Why Safeguard Funds?
The Financial Conduct Authority (FCA) implemented the Electronic Money Regulations (EMRs) in 2011, which stipulated that a fintech is required to identify clients’ funds and safeguard them apparently. It allows a third party to distribute the funds in an extraordinary event (like- insolvency) and thereby, effectively ringfences these funds. Unlike the Financial Services Compensation Scheme, which only covers £85,000 per customer, there is no upper limit to safeguarded funds in this case. Safeguarding is positive practice with good accounting that creates the right structure and processes to ensure safeguarding is effective.
How To Safeguard Funds
The EMRs normally allow a fintech unit to safeguard prime customer funds via two methodologies. They can take coverage with help of an insurance policy and in the event of insolvency, the proceeds of which are paid into a segregated bank account. It saves time and energy with the funds not urgently needing to be placed in designated ringfenced accounts. In the case of safeguarding via insurance, there are a few other parameters as well, such as measuring the adequacy of the policy terms and riders taken because of which the total amounts of customer funds might vary. Often Fintechs safeguard the customer funds by placing them in a designated segregated account at a credit institution such as Clearbank, Barclays, or Citibank.
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Key Considerations
Keeping Funds Separate
It is very important that the customer funds are protected from claims by creditors. For this, the customer funds are kept in a separate safeguarding account to ensure that company funds are diversified from these accounts to prevent commingling.(for example- operational liquidity/customers fee).
Ensuring Liquidity
Along with the allocation of the funds into a safeguarding account, liquidity also needs to be ensured so that customer transactions can be easily processed daily without any discrepancy. With clear visibility of funds, one can have the right amount of money in the right place. Businesses also need to embrace daily reconciliations for ensuring there are zero variances in reporting. Taking the help of a third-party solution and integrating it with its platform can save time and money by automating fund movements.
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Knowing Who Is responsible
It can be costly and time-consuming to acquire a financial license, but with that, the business house can have good customer relationships and can have greater control over procedures. On the other hand, integrating with a third-party platform and taking an agency license is often less time-consuming. No matter which road the business decides upon, what the consumers want in the end is the safety of their funds.
Create A Authentic Account Structure
It is very important to label every account without any error and create processes within these accounts that allow financial institutions to effectively identify the purpose for which they are serving. As the FCA domain has clearly stated that the specific designation should have words like ‘safeguarding’, ‘customer’, or ‘client’ while referring to such accounts.
Precise Reporting
Without accurate reporting safeguarding cannot be effectively managed. Real-time data needs to be accessed, such as account balances and customer activity so that one can know exactly what is where at any given point in time. The only precise route to execute this is via direct connectivity to a bank. This can be challenging as bank regulations are quite strict in terms of their reporting systems; a fintech can opt to use software like Integrated Finance so that they can directly integrate with a bank to access their needed information.
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