FCA Considers New Rules to Safeguard Customers in Event of E-Payments Firm Insolvency

The UK’s Financial Conduct Authority (FCA) is exploring new regulations designed to protect customers in the event that electronic payment companies go bust. Under the proposed rules, e-payments firms would be required to place client funds into a statutory trust, ensuring that customers could quickly receive compensation if the company became insolvent.

According to the FCA, this would mark a significant improvement from the current framework, where many e-payment firms fail to properly safeguard client funds. As a result, when these companies collapse, customers often do not get their full money back, and those who do are typically left waiting years for their refunds.

Currently, customers of e-payment firms are not protected by the UK’s Financial Services Compensation Scheme (FSCS). The FSCS protects bank deposits of up to £85,000 per depositor in cases of authorized firms going insolvent, but this safety net does not extend to funds held by e-money companies.

The FCA noted that e-money firms in the UK now hold approximately £18 billion in customer funds, a substantial increase from £11 billion in 2021. These funds, however, are not covered by the FSCS, leaving customers vulnerable. The regulator warned that this growing reliance on e-payment services means a larger portion of the UK population "is likely to be exposed to harm if there is a shortfall in safeguarded funds."

The FCA revealed that it has reviewed 12 e-payment insolvencies over the past five years, and in the majority of these cases, customers lost over 50% of their money. To mitigate this risk, the regulator’s key proposal is for e-payment companies to place customer funds into a “statutory trust.” This trust would ensure that client funds are invested in low-risk assets, safeguarding the money and ensuring it can be returned to customers in the event of the company’s collapse.

“The trust will provide better protections for consumers, who will be the principal beneficiaries,” the FCA said in a statement.

In addition to the statutory trust proposal, the FCA has suggested several other changes, including stricter rules around record-keeping for e-payment firms. These reforms are aimed at improving overall transparency and safeguarding customer interests.

The FCA estimates that the annual cost of these new regulations for the UK’s e-payment companies would total £12.3 million.

The regulator has launched a public consultation to gather feedback on the proposed rules. E-payment companies and other stakeholders have until 17 December 2024 to submit their responses.

By fLEXI tEAM