In a world where consumers now entrust vast sums to digital wallets and apps rather than traditional banks, safeguarding has evolved far beyond a box-ticking exercise. Regulators in the UK and EU are responding to significant supervisory concerns about weak practices and shortfalls when payment firms fail, with average customer fund losses running into the tens of percentage points in recent failures. The question is no longer simply “are the funds segregated?”, but whether firms can demonstrate real-time control, resilience and accountability over customer monies. New rules are making governance, systems, capital and evidence the heart of safeguarding, rather than just ring-fenced accounts. This article gives you the chance to reflect on standards where you are.

What Safeguarding Really Means for Modern Payment Firms

For much of the past decade, safeguarding was treated as a narrow accounting exercise: keep customer funds in segregated accounts and avoid comingling. Today, regulators see that approach as insufficient for a payments ecosystem built on instant transfers, embedded finance and outsourced infrastructure. Modern safeguarding now encompasses operational resilience, effective control over third parties, and accurate, near-real-time visibility of customer balances. UK supervisory reviews have shown that firms can appear compliant on paper yet still expose customers to loss because reconciliations are delayed, data feeds are unreliable, or partners fail.

Safeguarding is therefore increasingly framed as a consumer harm prevention tool, not merely protection in insolvency. In practice, this means managing risks across complex partner chains. This could be, for example, where a payment firm relies on a cloud-based ledger provider and an external settlement bank, both of which must align precisely. Regulators now expect daily reconciliations, clear escalation triggers and ongoing assurance, rather than annual reviews of static arrangements. Safeguarding has become a living system, sitting squarely at the intersection of finance, technology and governance.

Two Rulebooks, One Obligation

Since Brexit, payment firms operating across borders have had to navigate two distinct regulatory frameworks, but with remarkably similar expectations. In the UK, safeguarding obligations sit within the Payment Services Regulations and are reinforced by increasingly assertive Financial Conduct Authority (FCA) supervision, thematic reviews and data-led interventions. In the EU, the legacy of PSD2 (Payment Services Directive 2) is now giving way to PSD3 (Payment Services Directive 3) and the proposed Payment Services Regulation, designed to tighten harmonisation, close gaps and strengthen enforcement across member states.

Despite different rulebooks, regulators on both sides of the Channel are aligned on outcomes. Customer funds must be protected, movements must be transparent, and accountability must be clear. Problems often arise where firms try to apply a “lowest common denominator” approach by, for example, running a single safeguarding model across UK and EU entities without accounting for local reporting expectations or supervisory style. Several firms have faced follow-up reviews after assuming that compliance in one jurisdiction would be accepted in the other.

The regulatory trend is unmistakable. Authorities show less tolerance for formal, checklist-based compliance and far more interest in how safeguarding works in practice, especially during stress. Post-divergence, regulatory judgement increasingly outweighs literal rule interpretation, meaning that firms must evidence intent, control and understanding, not just technical compliance.

How Payment Firms Must Protect Customer Funds — and Prove It

Payment firms typically safeguard customer funds using one of two methods: placing them in segregated accounts with authorised credit institutions, or covering them through insurance or comparable guarantees. On paper, both approaches remain acceptable under UK and EU rules. In practice, however, regulators are far less interested in which method is chosen than in whether firms can prove, day by day, that it works.

Supervisory reviews increasingly focus on daily or near-real-time reconciliations, robust audit trails and the integrity of data flowing between customer ledgers, operational systems and bank accounts. Recent interventions have shown firms discovering shortfalls caused not by misuse, but by delayed settlement files, manual spreadsheet adjustments or system failures at third-party providers.

The greatest risks sit in the gaps between systems. A firm may rely on a processor for transaction data, a separate ledger platform for balances and a partner bank for safeguarding accounts. If those systems are misaligned, discrepancies can accumulate quickly and quietly. Regulators have stressed that these are operational, not accidental, failures.

Evidence readiness is now central to supervision. Firms must demonstrate, at short notice, exactly where customer money sits, why it reconciles, and who is accountable when it does not.

How Prudential and Reporting Duties Interlock with Safeguarding

Safeguarding does not exist in isolation. Regulators increasingly link it to a payment firm’s capital adequacy, liquidity management and ability to execute an orderly wind-down. A firm may have compliant safeguarding accounts, but if it lacks sufficient financial resources, those arrangements can fail under stress. Recent supervisory work has examined whether firms could continue daily reconciliations, retain access to safeguarding accounts and meet operational costs during a liquidity shock or rapid exit.

This connection is reinforced through reporting obligations. Regular regulatory returns are now supplemented by event-driven notifications, such as the discovery of a safeguarding shortfall, and frequent ad hoc information requests. In practice, firms have faced criticism for treating safeguarding reports as periodic compliance tasks rather than indicators of real-time financial health.

Poor prudential planning therefore becomes a safeguarding risk in its own right. If a firm cannot fund key staff, systems and controls during disruption, customer funds may be exposed. The regulatory message is increasingly clear: safeguarding is only credible if the firm can afford to operate it properly, even under pressure.

Safeguarding as Strategy, Not Just Compliance

Safeguarding has become a visible trust signal. Regulators, banking partners and increasingly customers now use it as a proxy for how well a payment firm is run. UK and EU authorities expect firms not only to comply with safeguarding rules, but to understand their safeguarding architecture end to end, test it under stress, and explain it clearly to supervisors. Firms that cannot articulate how customer money flows through their systems often attract deeper scrutiny, even where no loss has occurred.

By contrast, firms that treat safeguarding as a strategic capability tend to scale more smoothly. Clear ownership, automated reconciliations and well-rehearsed incident responses reduce the risk of supervisory intervention and support faster partner onboarding, particularly with cautious banks. During periods of market stress, these firms are also more resilient, as they can maintain controls and transparency when others struggle.

In modern payments, safeguarding is no longer just about where the money sits. It is about who controls it, who understands it, and who is accountable when things go wrong.

And what about you…?   

  • If a regulator asked today, could we clearly explain — end to end — how customer money moves through our systems and where it sits at any given moment?
  • How would our safeguarding processes perform under stress — for example, during rapid growth, a systems outage, or a sudden wind-down — and have we tested this in practice?