Safeguarding
Safeguarding is the statutory requirement that an authorized payment or e-money firm keep customer funds apart from its own money, by a method the rules prescribe, so the funds are identifiable and returnable to customers if the firm fails. It is a licensing condition, not best practice.
Also called: safeguarding · safeguarding requirement · segregation requirement
What the rules require
A payment institution or electronic money institution does not own the money customers give it to move or to hold as e-money. Safeguarding is the mechanism that makes that true in an insolvency as well as in principle. Both the UK and the EU require it, and not in the same way: the UK sets out the permitted methods in its payment services and e-money regulations, supplemented since May 2026 by the FCA’s own safeguarding rules, while the EU obligation runs through directives that each member state implements, choosing for itself which methods to allow. Either way a firm must use a permitted method rather than a scheme of its own design.
Segregation is the common choice: relevant funds are kept apart from the firm’s own money on receipt and, if still held at the end of the business day following receipt, placed in a designated safeguarding account at a credit institution or invested in specified secure liquid assets, with the account designated so the bank knows what it is holding. The alternative method uses insurance or a comparable guarantee from a bank or insurer outside the firm’s group, payable to customers if the firm fails. Either way the firm must be able to show, on any given day, which money is customers’ and how much of it there is — which is why reconciliation is part of the obligation rather than an operational nicety, and why the FCA now requires internal and external safeguarding reconciliations on every reconciliation day.
What it protects against
If a UK safeguarded firm fails, the safeguarded pool is intended to be distributed to customers ahead of general creditors, with the cost of distribution taken from the pool itself. Shortfalls arise less from theft than from ordinary process failure: money booked late, a fee swept from the wrong account, a payout partner holding funds under an arrangement that does not qualify, a reconciliation nobody ran.
Safeguarding is not deposit insurance, and in the UK it is not a trust either — the Court of Appeal has held that the e-money regulations create no trust over relevant funds. Nothing in it guarantees customers are made whole; it makes their money identifiable and gives them priority over it. Where the pool is short, customers share the shortfall.
In practice
Safeguarding is a statutory obligation with prescribed methods and a prescribed moment at which it starts, not a general duty to be careful with customer money. In the UK it comes from the payment services and e-money regulations, and since May 2026 those duties have been supplemented by the FCA’s safeguarding rules: reconciliations on every reconciliation day, acknowledgement letters from the banks holding the funds, a resolution pack, a monthly safeguarding return, and an annual safeguarding audit for all but the smallest firms. There is no statutory trust over the funds — the Court of Appeal has held that the e-money regulations create none, and the FCA’s proposed end-state regime, which would have imposed one, is not going ahead without further consultation. In the EU the obligation comes from the payment services and e-money directives, so the permitted methods sit in each member state’s implementing law rather than in a single European rulebook.
Example
An EMI holds £6 million of customer balances. £5.7 million sits in a designated safeguarding account at a bank; £300,000 is with a payout partner abroad under a commercial agreement that does not meet a permitted method. The firm safeguards 95 percent of what it owes and is in breach as to the rest, whatever the partner’s credit quality.
Commonly confused with
| Term | How it differs |
|---|---|
| Client Money | Client money is the regime for investment firms; safeguarding is the payments and e-money obligation, with different rules and a different rulebook chapter. |
| Segregated Account | A segregated account is an account structure; safeguarding is a legal obligation that a segregated account is one way of meeting. |
| FBO Account | An FBO account is a US structure for holding money on behalf of others; it is not a permitted safeguarding method under UK or EU rules. |
See also
- Safeguarding AccountA safeguarding account is the account at an eligible institution in which a UK payment or e-money firm places the customer funds it must safeguard, held and designated the way the applicable rules require rather than the way a bank chooses to label its product.
- Client MoneyIn the United Kingdom, client money is a defined regulatory term: money a firm holds for customers under one of the FCA’s client asset regimes, covering investment business, insurance distribution, debt management and claims management. It must be segregated, identifiable, and — in investment business — held on trust for the customers it belongs to.
- Electronic Money InstitutionA firm authorized in the United Kingdom or in an EU member state to issue electronic money and to provide payment services. The e-money it issues is a claim its holders have against the institution, redeemable at par and expressly not a deposit, which is why the funds behind it must be safeguarded.
- Relevant FundsRelevant funds are the customer money a UK payment institution or electronic money institution must safeguard: sums received for the execution of a payment transaction, and, for an e-money issuer, funds received in exchange for electronic money issued. Separation from the firm’s own money is immediate on receipt; placing the funds in a designated account comes a day later.
- Payment InstitutionA payment institution is a firm authorized in the United Kingdom or a European Union member state to provide payment services — transfers, acquiring, remittance, payment initiation — but not to issue electronic money. It may hold customer funds in payment accounts used only for payment transactions; those funds are neither deposits nor e-money.
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Regulatory information checked: 22/Sep/2026