How Your Money Is Protected at an EMI: Safeguarding, Client Asset Rules, and What Happens If It Fails

One of the most common concerns among businesses considering a specialist payment institution is the protection of their money. At a bank, the FSCS provides up to £85,000 in deposit protection. At an EMI, there is no FSCS. What replaces it, how robust that replacement is, and what would actually happen if the EMI failed — these are questions that every business placing material funds with an EMI should be able to answer.

The Safeguarding Requirement

Electronic Money Institutions in the UK are required to safeguard client funds under Regulation 21 of the Electronic Money Regulations 2011 (EMR11). Payment Institutions face equivalent requirements under Regulation 23 of the Payment Services Regulations 2017 (PSR17). The obligations are substantively similar: funds received from customers must be protected from the institution's own creditors at all times.

The safeguarding requirement can be met through one of two methods:

Method A: Segregation at a Credit Institution

The EMI holds client funds in a dedicated account at a bank or credit institution, clearly labelled as a safeguarding account and legally separated from the EMI's own funds. The bank holds the account subject to specific terms ensuring that the EMI's creditors cannot access the funds in the event of the EMI's insolvency. The safeguarding account must be reconciled daily against the EMI's customer liability records.

Method B: Insurance or Guarantee

Alternatively, the EMI can obtain an insurance policy or comparable guarantee from an authorised insurer covering the full amount of customer funds. This method is rarely used in practice because the cost of qualifying insurance is high and the conditions under which it pays out can be uncertain.

The vast majority of UK EMIs use Method A. The quality of the safeguarding arrangement depends critically on: the credit quality of the bank holding the safeguarding account; the legal clarity of the account designation; and the accuracy of the daily reconciliation.

What Happens in an EMI Insolvency

When an EMI becomes insolvent, the appointed insolvency practitioner (typically a licensed insolvency practitioner appointed by the court) must identify and return safeguarded funds to customers. Safeguarded funds are not available to the general body of the EMI's creditors — they sit outside the insolvency estate.

The Special Administration Regime (SAR) for payment institutions, introduced under the Investment Bank Special Administration Regulations 2011 and extended to payment institutions by the Payment and Electronic Money Institution Insolvency Regulations 2021, provides a specific insolvency framework designed to return client funds quickly. Under the SAR, the primary objective of the special administrator is to return funds to customers as swiftly as possible, ahead of other claims.

In practice, the return of funds in a payment institution insolvency depends on the quality of the safeguarding arrangements, the accuracy of the customer liability records, and the speed with which the safeguarding bank makes the account balance available to the administrator. In high-quality insolvency proceedings under the SAR, customers can expect to receive their funds within weeks. In poorly conducted insolvencies — particularly where safeguarding arrangements were deficient — the process can take much longer, and where funds were not properly segregated, customers may face losses.

The FCA's Safeguarding Failures Concern

The FCA has been explicit in its supervisory communications that safeguarding failures are a priority concern. Following a thematic review in 2021, the FCA found that a significant minority of regulated payment institutions had deficient safeguarding arrangements — including failing to maintain proper daily reconciliations, using safeguarding accounts that were not appropriately designated, and in some cases commingling client and own funds.

The FCA has since intensified its supervision of safeguarding, with direct requests for reconciliation data and account documentation as part of regular supervisory engagement. The FCA has also consulted on strengthened safeguarding rules that would bring the requirements closer to the CASS (Client Assets Sourcebook) regime that applies to investment firms — requiring annual safeguarding audits and more prescriptive account designation requirements.

How to Evaluate Safeguarding Quality

Before placing material funds with any EMI or payment institution, businesses should ask:

• Which bank or banks hold the safeguarding accounts, and what is their credit rating?
• Are the safeguarding accounts specifically designated and legally segregated from the EMI's own accounts?
• How frequently is the safeguarding reconciliation performed (daily is the regulatory minimum; real-time is best practice)?
• Has the firm's safeguarding arrangement been independently audited, and can it provide the most recent audit report?
• Is the firm subject to the FCA's SAR, and has it maintained compliance with SAR reporting requirements?

A quality institution will answer these questions clearly and promptly. An institution that is vague or unable to identify the safeguarding bank is exhibiting a significant warning sign.

CCYFX maintains safeguarding arrangements at tier-1 UK and European credit institutions, performs daily reconciliation of client liabilities against safeguarded balances, and makes its safeguarding documentation available to clients on request.