How “Safeguarding” keeps clients’ funds safe
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
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
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.