Strict New FCA Safeguard Regulations May Pose Significant Obstacles for Payment Organizations
The Financial Conduct Authority (FCA) has announced a new safeguarding regime for UK payment firms, set to take effect on May 7, 2026. This regime aims to significantly enhance consumer protection by ensuring that customers are refunded in full and promptly if a payment firm fails.
Key Changes and Requirements
The new rules focus on improving safeguarding practices, increasing transparency, and ensuring faster refund processes. Here are some of the key changes:
- Payment firms must perform daily internal and external reconciliations to ensure safeguarded funds match customer liabilities and are available if needed.
- Annual audits, carried out by qualified statutory auditors, are mandatory for most firms, with small firms holding less than £100,000 in safeguarded funds for 53 consecutive weeks exempted from the audit requirement.
- Firms must submit dedicated monthly returns to the FCA detailing safeguarded funds, reconciliation results, and any breaches, enhancing FCA supervision and responsiveness.
- If firms use insurance-based safeguarding, they must meet tighter conditions to ensure effectiveness as protection.
- Enhanced requirements around consistent record keeping and reporting, including reconciliation on "reconciliation days" defined as any non-bank holiday weekday, improve oversight and reduce the risk of fraud or misappropriation.
- The regime strengthens the FCA’s ability to intervene and ensures quicker, cost-effective return of funds to consumers if a payment firm fails.
These rules apply to Authorised Payment Institutions (excluding those only providing Payment Initiation or Account Information Services), Authorised Electronic Money Institutions (EMIs), small EMIs, and credit unions issuing e-money in the UK.
How Firms Can Prepare
To comply with the new regime, payment firms should:
- Implement robust daily reconciliation processes internally and with external records.
- Engage qualified statutory auditors early to prepare for the new annual audit requirements or verify exemption eligibility.
- Establish systems for monthly data collection and reporting to complete the new safeguarding returns accurately and on time.
- Review current safeguarding arrangements, including any insurance policies, to ensure they meet the stricter FCA requirements.
- Enhance record-keeping frameworks with improved compliance documentation and controls to meet the new transparency and monitoring standards.
- Develop or update contingency plans for insolvency or failure scenarios to enable fast and cost-effective return of customer funds.
- Monitor FCA guidance and consultations on final post-repeal rules (expected after the Supplementary Regime starting May 2026) to stay compliant as the regime evolves.
These changes aim to increase consumer trust, enhance protection against safeguarding shortfalls (previous failures averaged 65% shortfall), and modernize regulatory oversight for growing payment and e-money sectors. Firms are urged to act promptly to integrate these processes ahead of the May 2026 deadline to avoid compliance risks.
Catherine Brittain, financial services partner at RSM UK, stated that the changes represent a full-scale operational change. Many smaller boutique companies may no longer be eligible to complete safeguarding audits, requiring payment and e-money firms to source alternative audit partners.
The new regime is part of the FCA's ongoing efforts to protect consumers and ensure the stability of the UK's growing digital payment sector.
- Ffnews.com reported that the new safeguarding regime for UK payment firms, beginning May 7, 2026, will require firms to perform daily internal and external reconciliations and submit dedicated monthly returns to the FCA, as part of the effort to enhance consumer protection in the industry, finance, business, and banking-and-insurance sectors.
- In preparation for the new regime, payment firms must implement robust daily reconciliation processes, engage qualified statutory auditors, establish systems for monthly data collection and reporting, review current safeguarding arrangements, enhance record-keeping frameworks, develop or update contingency plans, and monitor FCA guidance, as stated by Catherine Brittain, financial services partner at RSM UK.
