Safeguarding

The fundamental difference between Safeguarding and traditional Deposit Insurance lies in the mechanism and scope of client fund protection, a distinction that is crucial for users of fintech and embedded finance services. Deposit insurance, such as the Federal Deposit Insurance Corporation (FDIC) in the United States or the Financial Services Compensation Scheme (FSCS) in the United Kingdom, protects customer deposits up to a specified limit—typically $250,000 in the US and £85,000 in the UK—in the event of a bank failure. This insurance is a guarantee against the bank's inability to repay its debts. In contrast, safeguarding is a regulatory obligation, primarily for non-bank financial institutions like Electronic Money Institutions (EMIs) and Payment Institutions (PIs), which requires them to keep client funds entirely separate from their own working capital. For example, under the UK’s Electronic Money Regulations 2011 (EMRs) and the Payment Services Regulations 2017 (PSRs), an EMI must place 100% of the relevant client funds into a segregated bank account, often referred to as a "safeguarding account," or cover them with an insurance policy or comparable guarantee. This means that the client funds never become assets of the EMI itself. If the EMI were to become insolvent, the client funds are ring-fenced and are not available to the firm's creditors. Instead, an insolvency practitioner is appointed to return the funds directly to the customers. This provides a 100% protection of the principal amount, not just up to a limit, because the funds were never legally part of the failed institution's estate. For a fintech user, this distinction is vital: while a traditional bank account offers insurance up to a limit, an e-money account subject to safeguarding offers protection of the full balance, albeit through a different legal mechanism that focuses on asset separation rather than a government-backed insurance payout. This difference is particularly relevant in the embedded finance space, where non-bank entities are increasingly holding customer funds.