Safeguarding customer money is a legal duty for payment firms, and most treat it as the end of the story. It is not. Safeguarding and insurance do different jobs. Firms that assume one covers the other are exposed in ways they rarely see until a loss lands.
What the Rules actually Require
If your firm holds customer money, regulators require you to ring-fence it. In Singapore, that duty sits in Section 23 of the Payment Services Act, which applies to major payment institutions. In Hong Kong, the parallel obligation sits in the Stored Value Facilities Ordinance (Cap. 584), which requires SVF licensees to protect the float.
The methods are narrow. Under Section 23, a firm safeguards customer money in one of three ways: a trust account with a safeguarding institution, an undertaking from one, or a guarantee from one, which can include a prescribed insurer. The money must stay separate from the firm’s own funds, and it must be reconciled and reported. Hong Kong works similarly, usually through a trust arrangement, sometimes backed by a bank guarantee or a custodian.
All of this does one job. It makes sure customers get their money back if the firm goes insolvent. That is the purpose of safeguarding, and it is where safeguarding stops.
Where Safeguarding Falls Short
Insolvency is not how most firms lose customer money. The real losses are operational, and safeguarding does nothing to reverse them.
An employee with access can steal safeguarded funds. A reconciliation can drift out of line and go unnoticed. Money can be commingled by oversight. A custodian or a process can fail. In each case the money was set aside exactly as the rules require, and it is still gone. Safeguarding kept it in a separate box. It did not stop someone emptying the box.
This is the gap. Safeguarding proves the money was ring-fenced. It does not make the customer whole when that money is stolen or mishandled.
The Cover that Responds
When safeguarding breaks, insurance is what responds, and different failures call on different policies. This is where safeguarding customer money stops being a compliance question and becomes an insurance one.
Crime insurance answers theft. If an employee takes safeguarded funds, if a payment is fraudulently transferred, or if staff are deceived by social engineering, a crime policy is built to respond. Cover depends on how the policy is worded, so the definition of insured property and funds matters.
Professional Indemnity answers error. Not every loss is theft. Some flow from a mistake in the safeguarding process itself, a negligent reconciliation failure or a procedural slip that causes a customer loss. Where the loss stems from that error, PI may respond, again subject to the wording.
Directors and Officers answers the aftermath. A safeguarding failure rarely ends with the money. It invites a regulator to ask how it happened, and it puts the firm’s directors under scrutiny. A D&O policy can meet the cost of defending them through that investigation. It pays for the defence, not the fine.
Together, these three cover most of what a payment firm is realistically exposed to when safeguarding fails. None of them is automatic. Each depends on the wording matching the way the firm actually holds and moves customer money.
Stress-test the Cover Before An Incident Does
Here is the part most firms miss. They safeguard diligently, buy a crime and PI programme, and never check whether that programme would actually respond to a safeguarding loss. The policies were often bought for a generic business, not for a regulated holder of customer money, and the gaps only surface at claim time.
The fix is straightforward. Map the ways safeguarding could break, theft, error, custodian failure, and hold each one against the wordings you already carry. Where a failure would not be paid, the cover needs adjusting or extending, and the policies need to work together rather than leaving seams between them.
This is a recommendation rather than a regulatory checklist, and the right structure depends on the jurisdiction, the custodians and how the firm is set up. Continuum advises payment firms across Asia on exactly this, helping them confirm their cover would respond to a safeguarding incident before one puts it to the test. For a clear view of your exposure, contact us.
