Safeguarding and Insolvency: How Customer Funds Are Protected When Firms Fail

The Insolvency Challenge

The entire purpose of safeguarding is to protect customer funds if a payment institution or EMI becomes insolvent. The direct answer: safeguarded funds form an "asset pool" that is used to repay customers before other creditors, after the insolvency practitioner's costs of distributing it. The funds are not covered by the FSCS, and the speed and completeness of repayment depend on how well the firm kept its records and reconciliations. In practice, the legal position has proven more complex than the framework suggests, which is why the FCA introduced the CASS 15 rules from 7 May 2026.

The Payment Services Regulations 2017 (PSR 2017) and Electronic Money Regulations 2011 (EMR 2011) require authorised payment institutions and EMIs to safeguard relevant funds by either segregating them in designated accounts or covering them with insurance or a guarantee. Neither set of regulations creates a statutory trust over the funds. Instead, they give customers priority over the asset pool in insolvency.

The Ipagoo Decision

The landmark case in this area is the Court of Appeal's decision in Re Ipagoo LLP [2022] EWCA Civ 302, which concerned an FCA-authorised EMI that entered administration. The case addressed a fundamental question: do safeguarded funds held under EMR 2011 constitute trust property?

The Court of Appeal held that the EMRs 2011 do not create a statutory trust over funds received from e-money holders. Instead, e-money holders have a statutory priority over the asset pool. Importantly, the court read the asset pool widely: funds that should have been safeguarded but were not are still treated as part of it, so customers keep their priority even where the firm failed to segregate properly. Other creditors may recover less as a result.

The decision applies directly to EMIs. The payment services regulations follow a similar structure, and the Payment and Electronic Money Institution Insolvency Regulations 2021 (which created a special administration regime for these firms) give administrators a framework for returning funds quickly.

Current Limitations of the Safeguarding Regime

Several practical limitations reduce the effectiveness of safeguarding as an insolvency protection mechanism:

Shortfall risk. If a firm has not maintained adequate safeguarding, due to reconciliation failures, commingling of funds, or delayed segregation, there will be a shortfall between what customers are owed and what is actually held in safeguarding accounts. CASS 15 now requires any shortfall found in a reconciliation to be paid in by the end of that day. In this scenario, not all customers can be made whole, and the distribution of available funds becomes contentious.

Distribution costs. The insolvency process itself consumes funds. Administrators and their lawyers charge fees from the estate, and if the only significant assets are safeguarded funds, there is tension between the costs of administration and the amounts available for distribution to customers.

Identification challenges. If a firm's records are inadequate, it may be difficult to identify which funds belong to which customers. This was a practical problem in Ipagoo and has been a recurring issue in other payment firm insolvencies.

Time delays. Even where safeguarded funds are identifiable and sufficient, the insolvency process takes time. Customers may wait months or years to recover their funds, during which they have no access to their money.

No FSCS coverage. Unlike bank deposits, funds held with payment institutions and EMIs are not covered by the Financial Services Compensation Scheme (FSCS). This means there is no compensation scheme if safeguarding fails: customers bear any shortfall in the asset pool.

The FCA's Reforms: CASS 15 in Force, Statutory Trust Deferred

The FCA consulted in CP24/20 (September 2024) and published final rules in PS25/12 (August 2025). The reforms come in two stages.

Stage 1: the Supplementary Regime, in force since 7 May 2026. CASS 15 now requires: - Internal and external reconciliations at least once each reconciliation day, with any shortfall paid in by the end of that day - A monthly safeguarding return to the FCA within 15 business days of month end - An annual safeguarding audit by a qualified auditor, unless relevant funds stayed at or below £100,000 for at least 53 weeks - A resolution pack that lets an insolvency practitioner find and return funds quickly - One director or senior manager responsible for safeguarding oversight - Prompt allocation of received funds to individual customers, by the end of the next business day

Stage 2: the Post-Repeal Regime, deferred. The FCA's end-state proposal would replace the current rules with a CASS-style regime including a statutory trust over safeguarded funds. It depends on HM Treasury revoking the PSRs 2017 and EMRs 2011, has no date, and the FCA has said it will consult again before going ahead. A statutory trust would:

Provide legal certainty. A statutory trust would remove the uncertainty about whether safeguarding creates trust obligations. The trust would be established by regulation, not by inference from the safeguarding provisions.

Clarify priority. The statutory trust would make clear that safeguarded funds rank ahead of the firm's general creditors in insolvency, and would establish rules for dealing with shortfalls.

Address distribution. The proposed reforms would include provisions for distributing funds to customers in an orderly manner, potentially without requiring full insolvency proceedings.

Reduce administration costs. By providing a clear legal framework, the statutory trust should reduce the time and cost of identifying and returning customer funds.

Until then, the asset pool and statutory priority described above continue to apply.

Wind-Down Planning

The FCA expects authorised payment institutions and EMIs to maintain credible wind-down plans, and CASS 15 now requires a resolution pack. Safeguarding must be a central element of both. A credible plan should address:

Fund identification. How will the firm identify all safeguarded funds across all accounts and currencies in a wind-down scenario? This requires up-to-date records of all safeguarding accounts, acknowledgement letters, and customer entitlements.

Final reconciliation. The wind-down plan should describe how a final reconciliation will be performed to establish the total amount owed to customers and compare this against available safeguarded funds.

Customer communication. How will customers be informed about the wind-down, their fund balances, and the process for recovering their money? The plan should include template communications and contact mechanisms.

Distribution mechanism. The plan should describe the practical process for returning funds to customers, including how identity verification will be managed, how disputes will be handled, and what happens to unclaimed funds.

Regulatory notification. The plan must include procedures for notifying the FCA of the firm's intention to wind down, in accordance with Principle 11 (relations with regulators) and any specific notification requirements.

Practical Implications for Firms

Minimise shortfall risk. The single most important thing a firm can do to protect its customers in insolvency is to ensure that safeguarded funds always equal or exceed customer entitlements. This means robust reconciliation, prompt segregation, and accurate fee deduction.

Maintain impeccable records. In an insolvency, the ability to identify which funds belong to which customers depends entirely on the firm's records. Firms should maintain real-time customer ledgers that are reconciled daily against safeguarding account balances.

Review banking arrangements. Ensure safeguarding account documentation is complete, including acknowledgement letters confirming that the bank has no right of set-off. Review whether the firm's safeguarding banks are themselves financially sound.

Test wind-down plans. A wind-down plan that has never been tested is unlikely to work in practice. Firms should conduct tabletop exercises to identify practical problems and refine their plans accordingly.

Keep the resolution pack live. The FCA's view is that the most useful resolution packs link to the latest records rather than static copies. Review it whenever accounts, agents or procedures change.

The Customer Perspective

Customers of payment institutions and EMIs should understand that their funds do not benefit from FSCS protection, which covers bank deposits up to £120,000 per person per bank. The safeguarding regime provides meaningful but imperfect protection. Customers concerned about the safety of their funds should consider: the firm's regulatory status (authorised vs registered), the firm's published financial statements, whether the firm has a credible wind-down plan, and the general reputation and track record of the firm.

Regulatory Outlook

The direction of reform is towards stronger protection for customer funds. The CASS 15 rules in force since 7 May 2026 already require daily reconciliation, monthly reporting, annual audits and resolution packs. The statutory trust would be the next step, but it depends on HM Treasury's plans to revoke the PSRs 2017 and EMRs 2011 and on further FCA consultation.

The reforms reflect a broader regulatory recognition that as payment institutions and EMIs handle increasing volumes of customer money, the protections around those funds must keep pace.