How payment institutions safeguard your money

What safeguarding payments actually means

Safeguarding is not the same as deposit protection. The FSCS guarantees bank deposits up to £120,000 per eligible person per authorised firm even if the bank goes under. Safeguarding, by contrast, is a structural requirement: it insists that customer funds are ring-fenced at all times so they can be identified and returned if a firm becomes insolvent. There is no government-backed guarantee on the amount; the protection rests on whether the firm has followed the rules correctly.

Under Regulation 23 of the PSRs 2017, a payment institution must safeguard relevant funds, which are sums received from, or for the benefit of, a payment service user for the execution of a payment transaction. Payments firms must protect these funds immediately on receiving them, keeping them separate from the firm's own money. The obligation applies continuously, not just at the end of the day.

The Electronic Money Regulations 2011 impose broadly equivalent rules on EMIs, under Regulation 20, for funds received in exchange for e-money issued. Both sets of regulations are enforced by the FCA. In its consultation, the FCA reported that 380 authorised payment institutions and 250 e-money institutions were required to safeguard, alongside 602 small payment institutions that may safeguard on a voluntary basis, giving a non-bank payments sector of more than 1,200 firms.

The two permitted safeguarding methods under Regulation 23

Regulation 23 allows firms to choose between two methods, and this remains the case under the Supplementary Regime. The first, and by far the most common, is the segregation method: the firm holds relevant funds in a dedicated account with an authorised credit institution (a bank) or the Bank of England, or invests them in secure, liquid, FCA-approved assets held with an authorised custodian. The account must be clearly identified as holding customer funds, not the firm's own money.

The second method is the insurance or comparable guarantee method: the firm arranges an insurance policy with an authorised insurer, or a comparable guarantee from a credit institution, to cover the relevant funds. In practice, the FCA found that segregation is used by more than 95 per cent of firms; the insurance route is rarely used, partly because few providers offer suitable cover. The FCA consulted on whether to keep this method and, in PS25/12, confirmed it would maintain the use of insurance policies and comparable guarantees in both the interim and end state, while adding new conditions such as a requirement to plan a switch to segregation at least three months before a policy expires.

When using the segregation method, the firm must also obtain a formal acknowledgement letter from the account bank or custodian, putting it on notice that the account holds customer funds and cannot be used to offset any debt owed by the payment institution. This letter is a key document in the resolution pack that every firm must now maintain.

Why the FCA tightened the rules: the insolvency evidence

The FCA's case for reform rested on hard data from real insolvencies. For firms that became insolvent between Q1 2018 and Q2 2023, the FCA found an average shortfall of 65 per cent in the funds owed to customers, calculated as the total shortfall over client funds owed across twelve insolvency cases. Seven of those twelve cases had shortfalls of more than 50 per cent. For the e-money institutions in the sample, the average shortfall was 80 per cent. Those are not rounding errors; they represent customers losing the majority of the money they believed was protected.

The distribution timeline made matters worse. Where funds were available for return, the FCA reported that it took, on average, over two years for a first distribution to be made to customers (its cost-benefit analysis put the modelled central estimate at 2.3 years, with a range of 1.2 to 3.5 years). Of the six insolvencies that happened since 2021, only one had resulted in any distribution to customers at all by the time the FCA published its consultation.

The FCA's multi-firm review of safeguarding arrangements, conducted with eleven non-bank PSPs in the first six months of 2019, had already identified widespread weaknesses: firms that did not segregate funds promptly on receipt, could not accurately identify their relevant funds, kept inadequate records, and reconciled infrequently. The subsequent years confirmed that voluntary improvement was insufficient, making binding rule changes necessary.

The new Supplementary Regime: what changed on 7 May 2026

The FCA's policy statement PS25/12, published on 7 August 2025, introduced a Supplementary Regime that became binding on 7 May 2026. The regime sits alongside the existing PSRs 2017 and EMRs 2011 rather than replacing them, strengthening the operational standards firms must meet. A second stage, the Post-Repeal Regime, would eventually move safeguarding closer to the FCA's client assets (CASS) framework with a statutory trust over customer funds. This end state is deferred pending further legislation: the FCA has said the Post-Repeal Regime would replace the existing regime if, and when, the safeguarding requirements of the EMRs and PSRs are repealed under the Financial Services and Markets Act 2023. Following industry concerns, the FCA is not proposing to implement those end-state proposals without further consideration and consultation, and it will review the Supplementary Regime once a full audit period has been completed before consulting again if changes are needed.

The headline operational changes are: safeguarding reconciliations at least once each day, other than weekends, public holidays and days when relevant foreign markets are not open, with any shortfall required to be made good; a new monthly safeguarding return submitted to the FCA; an annual safeguarding audit carried out by a qualified auditor (a payments firm that has not been required to safeguard more than £100,000 of relevant funds at any time over a period of at least 53 weeks is not required to arrange this audit under SUP 3A); a maintained resolution pack containing the documents and records needed to return funds promptly on insolvency; and enhanced systems and controls, so that firms can identify and remediate discrepancies quickly.

The FCA extended the implementation period from six months to nine months following industry feedback, and clarified that reconciliations are not required on weekends and bank holidays. It also confirmed that firms may continue to rely on existing acknowledgement letters, subject to new rules on reviewing and replacing them.

How payment institutions manage safeguarding day to day

In practical terms, safeguarding is an operational discipline as much as a legal requirement. When a customer sends funds to a Nasara Pay account, those funds must be segregated promptly on receipt: they move into a designated safeguarding account held at a regulated bank, clearly separated from the firm's treasury and operating accounts. The account bank confirms in writing that it holds funds on behalf of customers and cannot net them against the firm's own liabilities.

Each reconciliation day, the compliance team compares the total balance in the safeguarding account against the sum of all outstanding customer liabilities, then cross-checks this internal reconciliation against the bank's own records. Any discrepancy, whether caused by a timing difference, a processing error, or a more serious issue, must be investigated and any shortfall made good. Records of each reconciliation form part of the evidence base for the annual audit.

Governance sits at board level. The safeguarding policy must be kept current, the resolution pack complete and retrievable, and the monthly FCA returns accurate and on time. Firms subject to the Senior Managers and Certification Regime (SMCR) already allocate clear individual responsibility for compliance functions, so safeguarding is a board-level priority with accountable oversight, not just an operations task.

Safeguarding versus FSCS: understanding the difference

A common misconception is that safeguarding offers the same certainty as FSCS deposit protection. The FSCS guarantees up to £120,000 per eligible depositor per authorised firm, funded by a levy on the financial services industry. If your bank fails, the FSCS aims to pay eligible deposit claims within seven working days up to that limit, regardless of how well the bank managed its books. Safeguarding offers no such statutory guarantee.

What safeguarding does offer is a legally protected pool of funds that should, if the regime works as intended, be identifiable and distributable in an insolvency without creditors competing for it. The strength of the protection therefore depends heavily on the quality of the firm's compliance. A firm that has correctly segregated funds, kept accurate records, and passed its annual audit gives customers a high degree of confidence. A firm with inadequate safeguarding, as the 2018 to 2023 insolvency data shows, can leave customers with a large unrecoverable shortfall.

The FCA's reforms are designed to close that gap: daily reconciliations catch shortfalls early, monthly returns give the regulator a near real-time view of each firm's position, and the annual audit provides independent assurance. The resolution pack means that, in an insolvency, administrators can identify and return customer funds far more quickly than the average time to first distribution of over two years seen in recent cases. For customers of compliant firms, the new regime should meaningfully improve the practical reliability of safeguarding.

What to look for when choosing a payment institution

Before entrusting funds to any payment institution, you can check its authorisation status on the FCA Register at register.fca.org.uk. Every authorised payment institution and EMI has a firm reference number (FRN), and the register shows the firm's permissions, including whether it is authorised to hold relevant funds and therefore required to safeguard them. Unregistered firms offering payment services are operating illegally and offer no regulatory protection.

Beyond registration, look for transparency about safeguarding practices. A well-run firm will tell you clearly that customer funds are held in a segregated account at a named bank, that regular reconciliations are performed, and that an annual safeguarding audit is completed by a qualified auditor. Some firms publish their safeguarding policy or make it available on request. This transparency is a marker of operational maturity.

The FCA's monthly reporting requirement means the regulator will have more granular, timely data on each firm's safeguarding position from 7 May 2026, and firms that cannot meet that standard will face supervisory attention. In practice, the FCA will be better placed to intervene early if a firm's position deteriorates, reducing the likelihood of the large shortfalls seen in earlier insolvency cases. Choosing a firm that is preparing proactively for the Supplementary Regime, rather than treating it as a minimum compliance exercise, is a meaningful indicator of its overall approach to financial controls.

Conclusion

Safeguarding payments is not a passive label: it is an active, ongoing operational obligation that requires daily reconciliations, independent audits, board-level accountability, and monthly regulatory reporting. The FCA's PS25/12 reforms, in force from 7 May 2026, represent the most significant tightening of the regime since the PSRs 2017, driven directly by evidence that weak safeguarding left customers with an average shortfall of 65 per cent across twelve real insolvencies. The new rules narrow the gap between the promise of ring-fencing and its delivery in practice.

For businesses and individuals using payment institutions, understanding the safeguarding framework helps you make informed choices about where you hold funds and with whom. Nasara Pay is designed to meet the FCA's safeguarding requirements, with segregated safeguarding accounts, regular reconciliations, and transparent governance. If you want to know more about how your money is protected, or to explore our payment solutions for businesses operating internationally, visit our payments hub.

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