As the FCA’s enhanced safeguarding regime came into force in May this year, payment services and e-money firms that rely on the insurance or guarantee method should have taken a fresh look at whether their arrangements are truly fit for purpose.
While this option remains available under the new rules, the FCA has made it clear that it expects higher standards and much stronger evidence that these arrangements genuinely protect clients in practice.
In this article, the latest in our series helping firms as they get to grips with the new requirements, we explore the key changes under CASS15.
At its core, the new regime is outcome-focused. The FCA expects all safeguarding methods to deliver protection effectively equivalent to statutory trust segregation. For firms using insurance or guarantees, this means being able to demonstrate – clearly and convincingly – that client funds would be protected and paid out promptly if the firm were to fail, without delay or dilution.
Will it work in practice?
One key area of focus for firms should be how the insurance or guarantee actually works in practice. The cover must be legally enforceable for the benefit of clients, not just the firm. There should be no grey areas about who can make a claim, where proceeds are paid, or whether funds could become entangled in an insolvency process. If the wording is unclear, overly complex, or relies on assumptions about how it would operate under stress, it is likely to attract regulatory scrutiny.
The FCA is also paying closer attention to the strength and reliability of the cover itself. Policies or guarantees must be robust, appropriately structured, and issued by financially sound providers. They should not include exclusions or conditions that weaken client protection, nor should they be capable of being cancelled or restricted at short notice. Where multiple policies or guarantees are used, each must stand on its own and respond independently, rather than relying on another layer of cover being exhausted first.
Due Diligence & Contingency Planning Key
Closely linked to this is the FCA’s increased focus on due diligence over insurers and guarantors. Firms can no longer treat the provider of cover as a box-ticking exercise. They are expected to understand, document, and periodically reassess the financial strength, regulatory status, and reliability of the provider throughout the life of the arrangement. This includes assessing whether the provider could meet claims under stress or insolvency and whether any structural or jurisdictional factors could delay or prevent payment. Ongoing monitoring is particularly important where providers are overseas or part of wider group structures.
From an operational perspective, firms must also ensure that the level of cover keeps pace with client balances. This is not a one-off exercise. It requires accurate calculations, ongoing monitoring, and the ability to adjust coverage quickly as volumes change. Even short-term gaps between client money held and insurance limits may be viewed as a serious control weakness.
The new rules also introduce greater formality around FCA engagement and contingency planning. Firms are expected to notify the FCA in advance if they intend to rely on insurance or guarantees and to explain clearly how the arrangement works. They must also have a clear process to notify the FCA if they are unable to renew an existing insurance policy or guarantee – or secure an alternative provider – at least three months before the current arrangement expires. The process should outline how the firm will transition to holding client funds using the segregation method if the insurance or guarantee lapses. In practice, this may require firms to be ready to switch to segregation at relatively short notice.
Insurance & Guarantees are not a Panacea
Finally, it is important to stress that using insurance or guarantees does not reduce wider safeguarding responsibilities. Governance, senior management oversight, record-keeping, reporting, and audit expectations are all increasing. Boards and SMF holders are expected to understand the safeguarding model in use and actively oversee it, rather than treating it as a technical or outsourced solution.
Key actions firms should be taking now:
- Review existing arrangements to ensure insurance or guarantees are fit for purpose under the enhanced regime.
- Check enforceability: Ensure policies/guarantees are legally enforceable for the benefit of clients, with no ambiguity over claims or payments.
- Assess policy robustness: Confirm cover is strong, appropriately structured, and cannot be cancelled or restricted at short notice.
- Conduct thorough due diligence on insurers/guarantors, including financial strength, regulatory status, and reliability in stress or insolvency scenarios.
- Create contingency plans for non-renewal or lapses in cover, including readiness to move to client money segregation if needed.
Now is the right time for firms to sanity-check existing arrangements and consider whether they remain fit for purpose under the new regime – or whether a different safeguarding approach would be more resilient in the long run.
If you have any questions about safeguarding please contact our team of industry leading experts here at Cosegic.
