At a glance
Client money safeguarding is the legal duty on payment institutions and e-money institutions to keep the funds they hold for customers separate from their own money, so that if the firm fails, customers get their funds back in full. The firm holds the money; the customer keeps the claim on it.
Key distinction: Safeguarding protects customer funds from the firm's insolvency. It does not protect them from the firm's ledger. The rules say where the money must sit and how often it must be reconciled. They do not, by themselves, say whose name is on the account.
Safeguarding sits at the centre of the UK and EU rulebooks for payments, and it is being tightened on both sides of the Channel in 2026. This post defines the term, explains the methods firms use to meet it, and shows why the custody structure underneath decides how expensive compliance is.
What is client money safeguarding?
Safeguarding is the set of requirements, under the UK Payment Services Regulations 2017 and Electronic Money Regulations 2011 and the EU's second Payment Services Directive, that oblige a regulated payment or e-money firm to protect "relevant funds": money received from or for a customer in exchange for e-money or for the execution of a payment.
The principle is simple. Relevant funds must be identifiable, must be kept apart from the firm's working capital, and must be recoverable by customers ahead of the firm's other creditors if it collapses. The FCA's Supplementary Regime (PS25/12) restates that principle and adds the operational machinery that makes it enforceable.
Safeguarding is not deposit protection. A bank deposit in the UK is covered by the FSCS up to a fixed limit; safeguarded funds are not insured at all. Protection comes entirely from the money being kept separate and reconciled, which is why the quality of the separation matters more than any guarantee scheme.
Why safeguarding exists
The rules exist because payment firms fail, and when they do, the customer money is often not all there. The FCA's own analysis behind CP24/20 and PS25/12 found that firms that failed between 2018 and 2023 had an average shortfall of 65% in the funds they were supposed to be safeguarding, and that customers of those firms recovered 35 pence in the pound on average.
The scale makes the gap material. UK e-money institutions alone were safeguarding roughly £26 billion of customer money by 2024, according to the same FCA analysis. A regime under which customers of failed firms recovered 35 pence in the pound is not a technicality; it is the difference between a consumer protection and a promise.
The same failure pattern appears wherever customer funds are pooled. When Synapse collapsed in 2024, an estimated $265 million across roughly 100,000 accounts was frozen because the platform's ledger and the bank's balance no longer agreed. The Synapse case is the clearest recent demonstration of the rule that safeguarding is only as good as the reconciliation behind it.
How safeguarding works
The regulations give a firm two ways to safeguard relevant funds, and the FCA regime layers operational duties on top of whichever it chooses.
- Segregation. Relevant funds are placed in a dedicated safeguarding account at an authorised credit institution or the Bank of England, or invested in secure, liquid assets held with an authorised custodian. The account must be designated as holding customer money, and the credit institution acknowledges in writing that it has no claim over it.
- Insurance or a comparable guarantee. Instead of segregating, the firm holds a policy or guarantee from an authorised insurer or credit institution that pays out the full value of relevant funds on insolvency. The FCA has tightened the conditions under which this route is acceptable.
- Reconciliation. Under PS25/12, firms must reconcile safeguarded funds against their records every business day, investigate discrepancies, and record how each one was resolved. Reconciliation is the control that turns a separate account into actual protection.
- Acknowledgement letters and resolution packs. Prescribed letters from the safeguarding bank, retained and reviewed annually, plus a living resolution pack that lets an insolvency practitioner return funds quickly. The pack is a list of where the money is and who it belongs to.
- Accountability and audit. A named senior manager is personally responsible for safeguarding, the board approves the policy, and most firms face an annual safeguarding audit by a qualified statutory auditor.
The PS25/12 checklist sets out these duties in full, with the 7 May 2026 effective date and the exemption thresholds.
Safeguarding, deposit protection, and client money rules compared
| Dimension | Safeguarding (payment and e-money firms) | Deposit protection (banks) | Client money rules (investment firms) |
|---|---|---|---|
| Legal basis | PSRs 2017, EMRs 2011, PSD2 Article 10 | FSCS, Deposit Guarantee Schemes Directive | FCA CASS 7 |
| What is protected | Relevant funds received for payments or e-money | Deposits up to a fixed limit per depositor | Money held for investment clients |
| Mechanism | Separate account, secure assets, or insurance | Statutory compensation scheme | Statutory trust over segregated accounts |
| Insurance element | None, unless the guarantee method is used | Yes, up to the limit | None; protection is structural |
| Frequency of reconciliation | Daily under PS25/12 | Not applicable | Daily |
| Recovery on failure | Depends on the shortfall and the quality of records | Paid by the scheme within days | Distributed from the trust pool |
What changes in 2026
Three regimes are converging on the same requirements at roughly the same time.
- UK, 7 May 2026. The FCA's Supplementary Regime brings daily reconciliation, resolution packs, prescribed acknowledgement letters, senior manager accountability, annual audits, and monthly returns into force with no phase-in period.
- EU, PSD3. The Commission's package requires relevant funds to move into safeguarding accounts on receipt, with no commingling, and tightens diversification of where they are held. The PSD3 changes will apply to every platform serving EU customers from an EU entity.
- US, stablecoin reserves. The GENIUS Act imposes full reserve backing, segregation, and no lending against customer funds on stablecoin issuers. It is a different asset with the same custody logic, and the GENIUS Act requirements read like a safeguarding rulebook.
The direction is consistent: less tolerance for pooled balances reconciled after the fact, more insistence that the money is identifiable at every moment.
Where the custody structure matters
Safeguarding rules tell a firm where customer money must sit. They do not stop the firm from putting every customer's funds into one pooled account and tracking ownership in an internal ledger. That structure is legal, and it is also the structure in which shortfalls of that size go undetected, because reconciliation becomes a daily attempt to prove that a spreadsheet matches a bank balance.
Named custody accounts change the arithmetic. When each customer's funds sit in an account in that customer's own name, the daily reconciliation is a check that each account holds the right amount, and the ledger-versus-balance gap that produces shortfalls does not exist. Segregation is architectural, not contractual.
That is the difference between meeting the safeguarding floor and building above it. The rules are the baseline every regulated firm has to meet. A 100% reserve, non-lending custody model with named accounts is what makes meeting them cheap, provable, and resilient to the failure the rules were written for.
Lorum is the correspondent institution for banks and fintechs. It provides programmable access to global clearing, named custody, and treasury, on a non-lending, 100% reserve model. For fintech and PSP platforms preparing for PS25/12 and PSD3, the custody layer decides whether customer money is identifiable per customer at every moment, or only in the firm's own ledger.
Frequently asked questions
What does client money safeguarding mean?
It is the legal requirement on payment institutions and e-money institutions to keep customer funds separate from their own, either in a designated account or secure assets or through insurance, so the funds can be returned in full if the firm becomes insolvent.
Which firms have to safeguard client money?
Authorised payment institutions, e-money institutions, and small payment and e-money institutions that receive relevant funds. Banks do not safeguard deposits because deposits are covered by deposit protection schemes instead.
What are the safeguarding methods?
Two: segregation, where funds sit in a dedicated safeguarding account at an authorised credit institution or the Bank of England or in secure liquid assets with a custodian, and insurance or a comparable guarantee that pays out on insolvency.
Is safeguarded money the same as a protected deposit?
No. Deposits are covered by a compensation scheme such as the FSCS up to a limit. Safeguarded funds carry no insurance; protection depends on the funds being kept separate and reconciled correctly.
How do named custody accounts help with safeguarding?
When each customer's funds sit in an account in that customer's own name, reconciliation is a check that each account holds the right amount, so the ledger-versus-balance gap that causes shortfalls in pooled structures does not arise.
