What are you doing about client money? The rules are changing, don’t get left behind.
Between 2018 and 2023, 12 payments firms that were supposed to be safeguarding their customers’ funds became insolvent, resulting in an average 65% shortfall in the amount owed to clients. For E-Money Institutions, the shortfall was as high as 80%, while for Authorised Payments Institutions, it was around 41%.
In response, the FCA is transitioning from (what some might say) was vague guidance-based regulations to a more concrete, rules-based system by introducing a new section within the Client Asset Sourcebook (CASS): CASS 15. This move aims to clarify the safeguarding expectations and strengthen processes with tighter rules on records, reconciliations, governance, monitoring, and the establishment of statutory trusts.
Timelines for Implementation
The FCA has proposed a phased approach for implementing the new CASS 15 regulations. Here’s what firms need to know:
Interim Rules
The interim rules are expected to be finalised in the first Policy Statement by early during 2025 and will become effective 6 months later. 12 months later, by the end of 2025 / early 2026, firms will need to be fully compliant with these rules. Firms are encouraged to start preparing now to ensure they meet the upcoming deadlines.
Key highlights of the interim rules include:
Enhanced record-keeping and reconciliations: firms will need to conduct both internal and external reconciliations of safeguarded funds, with a requirement for daily reconciliations during business days, including weekends or holidays if the firm is open for business.
CASS resolution packs: the FCA is introducing a new chapter, CASS 10A, which mandates that safeguarding firms maintain a "CASS Resolution Pack." This document will provide clear information on the firm’s safeguarding practices, helping insolvency practitioners return customer funds more efficiently in the event of a firm’s collapse.
Monthly safeguarding returns: firms will be required to submit monthly reports detailing the value of safeguarded funds, the institutions where these funds are held, and the segregation and reconciliation methods used. This aligns with the current Client Money and Asset Returns (CMARs) system under CASS.
Strengthened Audit and reporting requirements
The FCA is also raising the standards for safeguarding audits, making them a key tool for regulatory oversight. Audits will follow a standardised format, ensuring consistency and clarity across firms. Safeguarding audit reports must be submitted annually to provide timely updates on industry practices and potential compliance issues.
Independent Audits: safeguarding audits must be conducted by qualified, independent auditors with experience in this area. All breaches, no matter how small, must be included in the audit report.
Broader Audit Requirements: all Payment Firms, with the exception of Small Payment Institutions (SPIs) and payment initiation service providers, will be subject to the new safeguarding audit regime. This applies regardless of whether the firm had to safeguard funds during the period being audited. Where safeguarding was not required, the FCA proposes a "Limited Assurance" audit similar to the existing CASS model.
Safeguarding enhancements and Third Parties
The FCA is extending its oversight of third-party involvement in safeguarding arrangements, with firms required to exercise greater diligence when selecting and reviewing credit institutions, custodians, and insurers. This extends to all third parties involved in receiving, managing, or safeguarding relevant funds. Moreover, safeguarding accounts will need to be clearly identifiable, with the word "safeguarding" included in the account name whenever possible.
Insurance and comparable guarantees
While the FCA will continue to allow the use of insurance or guarantees as a method of safeguarding, it is tightening restrictions around their use. Firms using this method must adhere to stricter rules regarding payout conditions, and policies must be planned three months before expiration to ensure continued protection. Firms will also need to maintain a dedicated safeguarding account for the entirety of the policy term to receive proceeds when a policy expires.
End-State Rules
The final stage of implementation will follow the repeal of the current safeguarding regulations. Once the new policy is issued, firms will have 12 months to comply. The cornerstone of the end-state rules is the introduction of statutory trusts for holding safeguarded funds. This legal structure will create a fiduciary relationship between firms and their clients, ensuring customer funds are fully protected in the event of insolvency. Statutory trusts will apply to both segregation and insurance/guarantee methods.
Another key aspect of the end-state rules is the immediate segregation of relevant funds, ensuring that customer funds are kept separate from the firm’s assets as soon as they are received. Firms currently receiving funds into non-designated accounts will need to switch to designated safeguarding accounts offered by approved providers.
Preparing for the future
The message of the Consultation Paper is clear: safeguarding processes are set to undergo substantial revisions. By enhancing their governance, improving reconciliations, and tightening their oversight of third-party relationships, firms will be better equipped to protect customer funds and meet regulatory expectations. As the industry moves toward a more robust safeguarding framework, firms that act now will be well-positioned to navigate the changing landscape, ensuring that customer funds are protected and regulatory risks are minimised.
How Shapes First can help
Your firm will need support to understand how current arrangements can be adapted, don't hesitate to reach out to us. We have significant experience in this area.
