Segregated Accounts: Get Connected to Client Money Protection Banking
Segregated accounts are one of the most important and most misunderstood pieces of infrastructure in regulated financial services. If you are a licensed payment company, EMI, or money service business that holds client funds at any point in the payment flow, your regulator almost certainly requires you to hold those funds in segregated accounts that are entirely separate from your own operating money. Faisal Khan LLC connects regulated payment companies and licensed financial operators to segregated account solutions through our network of banks, custodians, and licensed financial institutions that are specifically built to serve this requirement.
What Are Segregated Accounts
Segregated accounts are bank accounts or custody arrangements in which client funds are held separately from a company's own money. The core principle is simple: money belonging to your clients or customers must not be mixed with money belonging to your business. In the event of your company's insolvency, client funds held in properly segregated accounts are protected from creditors and can be returned to clients.
Segregation of client funds is a regulatory requirement under most payment company licensing frameworks. In the UK, the FCA requires EMIs and payment institutions to safeguard client funds under the Electronic Money Regulations and the Payment Services Regulations. In the EU, PSD2 imposes equivalent safeguarding obligations. In the US, the requirement to maintain client funds separately is embedded in many state money transmitter licensing frameworks and is a standard expectation of FinCEN-registered MSBs.
Getting this wrong is not a technical violation. It is a licensing and insolvency risk of the highest order.
Why Segregated Account Access Is Difficult for Payment Companies
Two distinct problems make segregated account access challenging for payment companies.
The first is the same problem that affects all payment company banking: most banks do not want to serve regulated financial operators. Even banks that will open an operating account for a payment company are sometimes unwilling to provide a segregated client money account, because the compliance implications of holding third-party client funds are more complex and higher-risk in the bank's view.
The second problem is structural. Segregated accounts must meet specific criteria to qualify as proper safeguarding under your regulatory framework. Simply opening a separate bank account and labeling it "client money" is not sufficient. The account must meet the specific requirements of your regulator, including the account title, the bank's acknowledgment of the safeguarding purpose, and in some cases a formal deed of acknowledgment from the bank that the funds are held in trust.
Many banks, even those willing to provide the account itself, are unwilling to execute the formal safeguarding documentation. This requires a banking partner who has done this before and understands what is required.
Safeguarding Methods: What Banks Must Provide
Regulatory safeguarding frameworks typically allow two approaches to protecting client funds:
Segregation in a Separate Bank Account: Client funds are held in a dedicated account at a credit institution (bank), titled clearly as a client money or client funds account, separate from the payment company's own accounts. The bank must acknowledge the purpose of the account. This is the most common safeguarding method.
Insurance or Guarantee Coverage: An alternative permitted under some frameworks, where client funds are covered by an insurance policy or bank guarantee rather than segregated physically. Less common in practice for payment companies at the account level.
Most regulated payment companies use the segregated bank account method. The institution providing the segregated account must be a credit institution, meaning a full bank, not an EMI, in most regulatory frameworks. This is a critical technical point: holding your "segregated" client funds at another EMI does not satisfy safeguarding requirements in most jurisdictions.
We specifically connect clients to credit institutions, not EMIs, for segregated account purposes where regulatory safeguarding is the requirement.
The Types of Segregated Account Solutions We Connect Clients To
UK FCA-Compliant Safeguarding Accounts: For FCA-regulated EMIs and payment institutions, we connect clients to UK-chartered banks willing to open client money accounts with the appropriate safeguarding documentation and account titling. This includes banks willing to execute formal acknowledgment letters confirming the safeguarding purpose of the account.
EU PSD2-Compliant Segregated Accounts: For EU-licensed payment institutions and EMIs, we connect clients to European banks in Lithuania, the Netherlands, Malta, and other EU jurisdictions that will provide properly structured segregated accounts meeting PSD2 safeguarding requirements.
US State-Compliant Client Fund Accounts: For US-licensed money transmitters, we connect clients to banking solutions that satisfy the specific client fund segregation requirements of their state licensing framework, which vary by state but consistently require physical separation of client funds from operating funds.
Multi-Jurisdiction Segregated Account Structures: For payment companies operating across multiple regulatory jurisdictions, we advise on the segregated account structure needed per jurisdiction and connect clients to the appropriate banking partners in each.
What Regulators Look for in a Segregated Account
When regulators audit your client money safeguarding, they will look for:
A bank account held at a credit institution (not an EMI) where the framework requires it
An account title that clearly identifies the funds as client money or funds held in trust
A signed acknowledgment from the bank that the funds are held for the benefit of clients and are not available to creditors in the event of the payment company's insolvency
A clear reconciliation process demonstrating that the balance in the segregated account matches the total client funds liability at all times
Documented procedures for how client funds move into and out of the segregated account
Failure on any of these points during a regulatory audit can trigger enforcement action, license suspension, or revocation. We prepare clients to meet these requirements before we make any banking introduction.
Frequently Asked Questions
Can I use an EMI account as a segregated client money account?
In most regulatory frameworks, no. PSD2 and the UK's Payment Services Regulations require that safeguarded client funds be held at a credit institution, meaning a bank. An EMI is not a credit institution. If your funds are held at another EMI and something goes wrong, your clients may not be protected. We connect clients to genuine credit institutions for segregated account purposes.
Does the bank need to sign anything specific for the account to count as properly segregated?
Yes. Under UK and EU safeguarding frameworks, the bank must acknowledge in writing that the account holds client funds and that those funds are not available to creditors of the payment company. This acknowledgment letter is a standard requirement. Not all banks are willing to provide it, which is why our network specifically includes those that have executed such letters before.
How much of our client funds need to be segregated?
The full amount of client funds held at any point must be covered by your safeguarding arrangements. If you hold 100% of client funds from receipt through to settlement, 100% must be segregated. If you only hold funds briefly before onward transfer, your exposure period and the amount held at any given time determines your safeguarding obligation. We advise on this calculation as part of our engagement.
Can a single bank provide both our operating account and our segregated account?
Yes, and this is often operationally convenient. However, the accounts must be completely separate, clearly labeled, and the bank must understand and document the distinction. We advise clients on how to structure the relationship with a single banking partner to satisfy both operating and segregated account requirements.
Get Connected to Segregated Account Solutions
Properly structured segregated accounts are not optional infrastructure for a regulated payment company. They are a licensing requirement, a client protection obligation, and a test that regulators take seriously. Faisal Khan LLC does not hold client funds or provide custody services. We connect licensed payment companies and financial operators to the banks and credit institutions that will properly structure and document segregated accounts to meet your regulatory obligations.
If you are launching a licensed payment business, restructuring your safeguarding arrangements, or facing regulatory questions about your client money protection, reach out. We connect you to the right banking partner and make sure the documentation is in order before you walk through the door.