The Regulator's Dilemma: When Protecting Customers Means Shutting Them Down

The Regulator's Dilemma: When Protecting Customers Means Shutting Them Down

The UK's payment sector faces a regulatory paradox. The Financial Conduct Authority (FCA) must protect consumers, yet enforcement can cause significant, immediate harm to those same customers.

This dilemma is most acute with Payment Service Provider (PSP) failures. When the FCA suspends or revokes a firm's authorisation¹, it can leave thousands without access to their funds. This isn't theoretical; it's a recurring reality.

🛡️ THE SAFEGUARDING IMPERATIVE

The core of the issue lies in the safeguarding of customer funds. The Payment Services Regulations 2017² require authorised payment institutions to segregate customer funds from their own. However, the FCA's own reviews have found that a significant number of firms are failing to meet this basic requirement³.

This has led to a major overhaul of the safeguarding regime⁴, with the FCA pushing for stricter controls and clearer segregation of funds. The message is clear: customer money is not the firm's money, and it must be protected at all costs.

💥 THE ENFORCEMENT PARADOX

But what happens when a firm fails to meet these standards? The FCA's enforcement toolkit is powerful, but it is also a blunt instrument. Suspending a PSP's operations can trigger a chaotic scramble for customers to retrieve their funds, often with limited success in the short term.

This creates a difficult choice for the regulator: act decisively to protect customer funds from further risk, but in doing so, cause immediate disruption and distress? Or, allow a non-compliant firm to continue operating, hoping to avoid a disorderly failure, but leaving customer funds exposed?

❓ THE CRITICAL QUESTION FOR 2026

The FCA's increasing focus on enforcement, coupled with the new emphasis on resolution planning from the Bank of England⁵, suggests that the tolerance for non-compliant PSPs is wearing thin.

The critical question for the payments sector in 2026 is: how can firms demonstrate not only that they are safeguarding customer funds correctly, but also that they have a credible plan to wind down their operations in an orderly manner if they fail?

For PSPs, the answer is not just about compliance; it's about survival. For their customers, it's about the security of their money.

References

¹ The Payment Services Regulations 2017, Regulation 108 ² The Payment Services Regulations 2017, Regulation 23 ³ Grant Thornton, "Top themes for the payments sector in 2026" ⁴ FCA, Policy Statement 25/12: Changes to the safeguarding regime ⁵ Bank of England, "Planning to fail – what resolution is and why it matters" (Jan 2026)