A safeguarding account is a segregated account which keeps customers' funds separate from a company’s operational funds. We explain how they work and whether your business needs one.
When a word starts with ‘safe’ you get an idea of what it’s all about. But with the number of different accounts that exist within fintech, it’s not always easy to keep track of exactly what each one does and whether it’s something you need.
Here, we wanted to clear that up, along with answering a few other questions you may have.
A safeguarding account is a type of segregated account which keeps your clients’ funds completely separate from your operational funds.
Imagine your business is an online marketplace. A buyer makes a payment to a seller, and that money now sits on their account within your platform. They might not withdraw it straight away, they may choose to keep it there - perhaps they can use that money themselves to make purchases on the marketplace.
By keeping these funds in a fully segregated, safeguarding account, managing your finances becomes a much easier task. It provides a clearer view of which funds are yours, as the business, and which belong to your customers. Crucially, if the worst should happen and your business was to go into insolvency, the customer funds would still be protected.
It is not just a safety net in case of disaster, it shows all your customers and potential customers that any money they have on your service cannot be lost or taken by any other party. It’s the best way of ensuring trust in your product.
If you are an Electronic Money Institution (EMI) or a Payment Institution (PI) you are legally obliged to have a safeguarding account due to PSD2 regulations. This is in part because the Financial Services Compensation Scheme (FSCS) does not cover EMIs or PIs. Therefore, a safeguarding account ensures the security of client funds.
The short answer is you will need a banking partner. Other financial institutions are not licensed to issue safeguarding accounts. There will be a process of collecting documentation and performing AML/KYC checks on your business. It is not easy to give an estimated timeline for this as it will depend on your business, but the banking partner will be able to give you more information on that.
It’s worth looking for a banking partner which has a track record for helping EMIs and PIs with safeguarding accounts, as the FCA has a one year deadline for applying for a Payment Service Provider license. If the banking partner takes three months to open a safeguarding account and you only have two months left to complete your PSP application, you will have lost a year of your time and will need to start again.
FCA regulations require your business to reconcile funds both internally and externally. Internally speaking, this ensures that money displayed on customer balances is transferred to the safeguarding account no later than one business day after the initial transfer has been deposited. The balance sheet of customer balances and the amount in the client safeguarded account should match exactly (excluding any platform fees that will be collected by your business).
Externally speaking, the total balance in customer balances must be used, including funds which have been accrued as fees.
Not quite. Your business will need to undertake an annual audit to give confirmation that processes are working and funds are indeed being safeguarded. The audit needs to show that three things:
Your business has an up-to-date safeguarding systems and controls manual
You hold records that demonstrate and explain the rationale behind your safeguarding decisions
You fully discharge your safeguarding obligations as prescribed by the PSRs
Not at all. Opening a safeguarding account is not as easy as opening a debit account, for example, but the process is getting quicker and easier. Remember that this protects you as well as your customers, making it impossible for mistakes to occur which puts client funds at risk.
Ultimately the segregation of funds is a strong and sensible approach and once you have it, you’ll be very glad that you do.
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