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).
The proposals, which take the form of a consultation paper, have been triggered by the FCA’s continuing focus on consumer protection as well as a number of insolvencies in the sector, with the FCA estimating that for such insolvencies between Q1 2018 and Q2 2023 there was an average shortfall of 65% between customer funds and those actually being safeguarded. Firms have until 17 December 2024 to respond to the consultation.
The proposed changes will be introduced in two phases, the interim-state, expected to come into force during the first 6 months of 2025 and the end-state, expected to come into force in the final 6 months of 2025.
The interim state will focus on three key aims:
1. Improved record keeping
There will be enhanced reconciliation requirements that relate to conducting and reviewing internal and external reconciliations and understanding the reasons for and resolving any discrepancies arising. Firms will also be required to maintain a resolution pack, with rules like those under the existing CASS 10.
2. Enhanced monitoring and reporting
There will be a requirement for certain firms to appoint a qualified auditor to report to the FCA under the new CASS 15 regime, stating whether the firm was in compliance with the safeguarding rules during the period. There will also be a requirement to submit a monthly return to the FCA, similar to a client money and assets return, which will replace the annual reporting requirements and lead to the FCA receiving more detailed information on firms on a more regular basis.
3. Strengthening safeguarding processes
This will introduce more stringent measures around how firms should segregate safeguarded funds and additional requirements in respect of investing safeguarding funds in secure liquid investments. There will also be enhanced rules around the insurance and comparable guarantee process.
These rules are intended to provide additional clarity to both customers and firms around the protections afforded to client funds and the requirements around safeguarding, with a focus on ensuring that the correct amount of funds are segregated at any time. The new SUP 3A, will also give firms more clarity around auditing and reporting requirements, and provide the FCA with more detailed and regular information about the processes and position of safeguarding firms.
Under the existing FCA rules payment services firms are required to exercise due skill, care and diligence in selecting and appointing auditors to provide assurance around safeguarding. Existing rules also state the audit does not need to be carried out in line with any specific auditing framework. This is set to change. The proposed rules will require firms to appoint an independent, qualified auditor to carry out the safeguarding audit and to take reasonable steps to ensure that the auditor has the required skill, resources and experience. The audit will need to be carried out in line with an auditing framework will be defined by the Financial Reporting Council. Auditors will be required to submit the safeguarding audit report to the FCA within four months of the end of the period to which it relates.
At PKF, we are aware that these proposals will have a significant impact on safeguarding 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.
