Safeguarding

Safeguarding is what stands between a customer of a non-bank payment firm and that firm’s insolvency. Banks protect depositors with capital, supervision, and deposit insurance. E-money institutions and payment institutions hold customer money without any of that machinery, so the law imposes a different discipline: the customer’s funds must be kept identifiably separate from the firm’s own, ready to be handed back if the firm goes down.

The mechanics come from the EU’s e-money and payment services directives, retained in UK law after Brexit. A firm safeguards by segregation, placing relevant funds in a designated account at a credit institution (or investing them in secure, liquid low-risk assets), or by insurance, covering the funds with a policy or comparable guarantee that pays into the insolvency estate. Funds received for issued e-money must be safeguarded from receipt, with a hard backstop of five business days under EMD2.

The distinction that matters commercially is with deposit insurance. A safeguarded balance is not a guaranteed balance. If the firm fails with its records in disorder, or with a shortfall in the designated account, customers wait, and may take a haircut, while an insolvency practitioner reconstructs who is owed what. UK insolvencies of payment firms produced exactly those shortfalls, which is why the FCA moved. Its PS25/12 policy statement (August 2025) introduced interim rules, in force from 7 May 2026: records that can distinguish safeguarded funds “at any time and without delay”, an annual safeguarding audit reported to the regulator, and a standing resolution pack listing where every safeguarded pound sits. The planned end-state, a full client-assets style regime, was deferred pending further consultation.

Two details of the mechanics repay attention. First, timing: funds must reach the safeguarded state promptly, and under EMD2 no later than five business days after e-money is issued, so there is always a window in which customer money sits unprotected on the firm’s own account. Second, redemption: e-money must be redeemable at par, on demand, without charge in the normal case, which makes the safeguarded pool the working float of the business rather than a dormant reserve.

For settlement, safeguarding defines where the credit risk actually sits when value is held by a non-bank. Money at an EMI is a claim on the EMI, backed by a segregated account the EMI controls, one step removed from the bank balance it resembles. Institutions weighing rails and counterparties read safeguarding arrangements the way they read collateral: the protection is real, but it is procedural, and its quality is only as good as the records behind it.