The Financial Conduct Authority (FCA) has announced plans to strengthen safeguarding rules for payment and e-money firms in an effort to better protect customers when these companies go out of business.

The proposed changes come as the use of payments firms has grown significantly in recent years. The FCA's Financial Lives Survey shows a five-fold increase in the use of current accounts with e-money institutions between 2017 and 2022. However, the regulator says it continues to see poor safeguarding practices from firms.

Unlike funds held by traditional banks, money held by payments and e-money firms is not directly protected by the Financial Services Compensation Scheme. Instead, these companies must safeguard funds, which can lead to customers losing money or experiencing delays in fund recovery if the firm fails.

Matthew Long, director of payments and digital assets at the FCA, stated: "We're consulting on proposals to make safeguarding rules stronger and clearer for payment and e-money firms so customers get as much of their money back as quickly as possible if the firm goes out of business."

Under the FCA's proposals, the existing e-money safeguarding regime will be replaced with a client assets style regime designed to work with payments firms' business models. The regulator also plans to publish strengthened interim safeguarding rules for firms by mid-2025.

The FCA's cost benefit analysis of its proposals has been subject to review by the new independent Cost Benefit Analysis Panel, established by the Financial Services and Markets Act 2023.

In a related development, Therese Chambers, the FCA's co-head of enforcement and market oversight, addressed the regulator's plans to potentially name companies under investigation. Speaking at a conference in London, Chambers said: "This autumn, we will intensify our engagement – meeting with trade associations, firms, those on all sides of the debate – exploring how we can develop our proposals."

The FCA's "naming and shaming" plans, first announced in February, have faced criticism from industry professionals who argue that publicly identifying companies before guilt is established could cause irreparable damage to firms and the finance industry as a whole.

Chambers acknowledged these concerns, stating: "We do think the case for a degree more transparency remains strong. But it needs to be seen within the vital context of a focused number of cases likely to deliver the greatest deterrent and delivered much faster."

Firms can respond to the FCA's consultation on safeguarding rules by 17 December 2024.

---