The UK’s Financial Conduct Authority (FCA) has introduced rules stipulating that payments firms must keep company funds separate from customer funds.
The FCA cited several instances where fintechs became insolvent, noting that customers were left with an average shortfall of 65% in these cases. The new safeguarding rules are intended to ensure that, if a company fails, customers are more likely to receive a full refund and face fewer delays.
Under the new rules, payments companies are required to conduct annual audits and submit monthly reports. Fintechs must also perform daily checks to ensure adequate resources are safeguarded to protect their customers and must create plans to prevent delays in reimbursement.
Safeguarding Vs. Commingling
The scrutiny of financial technology firms intensified following the failure of Synapse last year. After the fintech’s bankruptcy, it emerged that the company had commingled the funds it was safeguarding for many banking clients.
There was speculation that Synapse had tapped into customer funds to keep the business running after the loss of a critical client. Once the company went under, however, its records offered no clear way to separate individual accounts—leading to roughly $85 million in frozen customer funds.
Tightening Regulations Appropriately
In the aftermath, regulators worldwide pushed for clearer rules governing how fintechs and banks work together. However, JPMorgan Chase has proposed a different approach, suggesting that fintechs be charged fees to access its customers’ data.
This would represent a shift in the U.S. banking paradigm, where fintechs have historically had free access to consumer banking data. Many argue that charging fintechs fees could be a step backward for the open banking model, which is built on third-party connections.
However, the UK has taken a more regulatory-first approach to open banking than the U.S.—one reason why the model has gained more traction in the region.
Although the FCA may be tightening regulations around fintechs, there is still some leeway. The regulator stated that its rules would be adjusted based on the size of the company. For example, the FCA could remove the audit requirement for a fintech holding less than £100,000 in customer funds.
The FCA also noted that the new rules won’t take effect for nine months, giving fintechs enough time to reach compliance.
