Relevant Funds

Relevant funds is the UK legal term for the customer money that a payment institution or electronic money institution must safeguard. For a payment institution, relevant funds are sums received from, or for the benefit of, a payment service user for the execution of a payment transaction. For an e-money issuer, they are funds received in exchange for electronic money that has been issued. The firm must keep these funds separate from its own money and protect them so that, if it fails, customers are paid back ahead of its other creditors.

The term appears in the Payment Services Regulations 2017 (PSRs 2017) and the Electronic Money Regulations 2011 (EMRs 2011), which implement in the UK the safeguarding requirements of the EU's PSD2 and Second Electronic Money Directive. The Financial Conduct Authority supervises compliance.

For payment institutions, the definition captures money in transit: a customer's funds received for a transfer that has not yet been paid out, or funds received from a payer for a merchant that have not yet been settled. Fees the firm has earned and is entitled to keep are not relevant funds once they are due to the firm, though a firm must be careful not to deduct them early.

For e-money institutions, relevant funds are the amounts backing outstanding e-money: when a customer loads a wallet or a prepaid card with 100 pounds, the issuer receives 100 pounds of relevant funds and owes 100 pounds of e-money. Where an EMI also provides payment services unrelated to issuing e-money, the funds for those services are safeguarded under the payment services rules.

Money a firm holds in other capacities, such as its own capital or funds received through an unrelated business line, is not relevant funds. Where a single receipt mixes relevant and non-relevant elements, the regulations provide for an estimated split.

Two different timing rules apply, and firms often confuse them:

• Segregation on receipt: relevant funds must not be commingled with the firm's own funds at any time. From the moment of receipt they must be identifiable as customer money in the firm's records, even if they briefly arrive in a mixed account.
• Protection by the end of the next business day: if the funds are still held at the end of the business day following the day of receipt, they must be placed in a designated safeguarding account at an authorized credit institution, or invested in approved secure, liquid assets, or covered by insurance or a comparable guarantee.

The first is a bookkeeping and control obligation; the second is a requirement about where the money physically sits. Under either the segregation method or the insurance and guarantee method, the purpose is the same: if the firm becomes insolvent, the relevant funds form a separate pool for customers.

A safeguarding account must be in the firm's name, designated as holding customer funds, and protected so that the bank cannot use it to set off the firm's debts. Firms must perform regular reconciliation between the relevant funds they should hold and the amount actually in safeguarding accounts and assets, and correct any shortfall promptly. The FCA strengthened these requirements with new client-asset-style safeguarding rules, including more frequent reconciliations, monthly regulatory returns and annual audits. Small payment institutions are not obliged to safeguard but may choose to, and many do so to reassure customers and banking partners.

Several UK payment and e-money firms have failed with shortfalls in safeguarded money, leaving customers waiting months or years for partial repayment through insolvency proceedings. The Payment and Electronic Money Institution Insolvency Regulations 2021 created a special administration regime to speed up the return of relevant funds. Correctly identifying relevant funds, segregating them, and reconciling them daily is therefore one of the FCA's central supervisory priorities for the sector.

Similar concepts exist elsewhere under different names. In the EU, PSD2 and the e-money directive use the general term "funds received" and leave detailed implementation to member states. Investment firms in the UK hold client money under the FCA's CASS rules, which are more prescriptive. In the United States, money transmitters are generally required to hold permissible investments equal to outstanding payment obligations rather than segregating specific customer funds, although some states treat those investments as held in trust. Firms often hold customer money in a segregated account or a pooled account structure, and the design of those accounts decides how easily relevant funds can be identified and returned. For the general concept, see safeguarding.

• The Payment Services Regulations 2017
• The Electronic Money Regulations 2011
• Financial Conduct Authority