The Impact of FCA Rules on Co-mingled Client Funds in the Direct Payments Sector

The Impact of FCA Rules on Commingled Client Funds in the Direct Payments Sector

Overview

Recent Financial Conduct Authority (FCA) scrutiny of how organisations manage client funds has important implications for the direct payments sector. Although most direct payment providers are not formally regulated by the FCA, the spirit and safeguarding intent behind the FCA’s Client Assets Sourcebook (CASS) rules should still guide their practices.

These principles—focused on the protection, segregation, and safeguarding of client money—represent the benchmark for financial integrity. Providers handling funds on behalf of vulnerable individuals must therefore demonstrate the same levels of transparency and accountability expected of regulated firms.

What Are the FCA’s Expectations?

Under FCA regulations, regulated firms must hold client money in fully segregated bank accounts, ensuring that it is never mixed with a provider’s operational funds or with money from other services. This segregation guarantees that, in the event of financial distress, insolvency, or mismanagement, client money remains ring-fenced and protected.

These strengthened requirements will take full effect from May 2026.

The Financial Services Compensation Scheme (FSCS) adds a further layer of protection by insuring eligible deposits in client accounts up to £85,000 per person, per bank—but only when those funds are clearly identifiable and properly segregated.

Commingling client funds—such as combining direct payment money with appointeeship, deputyship, or other service funds—undermines this protection and risks breaching FCA principles, even if the provider itself is not directly regulated.

Why This Matters for the Direct Payments Sector

The direct payments sector manages public funds and personal budgets on behalf of vulnerable individuals. These funds are provided by local authorities to enable people to purchase and manage their own care. Such arrangements depend on trust, transparency, and robust safeguarding.

When direct payment funds are mixed with other clients’ money or unrelated service funds, several serious risks emerge:

• Loss of FSCS protection – Commingled funds may not qualify for protection if a bank fails.
• Breach of FCA principles – Even if not regulated, providers can still fall short of expected safeguarding standards.
• Increased vulnerability risk – Delays or errors in fund allocation can directly affect an individual’s access to essential care.
• Accountability and reputational risk – Local authorities may face scrutiny or liability if they commission providers that fail to follow best-practice safeguarding standards.

A Warning to Local Authority Commissioners

Local authority commissioners are responsible for ensuring that public funds—and the individuals they support—are safeguarded through sound financial practices. Commissioners should verify that providers:

1. Maintain fully segregated client accounts, ideally in the client’s own name.
2. Use FSCS-protected institutions for all client money.
3. Do not pool funds across different service types (e.g., direct payments, appointeeship, deputyship).
4. Can evidence compliance through audits, bank confirmations, and, where applicable, FCA registration or equivalent oversight.

Even in the absence of direct FCA regulation, commissioners should insist that providers operate in accordance with the FCA’s safeguarding spirit. Failure to do so not only expose councils to reputational and financial risk but can also endanger the welfare of the vulnerable individuals the system is designed to protect.

Conclusion

The FCA’s stance on the segregation of client money represents a vital safeguard for financial resilience and public trust. While direct payment providers may not fall under formal FCA regulation, they should adhere to the same principles of segregation, transparency, and protection.

For local authorities and providers alike, the message is clear:
Every pound of client money must be held in a secure, FSCS-protected account—not mixed, not pooled, and never at risk.

Upholding the spirit of FCA safeguarding is not merely a regulatory expectation; it is a moral and professional duty to protect vulnerable people’s financial wellbeing.