" class="no-js "lang="en-US"> A fintech guide to safeguarding customer funds - Fintech Finance
Monday, October 03, 2022

A fintech guide to safeguarding customer funds

Why safeguard funds?

In 2011, the Financial Conduct Authority (FCA) implemented the Electronic Money Regulations (EMRs) which stipulate that a fintech, as with all other regulated businesses, is required to identify relevant customers’ funds (e.g. payments made by customers to the business) and safeguard them. It effectively ringfences these funds and allows a third party to distribute them in the event of an extraordinary event such an insolvency; critically, customer funds are returned before any other creditors. Safeguarding is good practise and good accounting, and it’s important that a fintech creates the right structure and processes to ensure that safeguarding is executed effectively. Unlike the Financial Services Compensation Scheme, which only covers £85,000 per customer, there is no upper limit to safeguarded funds.

How to safeguard funds

The EMRs allow a fintech company to safeguard relevant customer funds using two methods. Firstly, they may take out coverage via an insurance policy, the proceeds of which are paid into a segregated bank account in the event of insolvency. Safeguarding via insurance can save time and effort in the short term with funds not needing to be placed in designated ringfenced accounts. There are also further considerations, such as making sure any cover is adequate; insurance tends to be fixed, whereas total amounts of customer funds will always vary.

A more common method is for a fintech to safeguard customer funds by placing them in a designated segregated account. This is often done by placing them in a separate account at a credit institution such as Barclays, Clearbank or Citibank.

Key considerations

Below are five key considerations to take into account when safeguarding client funds.

Knowing who is responsible

Acquiring a financial licence can be costly and time-consuming, but it does allow a business to own their customer relationships and have more control over procedures. On the other hand, partnering with a regulated third party and taking an agency licence is often less time-intensive, albeit sacrificing autonomy as agents must work within the licence holder’s risk and compliance framework.

Whether a business decides to operate under their own EMI/PI licence, or partner with another financial institution, it is the responsibility of the licence holder to safeguard customer funds.

Keep funds separate

Should a business enter liquidation, it is critical that customer funds are protected from claims by creditors. For this reason, a business should not only sweep customer funds into a designated safeguarding account, but also ensure that company funds (e.g. customer fees or operational liquidity) are diverted away from these accounts to prevent commingling

Create a good account structure

As well as segregating funds, it is important to label each account properly and create processes within these accounts that allow financial institutions to effectively identify what purpose they serve. This is particularly important with safeguarding, as the FCA has stated that they expect specific designation using words such as ‘safeguarding’, ‘customer’, or ‘client’ when referring to these accounts.

Allocation of funds to ensure liquidity

Along with sweeping funds into a safeguarding account, a business needs to ensure that they have enough liquidity to process customer transactions on a daily basis. This means having the right amount of money in the right place, and clear visibility of funds across all accounts. Businesses will also need to carry out daily reconciliations to ensure there are no discrepancies in reporting. These are tasks that can’t take up a lot of resources, so integrating a third-party solution through a platform, such as Integrated Finance, can save time and money by automating fund movements.

Accurate reporting

Safeguarding cannot be effectively managed without accurate reporting. A business needs access to real-time data, such as customer activity and account balances, to know exactly what is where at any given time. The only effective way to do this is direct connectivity to a bank. This can be difficult as banks often have different reporting systems; a fintech may prefer to use software, such as that offered by Integrated Finance, to directly integrate with a bank and access this information.

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