Safeguarding overhaul: navigating the new UK and EU rules for payment firms

January 2026  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

January 2026 Issue

The payment and e-money sector has evolved rapidly in recent years, prompting a corresponding shift in the regulatory landscape. In response, both the UK and the European Union (EU) have introduced significant changes to the rules governing payment firms.

Strengthening safeguarding: the FCA’s two-stage reform

In August 2025, the UK’s Financial Conduct Authority (FCA) concluded a major review of safeguarding requirements for payment and e-money institutions. The revised rules aim to mitigate risks observed in recent firm failures, where customers experienced lengthy delays and recovered, on average, only 35 percent of the funds owed to them.

According to the FCA, payment firms that became insolvent between the first quarter of 2018 and the second quarter of 2023 had average shortfalls of 65 percent in customer funds. The new rules are intended to strengthen consumer protection and improve safeguarding practices across the sector.

In the UK, safeguarding refers to the requirement that customer funds be kept separate from a firm’s own money, ensuring that these funds can be returned in the event of insolvency. Unlike deposits held by banks, funds held by payment and e-money firms are not covered by the Financial Services Compensation Scheme. Instead, firms must implement safeguarding measures, which, if inadequate, can result in financial loss or delays for customers when a firm fails.

The FCA’s updated safeguarding regime introduces reforms designed to enhance the protection of relevant funds, particularly in insolvency scenarios. These reforms focus on improving operational standards, oversight and accountability. The new rules apply to authorised payment institutions, electronic money institutions (EMIs), small EMIs, and credit unions that issue e-money.

On 7 August, the FCA published Policy Statement PS25/12, accompanied by finalised guidance titled Payment Services and Electronic Money – Our Approach, amendments to the FCA Handbook via Handbook Instrument FCA 2025/38, a new webpage summarising the changes, and a press release outlining the rationale and implementation timeline.

The policy statement outlines a two-stage reform process. The first stage, known as the Supplementary Regime, will take effect on 7 May 2026 following a nine-month transition period. This regime overlays the existing Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) with new provisions in the FCA Handbook, particularly within the Client Assets Sourcebook and the Supervision Manual.

The second stage, referred to as the Post-Repeal Regime, will be implemented once HM Treasury revokes the PSRs and EMRs. This stage will introduce a statutory trust framework for safeguarding. The implementation date for this regime has not yet been confirmed.

Under the new rules, firms will be required to undergo annual audits conducted by qualified auditors, submit monthly reports to the FCA and perform daily checks to ensure that the correct amount of money is being safeguarded. Additionally, firms must improve their wind-down planning to facilitate quicker returns of customer funds in the event of failure.

These measures are designed to address deficiencies identified in previous firm failures. The FCA has also introduced proportionate requirements for smaller firms in response to consultation feedback. For example, reconciliations will not be required on bank holidays or weekends. Firms holding less than £100,000 in relevant funds will not be required to arrange a safeguarding audit, and those holding no relevant funds will no longer need to conduct a limited assurance audit.

“People rely on payment firms to help manage their financial lives,” said Matthew Long, director of payments and digital assets at the FCA. “But too often, when those firms fail, their customers are left out of pocket. Most of those who responded to our consultation agreed we need to raise standards to protect people’s money and build trust, but any changes needed to be proportionate, especially for smaller firms.

“We’ll be watching closely to see if firms seize the opportunity and make effective improvements that their customers rightly deserve – this will help us to determine whether any further tightening of rules is necessary,” he added.

Parallel paths: EU regulatory developments

While the FCA is implementing its safeguarding reforms, the EU is also progressing with its own regulatory updates. The Payment Services Directive 3, currently in draft form and expected to take effect in 2027, and the Markets in Crypto-Assets Regulation, which came into force in December 2024, will introduce stricter safeguarding requirements through different mechanisms.

The development of parallel regimes in the UK and EU means that cross-border firms must prepare accordingly. Differences in legal frameworks and implementation timelines will require careful planning to ensure compliance in both jurisdictions.

Given the limited time before the FCA’s reforms take effect, firms must act swiftly. The changes will have wide-ranging implications, including increased operational complexity, enhanced audit readiness and more rigorous third-party risk management. These reforms will also entail significant cost considerations. Firms must therefore assess whether their current safeguarding practices, systems, governance structures and overall readiness are sufficient to meet the new compliance standards.

© Financier Worldwide

BY

Richard Summerfield