PSD2 Safeguarding Insurance Guide
This guide offers an insight into how the insurance method of safeguarding can provide payment service providers with economic benefits, help to alleviate some of the regulatory risks and allow customer propositions to be improved.
Authorised payment institutions (APIs), E-Money institutions (EMIs) and other non-bank payment service providers are legally obliged to protect customer funds, a practice known as ‘safeguarding’.
It’s a topic that is top of mind for the regulators across Europe who are focused on protecting consumers. In the UK, recent actions by the FCA have included a ‘Dear CEO’ letter issued in July 2019 detailing their findings from a multi-firm review, followed by further guidance issued in December 2019 focusing on the use of insurance in safeguarding.
Most firms deploy the segregation method, which sounds simple enough but it’s a more complicated picture. The payment flows, foreign exchange and separation of non relevant funds can each introduce an uncertainty and complexity that makes it difficult to be fully confident about which funds require segregation and for how long.
Many payment service providers (PSPs) are tying up more cash than they need to and depleting their operational funds. Or, worse, they are not compliant with the regulations potentially leading to dire consequences that include fines, loss of licence, criminal prosecution and loss of customer funds.
Some PSPs, particularly EMIs, who hold significant amounts of segregated funds can see an opportunity to improve capital efficiency and as a result are considering other complementary methods of safeguarding. This can allow firms to move customer funds into more efficient low risk investment vehicles.
These are all reasons why, for almost two years, Protean Risk worked with PSPs, regulators, insurance underwriters and law firms to develop a credible, feasible, safeguarding insurance policy. Launched in mid-2019 our PSD Bond was the first and is still the only safeguarding insurance policy available in the market.
PSD Bond has a huge role to play in making safeguarding work better for the benefit of all stakeholders in this complex and fast-evolving sector. It’s being used by an increasing number of APIs and EMIs, including some of the largest and well-known brands.
Firms purchasing safeguarding insurance are finding that by using insurance as a complementary safeguarding method they are saving money, improving capital efficiency, alleviating regulatory risk, strengthening consumer protection and even extending their value propositions as highlighted in the case studies within this guide.
With a credible and acceptable insurance option on the table, PSPs are well advised to re-examine their potential safeguarding alternatives. To help we’ve produced this guide that explains some of the challenges facing PSPs and uses real life case studies to give insight into where and how PSD Bond can make a difference.