Why payment firms are turning to insurance for safeguarding
Safeguarding is the key mechanism within the Payment Services Regulations (PSRs) and Electronic Money Regulations (EMRs) to protect relevant funds. When a firm becomes insolvent, it’s relevant funds (if properly safeguarded) become available for return to payment service users and e-money holders in priority to the claims of all other creditors.
Safeguarding can be performed through either segregation or through insurance (or comparable guarantee).
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The option to safeguard through insurance has been available since the regulations were introduced. Whilst safeguarding through segregation remains the most commonly used safeguarding method by firms, the use of safeguarding through insurance is increasing.
A key benefit is access to working capital. Under segregation, firms cannot use relevant funds held in safeguarding accounts. Insurance removes this constraint, allowing firms to use funds for operations and growth. In some cases, the cost of insurance may be lower than borrowing, or borrowing may be unavailable, making insurance a practical alternative.
How safeguarding through insurance works
The insurance method of safeguarding requires the relevant funds to be covered by an insurance policy with an authorised insurer. The policy will need to cover either all relevant funds (not just the funds held by a firm at the end of the business day following the day that they were received) or certain relevant funds.
The insurance policy must have no condition or restriction on the prompt paying out of funds. The proceeds of an insurance policy must be paid into a separate safeguarding account held by the firm. This account must be used only for holding such proceeds. The proceeds of the insurance policy must be payable outside the firm’s insolvent estate. One way of doing this is for the insurance policy to be written in trust for the benefit of payment service users or e-money holders from the outset. To ensure that a firm’s relevant funds remain adequately safeguarded, the amount of the insurance cover must at all times:
- include reasonable headroom to allow for any foreseeable variation in the amount of relevant funds
- there should be no level below which the insurance policy does not pay out
- the insurance policy should provide cover for at least as long as the firm is using the insurance method; and
- the firm must ensure that their insurer understands that the circumstances that lead to a claim would provide no grounds to dispute their liability to pay it.
Can firms use both safeguarding methods?
Firms are able to use both the insurance and segregation methods of safeguarding simultaneously. Where this is the case, the excess of relevant funds above the insurance policy limit should be protected by the segregation method.
Risk of non-renewal – the “cliff edge” scenario
There is risk that a firm’s insurance cover may not be renewed and that an alternative insurer cannot be found. If a firm is unable to extend its cover and has less than three months of its current policy remaining, it should prepare to safeguard all its relevant funds through segregation. It may be that a firm is unable to withdraw sufficient funds from its working capital to replace the insurance cover provided by its expiring policy without impacting its financial stability. If a firm is unable to demonstrate that it can safeguard all its relevant funds before the expiration of the policy, it should consider its financial position.
Firms using safeguarding through insurance should incorporate the non-renewal of the insurance policy into management’s going concern assessment.
The non-renewal of insurance should also be covered in a firm’s wind-down plan as a scenario that could lead to business failure.
The Supplementary Regime: FCA changes effective from May 2026
In August 2025, the FCA published policy statement PS25/12 to strengthen safeguarding practices. These changes – known as the Supplementary Regime – took effect from 7 May 2026.
Actions required at least 3 months before policy expiry
The Supplementary Regime introduces the following changes in relation to the insurance method of safeguarding:
- A firm must decide whether it intends to continue using the insurance method and notify the FCA of this intention
- If a firm does not have a replacement or renewal in place, it must submit a plan to the FCA explaining how it will transition to the segregation method if the insurance method is not replaced or renewed
- If a firm is unable to safeguard all relevant funds through segregation, it should consider its financial position and whether it is appropriate to enter an insolvency process so that a claim can be made under its insurance policy.
Other key changes
To deal with the risk of claims being disputed by insurers, the insurance policy must not contain any condition or restriction on paying out other than the certification of the insolvency event.
Firms are required to notify the FCA at least two months in advance if:
- they intend to use the insurance method of safeguarding for the first time
- there are changes to the insurance cover
- there is a change in the insurance provider.
The notifications must include a risk assessment of the changes and how the identified risks will be mitigated.
Azhar Rana, partner, Financial Services team, PKF Littlejohn
