Changes to the safeguarding regime for payments and e-money firms: Recordkeeping

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.

The enhancements cover record keeping, monitoring and reporting, strengthening elements of safeguarding practices and holding funds under statutory trust. The obligations will be added to the FCA Handbook.

The new regime 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 important therefore that firms start planning for the changes now.     

In this update, we cover the proposed changes in relation to recordkeeping.

Proposed safeguarding rules

Improved books and records – recordkeeping, reconciliations and resolution packs

The FCA is concerned that many firms have inadequate processes to identify relevant funds and perform reconciliations. This means that it can be difficult for a firm to distinguish between relevant funds and its own money. Under these circumstances, when a firm fails, it will be difficult for an insolvency practitioner (IP) to quickly identify which funds are relevant funds and available for distribution, and in what proportion consumer claims should be paid from the asset pool.  

Robust recordkeeping and reconciliation requirements will help firms put in place adequate processes to protect relevant funds. Complying with these requirements will help ensure that shortfalls in segregated funds are identified in a timely manner and that these are made good by the firm as soon as possible.

Proposals for the interim state

Policies and procedures

Firms will be required to develop policies and procedures to help ensure compliance with the safeguarding provisions in the Electronic Money Regulations (EMRs) and Payment Services Regulations (PSRs). Under current guidance provided in the FCA’s approach document, although it stated that firms must maintain organisational arrangements that are sufficient to minimise loss or diminution of relevant funds, there is no requirement to develop documented polices and procedures.

Records and accounts

Firms will be required to maintain accurate records to enable it to distinguish between relevant funds and other funds at any time and without delay. Although there is a similar requirement under current guidance, the proposed rules require that the records must be accurate.

Internal relevant funds reconciliations

An internal reconciliation should reconcile the amount due to customers with amounts held in safeguarding accounts. These are required to be performed at least once each business day.  This replicates existing guidance.

External relevant fund reconciliations

External reconciliations are bank reconciliations for safeguarding bank accounts. These are required to be performed at least once each business day. This replicates existing guidance.

Discrepancies

Firms are required to determine the reason for any discrepancy or difference identified by its reconciliations. These are required to be corrected by the end of the business day the reconciliation is performed unless the difference arises from a timing difference. This replicates existing guidance.

Notification requirements  

Firms will be required to notify the FCA in writing and without delay if:

• their internal records are out of date, inaccurate or invalid
• they will be unable to perform a reconciliation – internal or external
• they will be unable to remedy a discrepancy or difference in their reconciliations
• at any time during the previous year there was a material difference between the amount of relevant funds they were actually safeguarding and the amount they were actually safeguarding.

The above specific requirements are not covered by current FCA guidance or the Payment Services Regulations.

Resolution pack

A resolution pack is a collection of records and documents that are required to comply with the FCA’s client assets regulations and rules.

Firms will be required to maintain a resolution pack to help ensure they maintain and are able to retrieve information that would help an IP achieve a timely return of relevant funds to customers, in the event of another firm’s resolution help the Bank of England or Financial Services Compensation Scheme and help the FCA in the event of an insolvency.

The resolution pack is required to include a number of documents including:

• copies of the firm’s procedures for the management
• recording and transfer of relevant funds and assets
• a document identifying the institutions that the firm has appointed to hold relevant funds
•  a document identifying the person who has been given responsibility for safeguarding operational oversight
•  copies of any acknowledgment letters received from each institution identified.  

Under the proposed rules the documents must be retrievable within 48 hours and failure to maintain a compliant resolution pack is likely to result in breaches of the CASS rules being reported by auditors.  

Proposals for the end state

In the end state, the FCA will update its rules on policies and procedures, resolution pack requirements to reflect end state requirements and in relation to organisational arrangements to reduce the risk that relevant funds will be lost as a result of fraud, poor recordkeeping or negligence.  

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 Oliver Hawes.

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.