The new safeguarding regime covers many aspects and will be introduced in two phases – the ‘interim state’ and the ‘final state’. The FCA intends to publish final interim rules within the first six months of 2025. It’s therefore important that firms start planning for the changes now.
In this update, we cover the proposed changes that seek to improve the safeguarding procedures when investing in secure liquid assets.
Background
Under the current Electronic Money Regulations (EMRs) and Payments Services Regulations (PSRs), firms can safeguard relevant funds by investing in secure liquid assets.
These assets need to be capable of quick sale. There is a risk that if the market for these assets is not sufficiently liquid or stable, the firm might end up having insufficient funds to meet obligations to its customers.
Proposals for the interim state
Firms will continue to be able to invest in the same range of secure, liquid assets similar to the current rules. However, there are additional requirements for firms as they will now need to ensure that:
- There is a suitable spread of investments
- Assets are selected in line with an appropriate liquidity strategy, and credit risk policy
- Any foreign exchange risks are prudently managed.
The aggregate value of these assets will need to be included in the safeguarding resource when preparing the safeguarding reconciliation.
Proposals for the end state
The option for firms to safeguard by investing in secure, liquid assets will be retained as per the current guidance.
The new rules will require that the investments in secured liquid assets should be held under statutory trust and firms using this method of safeguarding will need to ensure they have the necessary permissions to invest client funds.
A statutory trust is a trust that is established automatically by legislation, rather than by an express agreement between parties. One of the proposals from the FCA is to impose a statutory trust, and we shall be covering this topic in detail later on in our article series. The imposition of a statutory trust will have the effect of strengthening the protection of relevant funds. Under the current EMRs and PSRs, there is a risk that where a firm fails with a shortfall in safeguarded funds and where they are secured creditors, those creditors may challenge the priority given to the top-up of safeguarded funds.
Firms that manage such investments with discretion may also need permission to manage the investments of relevant funds, or alternatively deposit the assets with a custodian firm that holds such permission.
Where a firm holds assets on behalf of clients as a result of using the option to invest in liquid assets, they will need to comply with CASS 6 custody rules.
How can we help?
At PKF, we are aware that these proposals will have a significant impact on payments and electronic (e-money) firms and are here to help. If you have any queries on the impact of new regime on your firm or safeguarding in general, then please contact Azhar Rana or Knowledge Muchemwa.
About our Payment Services team
Our specialist Payment Services team advise money remittance, payment processing and electronic money firms across the sector. Our services include statutory audit, financial reporting, regulatory advice and assurance, safeguarding audits, external finance and transactional support, as well as structuring, tax compliance and advice on a range of complex issues.
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Read our series of articles on the upcoming changes to the safeguarding regime for payment services and electronic money firms.
Changes to the safeguarding regime for payments and e-money firms: Overview
The long-anticipated publication of the FCA’s proposed changes to the safeguarding rules for payment services and electronic money firms will align the existing safeguarding regime with the current Client Assets Sourcebook (CASS) rules and lead to the creation of a new Chapter 15 of the Client Asset Sourcebook (CASS 15) and amendments to the Supervision Manual (SUP 3A).
This article is #1 in our series.
Changes to the safeguarding regime for payments and e-money firms: Record keeping
In September 2024, the FCA released a consultation paper which proposes significant enhancements to the safeguarding rules for payments and e-money firms. These are designed to protect customers of these firms, particularly as a result of an insolvency event.
This article is #2 in our series.
Changes to the safeguarding regime for payments and e-money firms: Enhanced monitoring and reporting
Currently, firms are required to arrange a safeguarding audit to assess whether their organisational arrangements are sufficient to enable them to comply with the safeguarding requirements under the Payment Services Regulations 2017 (or the Electronic Money Regulations 2011, if the firm is required to have its financial statements audited under the Companies Act 2006).
This article is #3 in our series.
Changes to the safeguarding regime for payments and e-money firms: Investing in secure liquid assets
The new safeguarding regime covers many aspects and will be introduced in two phases – the ‘interim state’ and the ‘final state’. The FCA intends to publish final interim rules within the first six months of 2025. It’s therefore important that firms start planning for the changes now. In this update, we cover the proposed changes that seek to improve the safeguarding procedures when investing in secure liquid assets.
This article is #4 in our series.
