The Safeguarding Shift – Are you ready for CASS 15?

Why is it relevant?

FCA Consultation Paper (CP 24/20): Strengthening the Safeguarding Regime

The Financial Conduct Authority (FCA) released Consultation Paper (CP 24/20) on 25 September 2024, aiming to enhance the safeguarding regime for payment and e-money firms. The proposed changes seek to minimize consumer harm in the event of a firm failure, addressing gaps in the current framework where the Financial Services Compensation Scheme (FSCS) does not apply. This initiative marks a significant step in strengthening consumer protection.

Current Safeguarding Issues: UK payment firms hold approximately £5 billion daily, while e-money issuers manage £18 billion. As FSCS protection does not cover firm failures in this sector, consumers risk financial losses. The FCA aims to mitigate these risks in line with Consumer Duty requirements.

Regulatory Timeline: The consultation period closed on 17 December 2024. Interim rules and a policy statement are expected in H1 2025, with mandatory compliance by December 2025. The final implementation timeline will follow.

Who does it affect?

The new rules will apply to:

• Authorised payment institutions
• E-money institutions and small e-money institutions
• Credit unions issuing e-money under the Payment Services Regulations (PSRs) and E-Money Regulations (EMRs)

What do you need to know?

A Two-Stage Approach

The FCA proposes a phased implementation with interim rules that supplement existing safeguarding provisions in PSRs and EMRs by introducing additional requirements under the FCA’s Supervision Manual (SUP) and a new Chapter 15 of the Client Assets Sourcebook (CASS). Key provisions include:

• Designating a responsible oversight individual for safeguarding compliance
• Requiring an annual external safeguarding audit, with reports submitted to the FCA
• Enhanced reconciliations, governance policies, and safeguarding resolution packs
• Stronger record-keeping aligned with CASS 7 standards
• Acknowledgment letters from banks and custodians to confirm safeguarded funds
• Introduction of a Client Money Asset Return (CMAR-like submission) to report safeguarded funds

End-State Rules will then replace existing safeguarding provisions in PSRs and EMRs, introducing:

• A statutory trust for holding safeguarded funds
• Mandatory segregation of funds, requiring direct receipt into FCA-approved safeguarding accounts
• Updated reconciliation and record-keeping to align with CASS standards
• Shortfall funding provisions ensuring firms can cover discrepancies using their own funds
• A single asset pool for safeguarded funds to improve oversight and efficiency
• Processes for transferring unclaimed funds to registered charities after a specified period

Understanding Safeguarding

Safeguarding aims to protect consumers’ funds held by payment institutions, e-money institutions, and credit unions. Current requirements are outlined in the Payment Services Regulations 2017 (PSRs) and E-Money Regulations 2011 (EMRs). However, FCA supervision has identified widespread deficiencies in implementation, leading to an average 65% shortfall in safeguarded funds for firms that became insolvent between Q1 2018 and Q2 2023.

Key Takeaways

Stronger record-keeping: Firms must implement detailed reconciliation and maintain a safeguarding resolution pack.
Enhanced monitoring & reporting: Independent safeguarding audits will be mandatory, with reports submitted to the FCA.
Improved safeguarding practices: Firms must diversify third-party providers, invest in secure liquid assets, and strengthen insurance and guarantee policies.
Statutory trust framework: The new rules will require firms to hold safeguarded funds in trust to provide additional security.

What should you do next?

The FCA will release a policy statement in H1 2025, outlining further implementation details, but firms must ultimately prepare for interim compliance by December 2025.

Contact us

For further information and to find out how we can assist you with these changes, please get in touch with your usual Blick Rothenberg contact or Nick Winters using the form below.