“Your Money is in Safe Hands” — a claim made by both banks and payment institutions. However, the rules and requirements for safeguarding client funds differ between these institutions. Clients may not always be keen on delving into the details, but understanding the mechanisms at play is crucial. It empowers you to make informed financial decisions, provides confidence, and ensures you are aware of both of your rights and the financial institution’s obligations. Ultimately, this enhances your financial literacy.
Here we will explain what safeguarding in an EMI entails and why it’s not just on par with, but possibly even better than traditional banking.
Starting with the basics: No loans, no problems.
A bank is essentially a credit institution: in simple terms, a banking license allows an organisation to take money from clients “for safekeeping” and then lend it out to other clients. This means your money isn’t literally “stored” at the bank — it’s not sitting on a shelf waiting for you to retrieve it. This leads to the primary risk with banks: in any significant crisis, your money might just not be there.
An EMI license doesn’t just prohibit the issuance of loans; it actually forbids any use of client funds whatsoever. Your money remains yours, down to the last penny, always available on your account.
The process of ‘Safeguarding’ means that your money is actually held in an account at a credit institution, and is not used for lending to others unlike money held by a bank.
Doug Laming, Head of Safeguarding, Bilderlings
Heightened Vigilance and Competent Regulator
Fintechs may be considered more flexible, but the regulator’s rules are no less strict than those of the banks.
Safeguarding, as defined by the Financial Conduct Authority (FCA) in the UK, encompasses a set of rules and guidelines specifically crafted for Electronic Money Institutions (EMIs) and Payment Service Providers (PSPs). The core objective of safeguarding is to protect customer funds in scenarios where the EMI or PSP encounters financial difficulties or faces insolvency.
The rules of safeguarding cover various aspects. Let’s explore some of these to provide you with an understanding of how exactly your money is kept safe and which mechanisms are responsible for its security.
Separate Accounts with Special Conditions
As we’ve already mentioned, EMIs cannot use client funds. This is not only for issuing loans but also for their own operational needs; in essence, for nothing at all. Yet, like any commercial organisation, EMIs are engaged in business activities. To segregate client money from operational funds, so-called segregated accounts are utilised.
Here’s what you need to know about segregated accounts:
- These are accounts held at banks — that is, an account opened specifically for holding EMI client funds in a credit institution that meets certain criteria;
- The bank guarantees that these funds are not “mixed” with the EMI’s funds, the bank’s own funds, or with any other of the bank’s customers funds ;
- The bank does not utilise these funds in its lending or operational activities;
- Protection of funds held with EMI’s in segregated safeguarding accounts is not limited to the amount covered by insurance schemes, such as FSCS, which covers funds held in bank accounts up to a certain amount
These accounts are known as ‘Safeguarding Accounts’
In other words, client funds are protected with the assurance that the bank cannot “misuse” them.
Every Penny Counts!
Any payment business involves the constant movement of money: individuals and companies send or receive payments. This means that a significant amount of funds is “in transit.” To protect these funds and make EMIs even more reliable, the UK regulator requires all client money to be accounted for and every last penny to be held on those segregated accounts.
Each day an EMI is required to complete a process called reconciliation: no one from the Finance Department goes home until every penny of client money is accounted for on those segregated accounts. If some funds are stuck “in transit,” they are covered by the company’s own resources.
To understand how much needs to be transferred and how to cover it, Financial Controllers calculate — they take all the reconciliation data, to identify where client money is located, and how much needs to be moved to the segregated safeguarding accounts. Therefore, the Payments Team regularly monitors how much money, and in which banks the funds are located, in order to withdraw excess liquidity or, conversely, replenish the accounts.
Therefore, the phrase “our clients can sleep soundly” can be taken absolutely seriously, knowing that their money is safely protected in a Safeguarding account.
Compliance and Oversight
It’s not enough just to adhere to these rules — regular reporting and audits are required. EMIs and PSPs must comply with specific regulatory requirements for safeguarding, including regular reporting and audits to demonstrate that customer funds are being appropriately segregated and protected.
Risk Management
EMIs must have effective risk management procedures in place to identify, manage, monitor, and report the risks associated with safeguarding customer funds.
The risks can vary widely, from technical to political — this is a topic for another article, but it’s important to note here: EMIs are required to constantly engage in risk management.
The FCA requires EMIs to have robust risk management processes and to regularly demonstrate compliance through audits and reports. This oversight ensures that the EMIs not only follow the segregation rules but also maintain a high standard of operational integrity.
Transparency and Fairness to Customers
Clear Disclosure means that customers must be informed about how their funds are being safeguarded and what the implications are for them, particularly in terms of risk.
Consumer Duty refers to specific FCA rules on serving customers as transparently and fairly as possible. This concerns not so much the protection of your funds, but rather protecting you from their inappropriate use.
Thus, Consumer Duty rules ensure that the services provided to a customer genuinely meet their needs, and no hidden fees are used. You cannot be sold a service that you do not need.
The protection of our clients’ funds has been, and continues to be, a major focus for Bilderlings and the FCA. At Bilderlings, Safeguarding and the protection of our clients funds is embedded into our culture and treated with the utmost importance throughout the whole company.
