Preparing for CASS15: What payments and e-money institutions need to know!

The FCA released a consultation paper (CP 24/20) on 25 September 2024 to improve the existing safeguarding regime and to ensure that that harm to consumers is minimised for payment and e-money firms.

Introduction

The Financial Conduct Authority (FCA) released a consultation paper (CP 24/20) on 25 September 2024 aimed at enhancing the safeguarding regime for payment and e-money firms.

The proposed changes are designed to minimise risk of harm to consumers in the event of a firm failure, addressing gaps in the current framework where the Financial Services Compensation Scheme (FSCS) does not apply. This new safeguarding regulation marks a significant step in strengthening consumer protection.

Context

• Current Safeguarding Issues: Payment firms in the UK currently hold approximately £5 billion daily, with e-money issuers holding £18 billion. The FCA is seeking to address potential shortfalls and delays in returning safeguarded funds as the Financial Services Compensation Scheme (“FSCS”) does not apply where a payments firm fails and therefore currently consumers may lose money in the event of a firm failure in line with the Consumer Duty requirements.

• Regulatory Response Timeline: The response period for CP 24/20 closed on 17 December 2024, with interim rules and a policy statement expected in H1 2025. All firms must comply with interim rules by December 2025, with the end-state implementation timeline to follow.

  
  

Key Impacted Firms

Impacted firms are as follows authorised payment institutions:

• E-money institutions;

• Small e-money institutions;

• Credit unions who issue e-money in the United Kingdom under Payment Services Regulations (PSRs) and E-Money Regulations (EMRs).

A Two-Stage Approach

Interim Rules

1. Supplement current safeguarding provisions in PSRs and EMRs.

2. Introduce specific requirements in the FCA’s Supervision Manual (SUP) and the new Chapter 15 of the Client Assets Sourcebook (CASS).

3. Key interim deliverables include enhanced reconciliations, governance policies, and a safeguarding resolution pack.

   
   

End-State Rules

1. Replace existing safeguarding provisions in PSRs and EMRs.

2. Introduce a statutory trust for holding relevant funds.

3. Update reconciliation, books, and record-keeping requirements.

4. Require government amendments to PSRs and EMRs, subject to HM Treasury review.

Key Deliverables

Interim-State Rules

• Responsible Oversight Individual - Assign responsibility for safeguarding compliance to a designated individual within the payments firm, akin to the Senior Manager Function (SMF) for CASS oversight.

• Annual External Audit - An independent and qualified external auditor must conduct an annual safeguarding audit to ensure compliance with the safeguarding framework.

• Submission to FCA - Auditor will submit the safeguarding audit report to the FCA within four months following the end of the reporting period.

• Governance Documents and Processes - Develop, implement, and maintain robust governance forums, policies and procedures, including safeguarding policies, reconciliation processes, and shortfall identification and mitigation strategies.

• Enhanced Reconciliation - Perform detailed daily internal and external reconciliations, aligning with best practices from CASS 7.

• Books & Records - Maintain complete, accurate, and up-to-date Books and Records to facilitate oversight and compliance with safeguarding requirements.

• Acknowledgment Letters - Secure acknowledgment letters from Banks and Custodians, confirming that relevant funds are held in designated safeguarding accounts.

• CASS Resolution Pack - Introduce a safeguarding resolution pack, modelled on the CASS Resolution Pack, including creating and testing procedures.

• CMAR like Submission - Firms must also submit a new monthly electronic return to the FCA detailing safeguarding arrangements and safeguarded funds (“Client Money Asset Return”).

• Diversification - Conduct due diligence and assess diversification requirements when selecting and appointing third-party providers.

• Consideration - Implement enhanced risk management measures when selecting liquid assets.

• Insurance & Guarantees - Establish detailed policies and procedures for the use of insurance policies and guarantees to strengthen safeguarding arrangements.

End-State Rules

• Statutory Trust - Require relevant funds to be held under a statutory trust, including those supported by insurance policies and guarantees.

• Safeguarding - Clearly define the commencement and termination points for safeguarding obligations to ensure compliance.

• Approved Banks - Ensure all relevant funds are received directly into designated safeguarding accounts held with FCA-approved banks.

• Acknowledgment Letters - Utilise FCA-provided template acknowledgment letters to confirm that relevant funds and assets are held on trust.

• Shortfall Funding - Adopt prudent segregation practices to enable payments firms to address safeguarding shortfalls using their own funds.

• Reconciliation and Books & Records - Implement updated reconciliation procedures and books and records standards to enhance safeguarding compliance.

• Asset Pool - Establish a single asset pool to consolidate safeguarded funds for improved oversight and efficiency.

• Gone Away Clients - Implement processes to transfer unclaimed funds to registered charities after a specified period, in line with FCA guidelines.

Our Approach to Support You in Implementing CASS 15

Our recommended methodology to implement such regulation is to follow a structured approach that includes review and assessment, design, and implementation phases.

Review & Assessment

• Evaluate your current safeguarding framework, governance, and processes.

• Identify gaps and areas for improvement in systems and controls.

Design

• Define necessary changes to meet regulatory obligations.

• Develop a detailed implementation plan tailored to your organisation’s needs.

Implementation

• Deliver training and update governance frameworks.

• Ensure processes, systems, and policies are aligned with new regulatory requirements.

How We Can Help You

Our Expertise

Our team includes professionals with deep CASS expertise, including:

• Regulatory SMF responsibilities, prior experience with the UK FCA and attending CASS related Forums.

• Senior Management responsibilities in managing Business Unit, Compliance, Operations, and Client Service functions.

• Implementation of CASS framework and CASS remediation projects.

Our Solutions

We design bespoke solutions in line with your business and regulatory needs.

Conclusion

Implementing CASS 15 is a complex but rewarding endeavour. With the right expertise and support, firms can not only achieve enhanced operational compliance but also enhance operational efficiency, reduce risk of harm to consumers and improve internal safeguarding regimes . By embedding robust safeguarding processes, firms can position themselves for long-term success and value, delivering better outcomes for both clients and stakeholders.