The FCA's proposed changes to the safeguarding rules will have a significant impact on payment institutions (PIs) and electronic money institutions (EMIs). The new rules will be introduced in two phases: the interim-state, expected to come into effect during the first half 2025; and the end-state, which is due to go live during the final 6 months of the year.
The interim rules seek to improve compliance with the existing guidance and will introduce major changes within the existing legal framework. The end-state rules will be embodied in a new chapter in the FCA Client Assets Sourcebook (CASS 15).
In this article, we draw on our extensive experience in CASS matters and expertise in the payment services sector to suggest how management teams can prepare for the upcoming changes.
The new rules focus on three main areas: improved record keeping, enhanced monitoring and reporting, and strengthening safeguarding processes. So, what will payments and e-money firms need to work on in time for the implementation of the interim state?
The FCA wants to see accurate books and records - this includes having adequate policies and procedures in place, maintaining records and accounts of relevant funds, and performing both internal and external relevant funds reconciliations at least once a day.
A new section will also be added to the CASS rules which will require payments firms to maintain a resolution pack. This is meant to make it easier for insolvency practitioners to be able to retrieve key information about the firm's safeguarding arrangements within a short space of time if an insolvency event occurs.
Firms will be required to have an external audit of their compliance with the safeguarding rules. Importantly, the person carrying out the firm's safeguarding audit will need to be suitably qualified, and there is a risk that firms may find that their current auditor does not meet this definition.
There will also be a requirement to complete and submit a new monthly safeguarding regulatory return, replacing the questions on safeguarding which are included in the existing regulatory returns.
The main elements to be aware of during the interim state relate to the segregation of relevant funds: