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Monday, December 05, 2022

Five key considerations when safeguarding funds

The safeguarding of customer and client funds is more than good practice; the Electronic Money Regulations, implemented by the Financial Conduct Authority in 2011, made it a requirement for all businesses, including fintechs, to be clear and concise about who is owed what if an extraordinary event such as a liquidation or bankruptcy was to occur. 

Key to this is implementing a set of processes that protect these funds from the moment of deposit to moment of release. It is also equally important to implement the right funds segregation framework, contrive an effective accounts structure, determine the frequency of segregation and account adjustments accordingly, and conduct timely reconciliations to address any discrepancies. 

If you’re in the process of building a digital banking product, take a look at these top five considerations to bear in mind when safeguarding funds. 

Know who is responsible for safeguarding

The first consideration is to know who is responsible for safeguarding, which will depend on the licensing arrangements. The attractive option is to operate with an Electronic Money Institution or Payment Institution licence, which allows a business to own their customer relationships and have more control over how they execute their services. The compromise, however, is the often long and costly process of acquiring these licences.

For businesses with less resources, a better option may be to partner with a regulated third party and use an agency licence model. This sacrifices autonomy in the long-term as a business must operate within the licence holder’s risk and compliance framework, but it is the more time, and cost-effective option in the short term. Regardless of this decision, it is important to identify who this responsibility for safeguarding lies with.

Don’t commingle funds

If a business has a large customer base that uses unique accounts, there is alway risk of commingling funds; a risk that substantially increases if the process of sweeping funds into a safeguarding account is still manual. 

It is crucial not to commingle customer funds with operational liquidity or fees from charging customers; the latter two are at the mercy of creditors should the business face liquidation. Consider automating processes to avoid human error, which again can be offered by a third party partner such as Integrated Finance.  

Correctly structure accounts

Correct account structure is critical when implementing safeguarding, and it is beneficial for a business to create a strict hierarchy of accounts in order to know the function of each account and the funds that sit within them. Ideally, you would expect to see the following in a business:

Client funds accounts that holds initial customer deposits (these can be pooled or individual)

Operational account which are funds designated for business operations (e.g. operational liquidity or salaries)

Fee account containing fees collected from customer transactions (such as FX payments or subscriptions)

Card transaction collection account which pools card merchant fees to be collected at a later day (Visa will collect this fee a day after the transaction, for example)

In addition to this, the FCA expects specific designation using words such as “safeguarding”, “customer”, or “client” when referring to safeguarding accounts. Often a business will only name an account according to their operational function, as above, which isn’t always helpful when a financial institution is trying to effectively identify what can be collected by creditors.   

Implement daily treasury management

Ensuring the right amount of money is in the right place at the right time can be challenging for a business. Implementing a daily treasury management process is important to ensure all client funds are swept into a safeguarding account. Just be aware that, if this is an external account different to your usual provider, there may be a time delay on a bank executing this process. 

It is also important to ensure sufficient liquidity in the client funds account in order to facilitate customer transactions. Consider how these transactions are completed and understand how it affects your business model.

Have an efficient reporting system

Safeguarding cannot be effectively managed without accurate reporting, and having access to real-time data, such as customer activity and account balances, allows you to know exactly what is where at any given time.

The best way to create an efficient reporting system is to have direct connectivity to your bank; this can be difficult to implement internally as banks often have different reporting systems. Instead, a business could look at partnering with a third party provider such as Integrated Finance, to access this information from a single API platform. 


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