The Financial Conduct Authority (FCA) has finalised a package of reforms to strengthen safeguarding requirements for payment and e-money firms. The new rules, which take effect from 7 May 2026, are designed to improve consumer protection and address weaknesses which have been identified in recent insolvencies, where client shortfalls averaged 65% of safeguarded funds.
The revised framework places greater emphasis on daily reconciliation, audit assurance and enhanced planning for orderly wind-downs, while scaling requirements for smaller firms that provide services such as digital wallets, prepaid cards or online payments.
New key requirements
From May 2026, authorised payment institutions, authorised e-money institutions, small money institutions and credit unions issuing e-money in the UK (except those providing only payment initiation or account service information) will need to follow a set of mandatory requirements, including:
- Daily safeguarding checks – firms must verify, on a daily basis, that safeguarded balances are sufficient to cover customer funds
- Monthly reporting – data must be submitted to the FCA on a monthly basis to provide greater visibility of safeguarding practices across the sector
- Annual audits – larger firms must appoint qualified auditors to carry out annual, independent safeguarding audits
- Wind-down planning – firms must prepare clear and practical plans to ensure funds are distributed quickly if they fail.
These measures are designed to reduce the risk of shortfalls, minimise delays in returning funds to customers and enable the FCA to identify non-compliance at an early stage.
A proportionate approach for smaller firms
Following industry feedback, the FCA has made adjustments to ensure that the requirements remain proportionate and that smaller firms can comply without being overburdened. For example:
- Firms holding less than £100,000 in safeguarded funds will not be subject to the annual audit requirement
- Small Payment Institutions (SPIs) remain outside mandatory safeguarding requirements but can opt in voluntarily.
The FCA believes that this tiered approach reflects the operational reality of differing sizes and models of smaller firms and provides a balance with the need for enhanced consumer protection to raise standards across the sector.
Why the changes matter
Many consumers assume that their money is fully protected when they use payment and e-money services. However, these funds are not protected by the Financial Services Compensation Scheme (FSCS), unlike deposits in banks or building societies.
Safeguarding, therefore, is the main protection mechanism. Weaknesses in record-keeping, reconciliations and wind-down planning have previously left customers exposed to significant losses and protracted insolvency proceedings.
The FCA’s consultation (CP24/20) received broad support for tightening safeguarding standards and introducing audit and reporting mechanisms, which are aimed at raising standards across the sector and building greater consumer confidence in non-bank payment services. The final rules under PS25/12 aim to tackle these issues.
Transition support
Firms have until May 2026 to prepare for the new safeguarding regime. The FCA has offered support through webinars, events and direct supervisory engagement. The transition period is an opportunity to strengthen internal processes, review safeguarding arrangements and ensure that governance is aligned with regulatory expectations. This phased approach is designed to help firms get it right, rather than rush through changes and risk making mistakes.
What firms need to do
The FCA’s safeguarding reforms are part of a broader regulatory shift towards a client assets ‘CASS-style’ regime post-repeal of the existing Payment Services and E-Money Regulations. While the May 2026 rules represent an interim framework, they set clear expectations that firms must meet higher standards of governance, transparency and operational resilience.
For financial service professionals, the message is clear – safeguarding is no longer a compliance formality but a central pillar of consumer protection and regulatory trust in the payments sector. Firms should prioritise:
- Reviewing safeguarding policies and procedures to ensure that they are robust enough to meet with daily reconciliation requirements
- Engaging external auditors to prepare for annual safeguarding audits
- Strengthening wind-down planning to confirm that customer funds can be returned efficiently
- Enhancing internal monitoring and reporting capabilities to support accurate monthly reporting to the FCA
- Assessing resource needs to ensure the appropriate allocation of staff, training and technology to manage safeguarding obligations effectively.
Final thoughts
The May 2026 reforms represent the next step towards a more comprehensive safeguarding framework, moving close to a CASS-style regime over the next few years.
For the industry as a whole, it’s a chance to raise standards and rebuild trust after previous failures.
For firms, safeguarding is no longer simply a compliance requirement but a core part of operational resilience and consumer protection. They must now invest in strengthening reconciliation, reporting and wind-down planning processes to ensure that client funds are properly protected.
For consumers, it means greater peace of mind with the reassurance that if a firm fails, their money is more likely to be returned in full and without long delays.
For the FCA, it’s another step in making sure that financial innovation doesn’t come at the expense of consumer protection. The organisation will be monitoring how effectively firms implement these changes. Firms that fail to act risk not only enforcement but reputational damage in a sector where customer trust is paramount. However, firms that do take early action will be better positioned to demonstrate compliance, protect their customers and maintain regulatory trust.
For more information on any of the issues we’ve discussed here, contact us.
