How “Safeguarding” keeps clients’ funds safe

Written by: Paul Gorman
Date posted: 18-05-22

All Payments Institutions are regulated by the Financial Conduct Authority (FCA). The specific regulations that govern (amongst other things) how clients’ funds are held and protected are ‘Payment Services Regulations (2017)’. Payments Institutions must (i) ensure relevant funds are ‘safeguarded’ in case they close or goes out of business; and (ii) have procedures to return those funds without undue delay.

‘Safeguarding’ rules exist to protect clients and ensure that their rights are upheld. Aston, in common with the majority of Payments Institutions in the UK, use a segregation of funds methodology rather than the insurance method.

Under the segregation method, Safeguarded funds are held separately from the Payments Institution’s own money. Importantly, in the event the Payments Institution goes out of business, the safeguarded funds can only be returned back to the client (minus liquidator expenses and the costs of sending the funds). The safeguarded funds are specifically not allowed to be used by the Payments Institution to offset or satisfy any of its own obligations or claims against it.

Banks hold client funds as ‘deposits’, which is not the same as safeguarding. Banks’ current accounts are a (on-demand) deposit account. A deposit is effectively a loan to a bank, and they lend-out a proportion of their deposits to make extra money. Because the bank doesn’t keep all of the deposits ‘on-hand’, personal and small company money needs to be covered by a depositor protection scheme (the Financial Services Compensation Scheme).

By contrast with banks, Payments Institutions MUST keep safeguarded funds on-hand. Not only can those funds not be used for the Payments Institution’s own needs, they also cannot be used to support money lending or other commercial activities. For this reason, FSCS in the UK is not applicable in the case of Payments Institutions.

Note that the protection provided by Safeguarding is predicated on the Payments Institutions correctly applying safeguarding procedures and protections. This is why you need to choose a reputable and trustworthy institution that you can be confident has good controls and has been in this business for over 9 years. It is also important to note that funds which are solely for the settlement of FX deals are not safeguarded. Once the proceeds of an FX deal have been settled back into the purchased currency’s safeguarded account ready to be used to make a payment, they become safeguarded again.

If you have any further questions about how your funds are held, what safeguarding means or would like to know more about Aston’s services please get in touch.