Safeguarding is the mechanism by which payment institutions and e-money institutions protect the funds they hold on behalf of customers from the moment those funds are received until they are either paid out to the intended recipient or returned to the customer. Unlike bank deposits, which are protected by deposit guarantee schemes up to defined limits, funds held by payment institutions and e-money institutions fall outside deposit protection. Safeguarding is the regulatory substitute for this protection, ensuring that customer funds are ringfenced from the institution’s own assets and cannot be used for the institution’s operational purposes or claimed by its creditors in the event of insolvency.
As illustrated in a typical safeguarding flow, a customer sends funds to a payment institution to initiate a payment or load an e-money account. Upon receipt, the institution is required to either place those funds in a segregated safeguarding account held at an authorised credit institution, or ensure they are covered by an insurance policy or bank guarantee, by the end of the following business day. The safeguarded funds are held separately from the institution’s own funds at all times and are subject to ongoing monitoring, reconciliation, and regulatory reporting to verify that the safeguarded amount matches the institution’s outstanding payment and e-money liabilities.
Key Takeaways: #
- Safeguarding is the regulatory requirement for payment institutions and e-money institutions to protect customer funds held against outstanding payment obligations or e-money liabilities, ensuring those funds are ringfenced from the institution’s own assets and remain available for return to customers in the event of insolvency;
- In the EU, safeguarding obligations are set out in PSD2 and implemented through national law in each member state. In the UK, the equivalent requirements are contained in the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, supervised by the FCA;
- Institutions must choose between two safeguarding methods: placing funds in a segregated account at an authorised credit institution, or covering funds with an insurance policy or bank guarantee from an authorised insurer or credit institution.
Why Safeguarding Is Required #
Protection in insolvency: The primary purpose of safeguarding is to ensure that customer funds are recoverable in the event that the payment institution or e-money institution becomes insolvent. Because payment institutions are not banks, their customers do not benefit from deposit guarantee scheme protection. Without safeguarding, customer funds would form part of the institution’s general estate in insolvency, leaving customers as unsecured creditors with limited prospect of recovery. Safeguarding ringfences customer funds so that they are available for return to customers ahead of the institution’s other creditors.
Regulatory requirement under PSD2 and national law: In the EU, the obligation to safeguard customer funds is established in Articles 10 and 11 of PSD2, which require payment institutions and e-money institutions to safeguard funds received from payment service users or received in exchange for e-money issued. These obligations are implemented through national law in each member state. In Lithuania, the safeguarding requirements are supervised by Banka Lietuvos and form part of the licensing conditions for payment institutions and e-money institutions operating under the Law on Payments. In the UK, equivalent requirements are set out in Regulation 23 of the Payment Services Regulations 2017 and Regulation 20 of the Electronic Money Regulations 2011, supervised by the FCA.
Separation from own funds: Safeguarding requires a clear operational and accounting separation between customer funds and the institution’s own funds. This separation must be maintained not only in the institution’s internal accounts but also at the level of the bank accounts in which funds are held. Customer funds must be held in accounts that are clearly designated as safeguarding accounts, and the institution must be able to demonstrate at any point that the balance of its safeguarding accounts matches its outstanding payment and e-money liabilities. This requirement makes a well-structured general ledger and chart of accounts an operational necessity for safeguarding compliance.
The Two Safeguarding Methods #
Method 1: Segregated account at an authorised credit institution: The most common safeguarding method is the placement of customer funds in one or more designated safeguarding accounts held at an authorised credit institution, such as a bank. The account must be held in the institution’s name and clearly identified as a safeguarding account in the institution’s records and in its agreement with the credit institution. The funds in the account must not be commingled with the institution’s own funds, and the credit institution holding the account must be made aware of the safeguarding purpose of the account. The institution must reconcile the balance of the safeguarding account against its outstanding liabilities on at least a daily basis.
Method 2: Insurance policy or bank guarantee: As an alternative to holding funds in a segregated account, the institution may cover its safeguarding obligation through an insurance policy or a guarantee provided by an authorised insurer or credit institution. The policy or guarantee must cover the full amount of the institution’s outstanding payment and e-money liabilities at all times, and must be structured so that the proceeds are available for distribution to customers in the event of insolvency. This method is less commonly used in practice, as it requires the insurance or guarantee to be in place continuously and to respond promptly in an insolvency scenario.
Safeguarding Obligations in Practice #
Daily reconciliation: Institutions must reconcile their safeguarding accounts against their outstanding payment and e-money liabilities on a daily basis. The reconciliation must identify any shortfall between the safeguarded amount and the liability, and any shortfall must be remedied promptly. A persistent or unresolved shortfall is a serious compliance breach and is likely to trigger supervisory intervention by the national competent authority.
Regulatory reporting: Institutions are required to report their safeguarding positions to their national competent authority as part of their periodic regulatory submissions. In the UK, the FCA requires equivalent information as part of the regulatory reporting framework for authorised payment institutions and e-money institutions.
Eligible assets and investment restrictions: Where customer funds are held in a safeguarding account, institutions may in some circumstances invest those funds in secure, liquid, low-risk assets, subject to regulatory approval and the requirement that the invested assets remain available to meet the institution’s liabilities at all times. The range of eligible assets is defined by the applicable regulatory framework and is typically restricted to government bonds or equivalent instruments. Investment of safeguarding funds in higher-risk assets is not permitted.
Safeguarding account agreements: The agreement between the institution and the credit institution holding the safeguarding account must include specific provisions confirming the safeguarding purpose of the account, restricting the credit institution from exercising any right of set-off or lien over the funds, and ensuring that the funds are identifiable as customer funds in the event of the institution’s insolvency. Institutions should review their safeguarding account agreements carefully to ensure these provisions are in place and enforceable.
Forthcoming Changes to UK Safeguarding Requirements #
The FCA published its Policy Statement PS25/12 on 7 August 2025, setting out the final rules and guidance for the Supplementary Regime together with related amendments to the FCA Approach Document. The Supplementary Regime will come into force on 7 May 2026. Firms should be treating the 7 May 2026 date as a hard compliance deadline for the Supplementary Regime obligations, including enhanced reconciliation, record-keeping, and reporting requirements, and should already be conducting gap analyses against the final rules in PS25/12.
FAQ: #
What is the difference between safeguarding and a deposit guarantee scheme?
- A deposit guarantee scheme (DGS) protects deposits held at authorised credit institutions, such as banks, up to a defined limit, which is 100,000 euros per depositor per institution in the EU and 85,000 pounds per depositor per institution in the UK. Payment institutions and e-money institutions are not authorised to accept deposits and their customers therefore fall outside DGS protection. Safeguarding is the regulatory mechanism that provides equivalent protection for customers of payment institutions and e-money institutions, by requiring those institutions to ringfence customer funds and hold them separately from their own assets. In insolvency, safeguarded funds are distributed to customers ahead of other creditors, providing a degree of protection equivalent in principle to, though different in legal mechanism from, a deposit guarantee.
What happens to safeguarded funds if a payment institution becomes insolvent?
- If a payment institution or e-money institution becomes insolvent, the safeguarded funds held in designated accounts are separated from the institution’s general estate and distributed to customers in accordance with their outstanding claims. The insolvency practitioner appointed to manage the institution’s failure is responsible for identifying the safeguarded funds, verifying customer claims, and distributing the funds accordingly. The effectiveness of this process depends on the quality of the institution’s records, the accuracy of its daily reconciliations, and the completeness of its safeguarding account documentation. Institutions with poor record-keeping or reconciliation failures may find that the insolvency process is more complex and that customer recovery is delayed or incomplete.
