Insights

The Importance of Safeguarding Regulation for PIs and EMIs

Name: MHA
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Shakeel Aslam · July 24th 2023 · read

In March 2023, the Financial Conduct Authority (FCA) sent a letter to CEOs of Payment Institutions (PIs), Electronic Money Institutions (EMIs), and small EMIs outlining the FCA’s priorities; the first was safeguarding.

Safeguarding ensures customer funds are properly identified, separated, and reconciled as relevant funds. There are various systems, controls, and processes that manage these steps to protect customers and prepare firms in the event of insolvency – which are primarily regulated by the FCA’s Payment Service Regulations 2017 and the Electronic Money Regulations 2011.

Besides an annual safeguarding audit being mandatory for all PIs, EMIs, and small EMIs, safeguarding assures customers that their funds are properly managed. Demonstrating your willingness to not only meet, but go above regulations such as these, can offer peace of mind to a customer considering placing their funds with you versus a competitor.

Some of the key aspects to be considered/covered as part of the independent annual audit review, include:

Identification of Relevant Funds
To ensure funds are managed appropriately, firms must understand which funds are relevant for safeguarding. Auditors will ensure they are properly identified so controls can be established accordingly.
Separation of Relevant Funds
There are two approaches to this step – segregation and insurance/guarantee – of which firms may use one or both. The former is to place customer and corporate funds into separate accounts. Alternatively, firms can obtain an insurance policy or comparable guarantee for the total amount of the relevant funds.
Systems and Controls
Besides having a plan for fund management, firms must demonstrate adequate internal control mechanisms. For example, reliable administrative, risk management, and accounting procedures.
Reconciliation of Relevant Funds
Firms are also expected to maintain accurate records and accounts through the frequent and regular reviewing of payments service users and the relevant funds being safeguarded.

With the increasing complexities of business structures, globalisation and technological innovation combined with increasing regulatory scrutiny, firms need to ensure they are operating within a sound and robust control environment with adequate governance structures, in particular when it comes to safeguarding of customer funds.

If you haven’t completed your annual safeguarding review yet, or you would like a more comprehensive and independent review completed, consider MHA, the UK member firm of Baker Tilly International – a global top 10 firm of accountants and business advisors. Our GRC (Governance, Risk, and Controls) team is comprised of highly experienced individuals with extensive expertise spanning multiple countries, sectors, and project types. We work with a number of PIs and EMIs and have performed numerous independent safeguarding annual audits, enabling us to add real value and benchmark against good practices across the relevant sectors.