trust currently exists under the law. This choice signals a more collaborative approach to regulation, acknowledging the need to avoid unnecessary legal and operational burdens on firms [2].

Industry engagement has played a significant role in shaping the final form of the regulations. Payments firms and fintechs provided detailed feedback on the cost-benefit implications of the proposed changes, leading to a more balanced outcome. The FCA’s willingness to adapt its approach highlights a broader shift in the regulatory environment, where stakeholder input is increasingly recognized as a valuable tool for policy development [2].

Looking ahead, the FCA will continue to monitor compliance closely, with enhanced tools to assess firms’ adherence to the new rules. By the end of Q2 2027, the regulator expects to have a comprehensive understanding of the effectiveness of the regime. This ongoing oversight will be critical in ensuring that the reforms achieve their intended goals of minimizing shortfalls and improving consumer confidence in the payments sector [2].

The changes also fit into a wider context of evolving UK payment regulation, including the government’s plans to integrate the functions of the Payment Systems Regulator (PSR) into the FCA. This move is expected to streamline regulatory processes and reduce the administrative burden on firms. Alongside these structural changes, new directives such as the upcoming Payment Services Directive 3 (PSD3) will further shape the regulatory landscape, particularly in areas like fraud prevention and customer authentication [3].

As the regulatory environment continues to evolve, firms must remain proactive in adapting their practices to meet new expectations. The FCA’s approach to safeguarding represents a step toward a more resilient and transparent payments ecosystem, with long-term benefits for both consumers and the industry [2].

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[2] Advocacy pays off: The FCA adopts a more pragmatic approach to safeguarding customer funds by payments firms (https://www.traverssmith.com/knowledge/knowledge-container/advocacy-pays-off-the-fca-adopts-a-more-pragmatic-approach-to-safeguarding-customer-funds-by-payments-firms/)

[3] The end of the PSR: What is next for UK payment regulation (https://www.electronicpaymentsinternational.com/comment/the-end-of-the-psr-and-new-directives-what-is-next-for-uk-payment-regulation/)