This is a case study in what can be achieved when firms and the FCA truly engage with one another in a consultation exercise. For "Payments Firms" (those operating in the UK under either the Payment Services Regulations 2017 (PSRs) or the Electronic Money Regulations 2011 (EMRs)), the FCA's PS25/12 and accompanying amendments to the Approach Document, setting out changes to the rules on safeguarding of relevant funds (the meanings of which are explained below but will be acutely, perhaps painfully, familiar to those in the payments sector) mark the first stage in a lengthy journey to an entirely new regulatory regime, trailed in the Mansion House/Leeds Reforms.
This article summarises the new requirements Payments Firms must now implement by 7 May 2026. It also examines what is perhaps more interesting: the proposals which the FCA is not taking forward at this time, and what broader signals this sends for the payments and fintech sectors. We are heading into what could be one of the most transformative periods for payments regulation in years.
The Fintech, Market Infrastructure & Payments team at Travers Smith can assist you with implementing the Supplementary Regime, and, more broadly, engaging with regulators and supervisors, including through responses to consultations – the earlier firms engage with regulators' proposals, the more chance of making an impact.
The concept of safeguarding of relevant funds
Payments Firms are subject to a very different prudential regime to deposit-takers. Notably, funds that customers hand over to Payments Firms are not protected by the Financial Services Compensation Scheme (FSCS). Instead, the legislation (which is derived from EU law) requires that funds received in exchange for e-money, or for the purpose of executing a payment transaction (referred to as relevant funds) must be safeguarded in accordance with specific rules. The policy objective is to ensure that funds that are not used for redemption or the execution of a payment transaction should be returned in full in the event of the insolvency of the Payments Firm.
Safeguarding can be achieved in more than one way, although this article concentrates on the "segregation" method. This (ultimately) involves placing the relevant funds into a designated bank account (or Bank of England settlement account) set up specifically for the purpose, holding the funds separately from its own or other funds.
The proposals in CP24/20
It is essential to understand the context for the FCA's proposals. As noted in its consultation, CP24/20, the average shortfall in customer funds following the failure of a Payments Firm between Q1 2018 and Q2 2023 was 65%. A cursory glance over historic FCA publications shows that the FCA wrote directly to the sector highlighting its concerns with safeguarding compliance in 2019, 2020, 2021, 2023 and 2025, as well as carrying out a (critical) multi-firm review in 2019 and publishing guidance in 2020, which was subsequently incorporated into the Approach Document. Ian Fleming wrote that once is happenstance, twice is coincidence, and three times is enemy action – but even he omitted to give a description of something that happens seven times.
Suffice to say, there was general agreement that something needed to be done – the question was exactly what. The FCA proposed a two-stage set of reforms in the CP:
- The "interim state": the FCA proposed to amend the Handbook, mainly the Client Assets Sourcebook (CASS), to codify and build on the guidance in the FCA's Approach Document.
- The "end state": once HM Treasury repealed and replaced the PSRs and EMRs, the FCA proposed an entirely new regime, modelled closely on the existing approach in CASS which applies to "client money" received, or held, by an investment firm in the course of, or in connection with, its FCA-regulated investment business.
Three key elementsof the end state proposals prompted intense pushback from Payments Firms:
- Requiring that customer funds be received directly into a designated safeguarding account (subject to some slightly unclear exceptions relating to physical cash, acquirers and payment systems). This would be a material change to the current rule, which only mandates the actual placing of relevant funds into a designated safeguarding account at the end of the business day after the day on which the Payments Firm received them.
- Imposing a statutory trust over the relevant funds. The Court of Appeal confirmed that there was currently no such trust in its Ipagoo decision in 2022, finding against certain arguments advanced by the FCA.
- Requiring additional regulatory permissions to be held by Payments Firms that chose to invest relevant funds into secure, liquid assets, and that managed these investments themselves with discretion. Many Payments Firms hold no permissions under Part 4A of FSMA, and this would represent a significant step for such firms.
PS25/12 Part 1 – the Supplementary Regime (formerly known as the interim state) to be in force from 7 May 2026
Most firms broadly accepted the principles of the interim state, subject to points on proportionality.
The FCA was persuaded by this feedback, most obviously by extending the deadline for compliance to 7 May 2026, and it also renamed the interim state as the "Supplementary Regime". The key requirements that Payments Firms will need to implement by then include:
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Accurate records and reconciliations |
Objective: allow the firm to distinguish between relevant funds and other fund at any time. Key win: While reconciliations will need to be carried out each reconciliation day, this excludes weekends and bank holidays. |
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Resolution pack |
Objective: to help an insolvency practitioner manage the prompt return of funds to customers. These living documents should cover information such as where relevant funds are held; lists of agents and distributors; and the procedures for recording and managing relevant funds. |
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Annual safeguarding audit and new monthly regulatory return |
Objective: greater scrutiny on an ongoing basis of compliance, and giving the FCA greater visibility. Key wins: The FCA dropped the proposal to limit appointments to those able to act as statutory auditors, disapplied the annual audit requirement for Payments Firms that have not been required to safeguard £100,000 of relevant funds at any point over a period of 53 weeks, and extended the deadline for submission of the annual audit reports following the end of the audit period. |
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Considering concentration risk |
Objective: ensure that Payments Firms challenge and document their decisions to rely on a small number of safeguarding banks, and consider diversification. Key win: The rules as drafted do not mandate diversification as long as Payments Firms have a good (documented) rationale. This is important as some Payments Firms continue to struggle to access banking services. |
Payments Firms must recognise that the FCA will monitor compliance strictly from May next year, especially given the more incisive tools it will have to observe firms' activities. By the end of Q2 2027, the FCA should have a wealth of insight into compliance.
PS25/12 Part 2 – the Post-Repeal Regime (formerly known as the end state) shelved – for now
In what can only be described as a significant advance for the sector, the end state, rebranded as the "Post-Repeal Regime" (a nod to HMT's programme to repeal and replace the PSRs and EMRs), is currently not being taken forward in its proposed form (as set out in CP24/20). No concrete timeframe is given as – by definition – the Post-Repeal Regime will have to follow the replacement of the PSRs and EMRs. In addition, the FCA will consult further before progressing.
What should impacted firms do now?
For Payments Firms confident that they comply with the current guidance in the Approach Document, the changes under the Supplementary Regime are likely to be incremental. However, May 2026 is not far away once firms have properly analysed the needed lift. It is also too late for any additional engagement on the FCA's policy choices on the Supplementary Regime, but the FCA will engage on implementation efforts, including through roundtables.
The broader context: The National Payments Vision, Payments Forward Plan and beyond
A huge amount of change is about to take place in UK payments regulation and policy. A non-exhaustive list of what we know is coming, and roughly when, merely in 2025 includes:
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September |
Consultation on consolidating the PSR into the FCA |
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Report into the Payments and Electronic Money Special Administration Regime |
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Next Bank of England paper on systemic stablecoins |
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Payments Vision Delivery Committee's (the PVDC) strategic priorities for payments infrastructure |
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First meeting of the Retail Payments Infrastructure Board |
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VRP scheme, as announced in FS25/4 on the Future Entity for open banking) |
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Final text of the statutory instrument extending the regulatory perimeter to cryptoassets, including stablecoins. This is essential for stablecoins, as the original drafting created serious (unintended) obstacles to using stablecoins for payments |
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Further legislative work by the EU on PSD3/PSR, the effects of which will be felt in the UK |
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End of 2025 |
The Payments Forward Plan |
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On any view, PS25/12 is a good result for the industry – and credit is due to the FCA for having the intellectual confidence to change course. It is abundantly clear to us – even if not explicitly stated in PS25/12 – that the NPV and the government's focus on growth has transformed the way the industry can engage with the FCA and its peers. Responses to CP24/20 relied heavily on the need to ensure the competitiveness of the UK. Critically, responses to the CP engaged directly and closely with the cost-benefit analysis in a sophisticated and detailed way.
More importantly, the NPV (and the government's response), now built on by the work of the PVDC, establishes a clear precedent for regulatory initiatives to be viewed holistically and through an ecosystem-wide lens. For example, it is absolutely essential that the new delivery company, established under the auspices of the Retail Payments Infrastructure Board to procure and fund next-generation retail payments infrastructure, does so in a way that facilitates the adoption of new technologies, most obviously stablecoins, payment initiation services, and possibly a digital pound.
A final thought: the FCA will be considering the feedback to its consultations on stablecoin issuance and cryptoasset custody. There is a long way to go on that, but the shelving (for now) of the statutory trust proposal is striking, as the same logic drives its parallel proposal for qualifying stablecoin backing assets. Might this also change?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
