UK Tightens Controls on Payment Firms After Insolvency Losses

By Parth Prabhudesai

The UK’s financial regulator is set to significantly tighten protections for customers using payment and e-money firms, introducing new safeguarding rules that will take effect from May 2026. The changes, announced by the Financial Conduct Authority (FCA), aim to ensure that customer funds are better protected if a firm fails, following concerns over past insolvencies in the sector.

Safeguarding requires firms to keep customer money separate from their own operational funds, ensuring it can be returned in the event of failure. Under the new regime, firms will be required to carry out daily reconciliation checks, submit monthly reports, and conduct annual audits by qualified auditors. Firms will also need stronger wind-down planning so customer funds can be returned more quickly if insolvency occurs.

The FCA has allowed a nine-month implementation period following industry consultation. It has also introduced proportionality measures for smaller firms, including removing the audit requirement for firms holding less than £100,000 in customer funds.

The regulator said the reforms are necessary given historical weaknesses in the sector. Between Q1 2018 and Q2 2023, payment firms that became insolvent had an average shortfall of 65% of customer funds, leaving consumers significantly exposed.

Matthew Long, Director of Payments and Digital Assets at the FCA, said, “People rely on payment firms to help manage their financial lives. But too often, when those firms fail, their customers are left out of pocket.” He added that most respondents to the consultation supported stronger protections, provided they remained proportionate for smaller firms.

Industry response has broadly acknowledged the intent of the reforms. Deep Patel, Partner and UK Payments Lead at Capco, said the rules represent a “welcome move” that reflects a wider shift towards stronger consumer protection. He noted that while established firms may already have similar controls, smaller players could face higher compliance and operational costs.

Patel added that firms will need to invest in stronger reconciliation processes, governance structures, and wind-down planning. However, he said the long-term outcome should be a more resilient payments ecosystem, with improved consumer trust and sustainable growth.

The reforms may also influence market structure. Analysts suggest that higher compliance costs could accelerate consolidation, particularly among smaller payment firms and newer entrants. However, the FCA believes stronger safeguarding standards will ultimately enhance trust in the sector and support healthier competition.

Overall, the changes mark a shift toward tighter operational discipline in the UK payments landscape, as regulators respond to rapid sector growth and increased reliance on non-bank financial platforms.