Safeguarding
Safeguarding is the set of rules requiring payment and e-money institutions to keep customers' money apart from their own and protect it from their creditors, either by holding it in segregated accounts or secure, liquid assets, or by covering it with an insurance policy or a bank guarantee. It is what stands between customers and a failed fintech.
- Also known as
- Safeguarding of customer funds, Safeguarded funds, Segregation of customer funds
- Used at
- every authorised payment institution and e-money institution that holds customer funds, from wallets and remittance firms to merchant acquirers
- Binding
- PSD2 (Article 10) and the E-Money Directive in the EU; in the UK the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, supplemented by FCA rules in force from 7 May 2026 (policy statement PS25/12)
- Timing
- under PSD2, funds not yet paid out by the end of the business day after receipt must be in a separate account at a credit institution or in secure, low-risk assets; under the UK e-money rules, funds received by card must be safeguarded no later than five business days after the e-money is issued
- UK rules from May 2026
- safeguarding reconciliations at least once each business day, a monthly safeguarding return to the FCA, an annual safeguarding audit unless the firm never safeguards more than £100,000, and a resolution pack to speed the return of funds if the firm fails
- Why it matters
- the FCA found an average shortfall of 65% in client funds at payment firms that became insolvent between 2018 and mid-2023; the Financial Services Compensation Scheme does not cover the failure of the payment firm itself
- On failure
- UK payment and e-money institutions can enter a special administration regime (2021) whose first objective is returning customers' funds as soon as reasonably practicable
How safeguarding works in practice
A customer tops up a wallet with £1,000. Within the deadline the firm must hold £1,000 in a designated safeguarding account at a bank, in its own name but marked as held for customers — or in approved low-risk assets, or covered by an insurer's or a bank's guarantee. Every business day it reconciles what it owes customers against what it holds, tops up any shortfall from its own money and records the result. If it fails, the safeguarded pool is ring-fenced for customers rather than shared with general creditors.
Weak safeguarding is usually operational rather than dishonest: customer money left in operating accounts, reconciliations run monthly or never tied to the ledger, a bank never told the account holds customer funds, fees and chargebacks netted against the pool. Keeping safeguarding accounts open is itself a constraint, because banks choose carefully which payment firms they will hold money for.
For a buyer, safeguarding is the first regulatory workstream. Does a daily reconciliation exist, and does it tie to the ledger? Have there been shortfalls or breaches reported to the regulator? What did the last safeguarding audit say, and how concentrated are the safeguarding banks? In the price bridge, safeguarded balances are neither the target's cash nor its debt; they belong to customers, and a buyer who counts them as cash is paying for money it cannot use.
Example
A UK e-money institution holds £180m of customer balances. Its reconciliation, run each business day, compares total e-money outstanding on the ledger with balances at two safeguarding banks and £40m of short-dated gilts in a segregated custody account. One Monday it finds a £2.4m shortfall: on Friday a card-scheme settlement was paid from the safeguarding account instead of the operating account. The firm tops up the pool from its own funds the same day, fixes the payment routing and reports the breach to the FCA. At sale, the buyer samples 60 reconciliations, finds the breach disclosed and resolved, and accepts it. A second target, reconciling weekly and carrying a qualified safeguarding audit, has its price cut by £9m and a specific indemnity added.
Common mistakes
- Treating safeguarded balances as the company's cash in a valuation or price bridge. - Reconciling weekly or monthly, so a shortfall runs for days before anyone sees it. - Paying fees, refunds or scheme settlements out of the safeguarding account. - Relying on a single safeguarding bank with no plan for the day it closes the account. - Telling customers their money is protected like a bank deposit; safeguarding, not the compensation scheme, is their protection. - Filing the annual safeguarding audit without the board ever reading it.