What you need to know about safeguarding of accounts, assets and funds

The basics of safeguarding of funds are covered in Freemarket’s FAQs. It is not the intention of this article simply to rehash the FAQ text into prose, although by necessity some of the basic content is replicated. The intention is to provide a slightly longer description of safeguarding than would usually go into FAQs and to look at it from a practitioner’s perspective. None of it should be construed as advice, and there are also some personal opinions in here may not reflect the official views of Freemarket.

Having said all that, I think it’s still pretty useful content for those who want to know a bit more about what it is and how it works, so let’s jump in.

Purpose and methodology of safeguarding

Safeguarding is used by Payment Institutions and E-Money Issuers (PIs and EMIs) to protect funds it holds in-trust for the beneficial use of underlying users in the event they were to go into liquidation. It ensures that the funds can only be used to complete the payment as instructed or, should that prove to be impossible (such as if the PI/EMI were to cease operating due to a forced liquidation before the instruction is executed), the funds are returned to the original payer.

There are 2 ways of safeguarding in the UK:

  1. Segregation of funds, which is used universally; and
  2. Insurance method, for which the author is unaware of any real-world use case

Other jurisdictions also have methodologies such as ‘by Guarantee’ but this type of safeguarding is not used in the UK. In regulatory terms, the PI/EMI is a Payment Services Provider (PSP) and the underlying client is the Payment Services User (PSU). There may also be other PSPs in the payment chain.

It’s all about outcomes

The FCA regulates based on good customer outcomes. Rather cleverly, the regulations create outcomes that protect the funds the customer has paid to the PI or EMI. Safeguarding creates a chain of custodial protection whereby:

  • the safeguarding account is provided by a qualifying credit institution;
  • the first PI/EMI is the holder of the bank account being used;
  • there will not usually be intermediary PIs / EMIs between the institution with the bank account and the PSU, although this is possible;
  • ordinarily, funds in a company’s operational bank accounts (which are not protected by safeguarding) would be subject to general and specific liens and retentions in the event of liquidation. That is, the bank could be forced by the courts to cease trading and any residual balances would be treated as assets which could be dispersed to creditors;
  • however, and this is the clever bit, where the bank provides safeguarding accounts it agrees that the funds held in that account are NOT subject to any liens or retentions;
    1. The side-letter agreement, which is contractually binding, effectively recognises that beneficial ownership of the funds resides with the PSU.
    2. This means that the funds attributable to that PSU can only be used to complete a payment instruction or must be refunded back to the original PSU.
  • For its part, the PI/EMI must agree not to use the accounts to store own-funds as these would ‘contaminate’ the safeguarding and put the protection of the funds at risk
    1. Clearly it might be better for the PSU if this were not the case. Slightly over-funding the account provides additional protections and also potentially prevents intra-day funding gaps where the fees are moving in and out;
    2. However, these accounts are usually set up to avoid such issues so the over-funding shouldn’t be necessary, and it is far more important to protect the sanctity of safeguarding and thereby the PSUs’ beneficial ownership.
  • We have worked backwards to the first link in the chain which is the PSU (before the funds are paid out). They have beneficial ownership of the money until the payment instruction has been completed. Completion is defined as the funds having been paid to the beneficiary (or the beneficiary’s PSP).


Payment Services Regulations (2017) stipulate that PIs / EMIs must have appropriate and well-managed safeguarding arrangements to ensure customer funds are not subject to any other claim and that in the event of insolvency, are returned to the customer in full, and in a timely and orderly way.

This is set out in detail within:

  • PSRs regulation 23
  • Chapter 10 of the FCA Approach Document

    Current PSRs are law in the UK and were transposed into UK law from the 2nd Payment Services Directive (PSD2) in 2017 (hence the date of the legislation). PSRs (2017) replaced PSRs (2007) that were derived from the first PSD (PSD1).

    EU directives do not all have to be implemented into law in the same way in each country. It is widely acknowledged that the way the UK regulates is very supportive to PIs / EMIs. Perhaps this is because the UK parliament and regulator actively seek to break monopolistic and anti-competitive behaviours of the large banks. Indeed some of the changes required in PSD2 were already underway in the UK through Open Banking, Banking Reform and various initiatives of bodies such as the Competition & Markets Authority.

Safeguarding in practice

Banking partners are required to warranty (in a side letter to the usual T&Cs of the account) that the safeguarded funds will not be used to satisfy or offset any other obligation including those obligations imposed on the PI/EMI itself. Directionally, the side letter must come from the bank to the PI. If the PSU’s payment instruction is unable to be complied with, the bank must return the funds to the original source. If this cannot be done by the PI/EMI due to liquidation then it will be overseen and instructed by the insolvency practitioner.

PI/EMIs do not maintain a safeguarding account for each individual customer. Rather, they hold pooled accounts in the name of “[PI name] Client Accounts” in each currency for the purpose of providing payment services.

Individual customers’ funds in safeguarding accounts are identified through its ledger of virtual account numbers and/or virtual reference numbers. These records are used to reconcile credit, debit and balance transactions each day such that (i) the recorded positions for each client individually show what amount of the total balances held is attributable to them; and (ii) the individual amounts recorded in virtual accounts should add up to the total balance held in the real account.

PIs and EMIs also move fees and charges out of the safeguarding account to their own operational account as they are required to do so at least daily.

Relevant funds

In PSRs, safeguarding applies to ‘Relevant Funds’ which are defined as sums received:

  • from, or for the benefit of, the Payment Services User for the execution of a payment transaction, and
  • from another Payment Services Provider (either a bank or non-bank) for the execution of a payment transaction on behalf of a Payment Services User
  • relevant funds do not include funds withdrawn from the safeguarding account during the settlement of an FX deal. Once the proceeds of the FX deal are placed back into the safeguarding accounts (and assuming those funds will be used to make a payment) they become relevant funds again and are protected by safeguarding.


PIs/EMIs are obliged to safeguard any monies you transact including funds placed into their payment account at the PI/EMI, withdrawals. Safeguarding should start as soon as Relevant Funds have been received. It should continue until the Relevant Funds are paid out to the payee or the payee’s Payment Services Provider.

  • Safeguarding is always ‘owed’ to the underlying user (the Payment Services User in PSRs), not to any intermediary PSP
  • The underlying PSU is therefore the beneficiary of safeguarding in the event that EITHER (i) the principal PSP to go into insolvency, or (ii) an intermediary PSP were to go into insolvency


The FCA requires both internal and external reconciliation to take place.

Internal reconciliation

The internal reconciliation provides assurance as to the accuracy of internal records with regards to how much should be safeguarded. This is done by comparing:

  • The aggregate funds owing to clients as displayed on the firm’s internal system; and
  • The aggregate funds that the firm believes it holds in its safeguarding accounts (counting only the relevant funds, i.e. excluding fees that will be moved off the account)

    This enables the firm to check the accuracy of its records by comparing its internal customer balances with its own record of customer funds held in the safeguarding account. This comparison should result, taking account of timing differences, in an exact match.

    External reconciliation

    In contrast to the internal reconciliation, which is only interested in the record of relevant funds held at the banking providers, the external reconciliation uses the total actual balance held in the safeguarding accounts, including non-relevant funds in the form of fees accrued.

Complex scenarios

There are some complex / nuanced scenarios that only apply in a limited number of cases and sometimes cause confusion. Descriptions of these situations may be read in isolation and need not be understood by all readers of this article. If you are confused please skip to Differences between payment accounts and bank accounts.

Double safeguarding

The industry is consulting with the FCA on some ambiguity in the wording of the PSRs approach document but as a general set of principles:

  • Safeguarding is owed to the PSU
  • Safeguarding is owed from the point the funds are received until they are paid to the PSU (or their PSP)

Double safeguarding would mean that the client’s funds are segregated AND the PSP also has to use the same amount of its own funds while the client’s money transitions. The ambiguity occurs where there is an intermediary PSP. However, safeguarding is owed to the PSU, not the intermediary PSP.

Furthermore, the intermediary PSP is liable in the event it creates a loss for the first PSP. Double safeguarding is seen by the key industry bodies as an over-zealous interpretation of the safeguarding rules, but expect further clarifications to follow from the regulators.

Multiple PSPs; PSP also acting as PSU

The PI/EMI with accounts directly at the qualifying credit institution may hold safeguarding funds sent by another intermediary PSP. The first PI/EMI might also hold funds for the intermediary PSP as a PSU as well (e.g. fees). In this scenario, safeguarding applies in 2 separate and distinct ways:

  • the safeguarding that the first PSP has documented with their bank is ‘owed’ to the underlying PSU (for the amount the PSU sent); AND
  • safeguarding is ALSO owed by the bank to the intermediary PSP (who are acting as a PSU) for the amount they have separately provided (they are PSU in this case).

These amounts are not considered to be co-mingled as the amount held for the underlying client when they are PSU cannot be used to settle or offset the obligations of the intermediary (whether they are acting as an intermediary PSP or as a PSU).

Funds received for FX

Funds received for foreign exchange are only relevant for safeguarding purposes to the extent that they are received into customer payment accounts. Foreign exchange in and of itself is not an activity covered by the safeguarding requirement. In practice this means that where a client executes an FX transaction, their available balance will fall whilst the FX is undertaken. The proceeds of the FX deal will then land. There may be a small-time delay or lag while the 2 legs of the FX deal settle during which the funds are not safeguarded. During this time the funds are transitioning via the FX liquidity provider. This is described in the FCA’s PSRs approach document and your PI/EMI will be able to update you further.

Differences between payment accounts and bank accounts

Generally, PSUs make use of PIs and EMIs because banks do not have the flexibility of product or pricing structure to meet their needs. A client’s account with a PI/EMI is a payment account. The payment account should never be described or thought of as a bank account because PIs / EMIs are not banks. If the PSU wants to deal with a bank then they should open and operate a bank account.

The key differences between payment accounts at a PI / EMI and a bank account are:

  • Where the PI is authorised to operate and offer payment accounts, these are not the same as bank current accounts. Bank current accounts are BOTH deposit accounts and payment accounts (see FCA PERG 15.2).
  • Banks do not treat the funds on deposit (including those in a current account) as either client monies or safeguarded monies. The deposit at a bank account is treated as a ‘loan’ to the bank. Banks do not have the same limitations around co-mingling of funds.
  • The PI or EMI is not allowed to pay interest on the balances. However, even if interest rates were much higher:
    • Interest foregone vs a current account is usually close to nil;
    • Funds moved to a PI should be accompanied by a payment instruction, so the time available to earn interest elsewhere would be short; and
    • The savings from using a PI / EMI rather than a bank are typically much greater than the interest which might have been earned.
  • The funds in an account held at a PI / EMI are not eligible for depositor protection via the Financial Services Compensation Scheme FSCS. However,
      • FSCS is only relevant to retail and micro-enterprises; and
      • The underlying intent of safeguarding is that the PSU is not subject to the default risk of the PI/EMI, but rather to the default risk of the bank providing the safeguarding account. However, it must be noted that:
        1. There is a risk that safeguarding may not have been correctly or robustly applied (see the examples provided at the end of this article); and
        2. Return of funds to the PSU as payer may involve some costs (such as costs of the PI/EMI’s insolvency practitioner) so the PSU may not receive back the full amount.

Many PSUs using PIs and EMIs, therefore, benefit from lower costs, whilst foregoing little interest and facing very little incremental risk.

Safeguarding audit

PIs / EMIs must undertake an annual audit of compliance with the PSRs 2017 safeguarding requirements. The safeguarding audit provides formal ratification and comfort that the safeguarding process is being followed and that funds are truly protected.

The audit must show that the PI/EMI (i) has an up-to-date safeguarding systems and controls manual, (ii) holds records that demonstrate and explain the rationale behind its safeguarding decisions, and (iii) fully discharges its safeguarding obligations as prescribed by the PSRs.

Recent failures

Failures are never welcomed in the payment industry. If individual failures aren’t fully understood they can stigmatise others in the same industry by association. Assuming you have read this far, I can assume you want to understand the way the payment industry works in more detail than the average person. I, therefore, feel safe describing a couple of examples – the intention is that they are cautionary tales for operators rather than indictments of the industry.


In 2019 and 2020, Wirecard AG illustrated the strength of the regulatory environment in the UK for PSPs by providing an almost perfect (although tragic) counterfactual by highlighting how poor the regulatory environment is in Germany. Both countries were subject to the same EU directive (PSD2) which makes the failure even more shocking.

  • Wirecard had some great business lines and departments,
  • However, the supervision has to make sure it all works harmoniously and for the benefit of clients. Sadly, this wasn’t the case.
  • The episode only really came to light after dogged investigation by journalists at the Financial Times newspaper.
  • What made the episode *really* notable was not only that the German regulator didn’t pick up on the clear evidence of misconduct, but (rather astonishingly) they actually sought to frustrate the journalists’ investigation.
  • The ex-CEO, ex-COO, 2 other former board members and various other executives have been implicated in the criminal investigation and proceedings.


    Premier FX

    Premier FX – subject to recent censure (Q1 2021).

  • Premier FX told clients they could hold funds indefinitely (not true) that their funds would be held in secure, segregated client accounts (misleading, see above description) and their funds would be protected by FSCS (not true, see above)
  • Safeguarded funds were being used to settle other clients’ obligations as well as the cash flow requirements of the firm itself (which is clearly a breach of principles and practices)
  • Sadly, this all only came to light when the principal of the firm passed away and was discovered by his children

These levels of fraud and duplicity are exactly why you should work with a PI/EMI with (i) the scale and structure to separate responsibilities, and (ii) who will actively seek the validation the safeguarding audit provides, not just submit to external review out of a sense of obligation or to ‘tick a box’.