Customer funds safeguarding

Description

A working safeguarding program enforces the legal premise that customer funds held by a payments institution or e-money issuer are not the institution's funds. The components are segregation of those funds in a dedicated account at a regulated credit institution (or in approved liquid assets, depending on the regime), daily reconciliation between the customer-liability ledger and the safeguarding-account balance, and a documented insolvency-protection mechanism (usually a statutory trust or equivalent guarantee) that survives the institution's own failure. The regimes layer with similar shapes and different specifics. PSD2 Article 10 covers payment institutions; EMD2 Article 7 covers e-money institutions with end-of-business-day-after-receipt segregation. MiCA Article 75 extends an analogous regime to crypto-asset service providers, with separate accounting expected for fiat holdings versus custodied crypto-assets. The UK FCA framework (PSRs 2017 Regulation 23 and EMRs 2011 Regulations 20-22) sits on a comparable structure, with the 2024 Dear CEO letter and the Modulr and Pockit enforcement actions tightening reconciliation and qualifying-account expectations meaningfully. US state Money Transmitter Licenses operate on a permissible-investment list (cash equivalents, US government securities, qualifying bank deposits) with quarterly or monthly reconciliation, and post-FTX, Voyager, and Celsius the state regulators have collectively tightened scrutiny on segregation in practice. The insolvency angle gives this regime its bite. The customer of a safeguarded institution is not a creditor of the institution in the ordinary unsecured-claim sense; the safeguarding regime exists to make that legal posture operationally enforceable when the regulator arrives during a wind-down. Reconciliation breaks are the commonly-seen enforcement trigger. A one-off break with a documented cause and a same-day correction reads as operational noise; a sustained break reads as evidence the segregation is theoretical rather than actual, and that is the finding that draws supervisory action. Evidence formats that hold up include safeguarding-account bank statements signed by the credit institution, daily reconciliation reports keyed to the customer-liability ledger, and external auditor confirmations against both ledgers.

Applicability

Applies when: sector is fintech.

How predicates are evaluated

Required by (5 regulations)

• PSD2

  Article 10 — safeguarding requirements for payment institutions.

  Directive (EU) 2015/2366

• US MTL

  Per-state permissible-investment requirements; cash equivalents + US government securities + qualifying bank deposits; quarterly/monthly reconciliation; post-FTX-Voyager-Celsius regulator attention on segregation.

  Bank Secrecy Act, 31 U.S.C. §§5311-5336; 31 CFR Chapter X; per-state Money Transmitter Acts

  Source →

• EU EMD2

  EMD2 Article 7 — safeguarding by end-of-business-day-after-receipt; segregation in qualifying credit institution OR insurance/guarantee; 2024 EBA Guidelines tightened operational expectations.

  Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009

  Source →

• EU MiCA

  MiCA Article 75 custody-of-crypto-assets segregation + recordkeeping + daily reconciliation; parallel framework for client-fund-safeguarding in CASP services involving fiat-currency holdings.

  Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023

  Source →

• UK FCA Payments

  PSRs 2017 Regulation 23 + EMRs 2011 Regulations 20-22 — segregation in safeguarding account at authorized credit institution OR insurance/guarantee; 2024 FCA Dear CEO letter tightened reconciliation + qualifying-account expectations; recent FCA enforcement actions (Modulr, Pockit) signal supervisory attention.

  Payment Services Regulations 2017 (SI 2017/752); Electronic Money Regulations 2011 (SI 2011/99); FCA Handbook

  Source →

Fulfilled by (1)

• In-house build · high effort

Magist does not accept payment from vendors. Methodology.

Evidence formats

• safeguarding bank statements
• daily reconciliation reports
• auditor confirmations