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Will the gap close? Safeguarding vs holding client money

Updated: May 19, 2021

The FCA's recent publication on updating the rules for payment services and e-money firms (covered in our earlier post) suggests that more focus is being placed on an area that has needed looking at for some time: the difference between the rules for safeguarding that apply to payment services and e-money institutions and the rules for holding client money that apply to other regulated firms.

For most regulated firms, the rules on how money is held on behalf of customers is covered by the incredibly detailed and prescriptive Client Asset Sourcebook (“CASS”). These require a variety of measures to be in place to ensure that customer's money is protected in the event of the regulated firm's failure, or that of the banking institution with whom the client account is held.

For payment services and e-money institutions, the safeguarding rules have to-date been much lighter. The recent consultations suggests that will change and the gap between the two regimes will become narrower. For example, it will creating a set format for the acknowledgement letter issued by the banking institution ultimately holding the funds, which will be similar to the letter required by CASS.

There are also proposals to increase the reporting requirements and due diligence requirements that apply when the payment services or e-money institution chooses their auditors and credit institutions.

This may well just be a first step as there remain many differences between the regimes. The proposed rules are temporary, pending a wider consultation later this year and we would be surprised if further changes are proposed at this point.


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