Safeguarding - An overview for EMIs and PIs
With digital transactions and electronic money taking the stage in the modern world, the security and protection of that money have become necessary.
Safeguarding regulation helps investors by offering them a way to protect their funds if their payment solutions provider goes bankrupt. It is a key requirement for all electronic money institutions (EMIs) and other payment institutions in the UK to safeguard their customers' funds under the Electronic Money Regulations 2011 and Payment Services Regulations 2017. These companies must segregate client funds to ensure that they remain ringfenced in the case of firm failure.
EMIs and payment institutions can choose to safeguard their client funds in a few ways -
- Segregated account- companies can separate their corporate funds from their user’s funds and hold them in a client-asset account with a third-party custodian or bank
- Segregated investment - companies can move their user funds to a third-party authorised institution and invest funds in secure, liquid, low-risk assets
- Insurance - companies can also move their clients’ assets to a third party by using the insurance bond method and get them insured in case of loss.
With the help of custodians like WealthKernel, EMIs and other payment institutions can benefit from a high-interest multicurrency safeguarding solution that lets them invest user funds in a qualifying (low-risk) Money Market Fund.
Benefits of safeguarding your customer assets -
- Mitigate risk - By separating your client funds from corporate funds and diversifying where your client assets are held, you can mitigate counterparty risks that can rise due to financial instability in one of the companies.
- Compliance with regulations - The FCA considers safeguarding a key requirement for EMIs to make sure that client assets are safe and accessible in the event of insolvency. Complying with this regulation will help you build trust with your customers and regulators.
- Maximise returns - Some safeguarding solutions let EMIs invest their client assets in a low-risk instrument such as an MMF. Custodians like WealthKernel offer you high-interest multicurrency safeguarding that can provide another source of revenue through yields.
While safeguarding is mandated by the regulators, there are some challenges that EMIs should prepare for -
- Issues with tracking and reconciliation of funds - EMIs should track and reconcile customer funds to the safeguarding account as soon as the funds are received. Sometimes, with all the client assets in one account, it becomes difficult to segregate them on a daily basis without running the risk of mixing client funds with corporate funds.
- Lengthy risk assessments - With low visibility of end-customers, banks and custodians will need to conduct due diligence and risk assessments of your business, which may be time-consuming and expensive.
- Pre-requisites for safeguarding - Some third-party custodians or banks require EMIs or payment institutions to be regulated and with the necessary permissions, before they can use safeguarding services.
- Annual audit - The FCA requires all EMIs and payment institutions to undergo annual audits that involve a full review of company policies and procedures to check potential areas of risk and good practices. The audit, though critical, is often time-consuming and costly. |
Have more questions about safeguarding in the UK as an EMI or payment institution? Get in touch with us.
About us -
WealthKernel is an authorised custodian with a safeguarding solution suitable for E-money institutions and Authorised Payment Institutions. We have full permissions in the UK to safeguard assets and are equipped with a team experienced in Fintechs and EMI regulations. We offer faster onboarding with our API-first technology and have open architecture relationships with leading asset managers, all via the same API.
Looking for a safeguarding solution for your client assets? Contact us sales@wealthkernel.com
