Emma RadmoreThe FCA is consulting on radical changes to the safeguarding rules for payment and e-money firms, to bring the requirements within a CASS style regime and in the interim while this transition takes place strengthen the existing rules.
The FCA has long been concerned about the standard of compliance with the existing rules, despite having issued guidance to firms, and statistics suggest an average shortfall of 65% in funds of firms that became insolvent in the last 5 years. The purpose of the safeguarding regime is well known and understood, but the FCA has identified many weaknesses which it has not found within the CASS community. So the ultimate proposal is to replace the current safeguarding requirements in the EMRs and PSRs with a regime that requires relevant funds and assets be held on trust. The interim rules will support a greater level of compliance with the existing requirements with beefed up record keeping, reporting and monitoring requirements. As part of the interim rules the FCA will look to provide greater clarity and detail for firms.
The interim rules will:
- include more detailed record-keeping and reconciliation requirements building on those in CASS 7;
- require firms to keep a resolution pack;
- introduce a new monthly regulatory return, together with an annual audit requirement;
- require firms to allocate oversight of compliance with safeguarding requirements to a specified individual;
- put in place additional safeguards where payment firms invest in secure liquid assets;
- require firms to consider diversification in their choice of third parties with which they hold, deposit or insurer relevant funds and to apply appropriate due diligence requirements; and
- place more detailed requirements on safeguarding using the insurance or comparable guarantee method.
The “end-state” rules will include:
- a requirement to receive relevant funds directly into an appropriately designated account at an approved bank (with some exceptions);
- a ban on agents and distributors receiving relevant funds unless their principal safeguards sufficient equivalent funds;
- impose a statutory trust over relevant funds held by payment firms, and relevant assets, insurance/guarantees and cheques; and
- greater detail on when the safeguarding obligations starts.
The new rules will apply to AEMIs and small EMIs, APIs and relevant credit unions. SPIs will be able to to opt-in if they wish.
Practically, the new rules will be integrated within SUP (mainly chapters 3 and 16) and CASS, and the Approach Document will be updated. CASS will include a new chapter CASS10A and CASS15
Consultation closes on 17 December. The FCA plans to publish its final rules within the first half of 2025. The FCA plans that the interim rules will take effect 6 months after finalisation and the end-state rules within 12 months.