Safeguarding is the statutory obligation on authorized payment institutions and electronic money institutions to protect the funds they receive from customers, so that the money can be identified and returned if the firm becomes insolvent. In the European Union and the United Kingdom, a firm must either keep customer funds segregated from its own money in a protected account or approved assets, or cover them with an insurance policy or a comparable guarantee. Safeguarding is a condition of holding a license, not an optional good practice.
The requirement exists because payment and e-money firms are not banks. Their customers are not covered by deposit insurance, so the protection of funds in transit or held as balances depends on how well the firm separates and tracks them.
Legal basis
In the EU, safeguarding for payment institutions is set out in Article 10 of the Second Payment Services Directive (PSD2), and for e-money issuers in Article 7 of the second E-Money Directive (2009/110/EC). The United Kingdom implemented these through the Electronic Money Regulations 2011 and the Payment Services Regulations 2017, supervised by the Financial Conduct Authority (FCA). In 2025 the FCA finalized a revised safeguarding regime, with new rules in its client assets sourcebook taking effect in 2026, that adds monthly reporting, annual safeguarding audits and resolution planning for affected firms.
The funds that must be protected are called relevant funds: sums received from payment service users, or in exchange for issued electronic money, that the firm still holds.
Methods of safeguarding
Segregation
Under the segregation method, the firm must not mix relevant funds with its own money. Funds still held at the end of the business day after receipt must be placed in a safeguarding account with an authorized credit institution or a central bank, or invested in secure, liquid, low-risk assets approved by the regulator. The account must be designated so the bank knows it holds customer money and cannot use it to offset debts the firm owes the bank. In practice this is a segregated account, often a pooled account holding many customers' funds together.
Insurance or guarantee
Alternatively, a firm can cover relevant funds with an insurance policy or a guarantee from an authorized insurer or credit institution that is not part of its own group. The policy must pay out into a designated account if the firm becomes insolvent. This method is less common, mainly because suitable cover is costly and hard to obtain.
Reconciliation and record-keeping
Safeguarding only works if the firm knows, every day, how much it owes customers and how much it holds for them. Firms therefore perform internal and external reconciliation, comparing their own ledger of customer balances with the amounts in safeguarding accounts and correcting any shortfall promptly. Regulators have found that weak reconciliation, unclear records and the late transfer of funds into protected accounts are the most common safeguarding failures.
Who must safeguard
Authorized payment institutions and authorized electronic money institutions must safeguard. A small electronic money institution must safeguard the funds it receives for e-money. A small payment institution is generally not required to safeguard under the UK regulations but may choose to do so voluntarily. Banks are outside the regime because their customers are protected by capital rules and deposit insurance.
Safeguarding in insolvency
When a payment or e-money firm fails, safeguarded funds are meant to be returned to customers ahead of the firm's other creditors, after the costs of distribution. The United Kingdom introduced a special administration regime for payment and e-money institutions in 2021 to speed up that process. Several insolvencies have nevertheless shown that customers can wait months, and may lose part of their money, when safeguarding records are incomplete or funds were not segregated as the rules required.
Comparison with client money and US rules
Safeguarding is related to, but different from, the client money rules that apply to investment firms. In the United States there is no single federal safeguarding rule for nonbank payment firms; instead, state money transmitter licenses impose permissible-investment requirements, bonding and net worth standards, now being harmonized by the Money Transmission Modernization Act. For the UK supervisor, see the FCA regulator profile.