Author: James Borley, Director of Payment Services
Dormant accounts are a familiar feature of the financial services landscape. Whether arising from forgotten savings accounts, unused payment cards, or e-wallets abandoned after a single transaction, firms inevitably encounter customer funds that remain untouched for extended periods.
However, while banks and Electronic Money Institutions (EMIs) may face similar operational challenges in managing dormant customer relationships, the regulatory treatment of dormant balances differs significantly. These differences become particularly important when considering customer protection, safeguarding requirements, and the treatment of funds in the event of insolvency.
For compliance officers, safeguarding specialists, and senior management within payment firms, understanding these distinctions is essential.
The Banking Position
Traditional banks accept deposits under a banking licence (Part 4A permission granted under the Financial Services and Markets Act 2000 (FSMA)) and hold customer money as liabilities on their balance sheets.
When a customer account becomes dormant, ownership of the funds does not change. The bank continues to owe the money to the customer, regardless of the period of inactivity. In many jurisdictions, banks are permitted to transfer long-dormant balances into central reclaim funds or unclaimed asset schemes, provided customers retain a perpetual right to reclaim their money.
In the United Kingdom, customers of authorised banks benefit from protection under the Financial Services Compensation Scheme (FSCS). Eligible deposits are protected up to £120,000 should the bank fail.
Consequently, although dormant accounts may present operational and conduct risks, the underlying customer protection framework remains relatively straightforward: customer funds form part of the bank’s balance sheet and are protected by the FSCS.
The EMI Model is Fundamentally Different
EMIs operate under an entirely different regulatory regime, the Electronic Money Regulations 2011 (‘EMRs’).
Unlike banks, EMIs are explicitly prohibited from taking deposits. Instead, they issue electronic money in exchange for funds received from customers. The customer’s claim is therefore not a deposit claim against a bank but a redemption claims against the EMI.
This distinction has profound implications.
Because EMIs do not operate under the banking model, customer funds are not protected by FSCS. Instead, customer protection is achieved through safeguarding requirements imposed under the EMRs and associated FCA rules and guidance, notably CASS 15.
In practice, customer funds received in exchange for electronic money must, upon receipt, be segregated from the firm’s own money and protected through prescribed safeguarding arrangements.
The regulatory objective is clear: if the EMI fails, all safeguarded funds should be available for return to customers rather than being distributed amongst the firm’s general creditors.
Can an EMI Close Dormant Accounts?
The answer depends largely on the firm’s contractual arrangements and applicable legal requirements.
Most EMIs include inactivity provisions within their customer terms and conditions. These may permit the charging of dormancy fees after a specified period or, in some cases, account closure following reasonable attempts to contact the customer.
However, a crucial distinction must be remembered: account closure does not extinguish the customer’s entitlement to their funds.
Where electronic money remains redeemable, firms must continue to maintain appropriate records demonstrating customer entitlements and ensuring that any residual balances remain protected.
The Financial Conduct Authority (FCA), as regulator of the EMI population, is generally concerned with ensuring that firms can demonstrate:
- Accurate reconciliation of dormant balances;
- Effective record keeping;
- Appropriate customer communication efforts;
- Continued safeguarding of outstanding customer funds; and
- Fair treatment of customers seeking redemption after prolonged inactivity.
Dormancy should therefore be viewed primarily as an operational and governance issue rather than a mechanism through which customer funds can be absorbed by the firm.
Safeguarding Challenges Created by Dormant Accounts
Dormant accounts frequently create practical safeguarding challenges.
Over time, firms may accumulate thousands of low-value dormant balances. While individually immaterial, collectively they can represent a significant safeguarding obligation.
Compliance and finance teams must ensure that:
- Dormant balances continue to be included within safeguarding calculations;
- Reconciliations accurately capture inactive customers;
- Customer records remain accessible;
- Data retention obligations are met; and
- Policies exist for managing long-outstanding balances.
Weak governance in this area can lead to safeguarding shortfalls, inaccurate reconciliations, and regulatory findings.
Indeed, regulatory reviews of payment firms have repeatedly identified safeguarding governance as a key area of supervisory concern, with firms sometimes failing to adequately account for historic customer balances.
What Happens if an EMI Becomes Insolvent?
This is where the distinction between banks and EMIs becomes most apparent.
If a bank fails, eligible depositors typically look to the FSCS for compensation.
If an EMI fails, customers instead rely upon the effectiveness of the safeguarding arrangements.
The intention of safeguarding is that relevant customer funds are separated from the firm’s own assets and therefore excluded from the general insolvency estate. An insolvency practitioner should identify safeguarded funds and distribute them to customers in accordance with their respective entitlements.
However, unlike deposit guarantee schemes, safeguarding is not an insurance mechanism.
If safeguarding arrangements have been poorly implemented, records are incomplete, reconciliations are inaccurate, or there is a shortfall in safeguarded funds, customers may face delays and potentially losses during the insolvency process.
Recent insolvencies within the payments sector have highlighted the importance of robust safeguarding governance, accurate books and records, and effective reconciliation processes. The FCA increasingly focused on ensuring that firms can facilitate a prompt return of customer funds in a stress or failure scenario, hence the introduction of wide-ranging safeguarding reforms in May 2026.
The Problem of Dormant Customers During Insolvency
Dormant accounts introduce additional complexity during insolvency proceedings.
Where customers have not engaged with the firm for many years, insolvency practitioners may encounter difficulties in:
- Locating customers;
- Verifying customer identities;
- Confirming entitlement records; and
- Returning safeguarded funds efficiently.
Consequently, firms should not assume that dormant accounts represent a negligible compliance issue. Poor record keeping may significantly increase the operational burden and cost of a future insolvency process.
From a regulatory perspective, firms should be able to demonstrate that dormant customer records remain sufficiently complete to facilitate the eventual return of funds, regardless of the period of inactivity.
Governance Expectations for EMIs
Senior management should ensure that dormant account management forms part of the firm’s wider safeguarding framework.
A robust approach typically includes:
- A documented dormant account policy;
- Periodic reviews of inactive balances;
- Defined customer communication procedures;
- Clear treatment of dormancy fees where applicable;
- Ongoing safeguarding and reconciliation controls; and
- Board-level oversight of safeguarding risks.
As the FCA continues to scrutinise safeguarding arrangements across the payments sector, dormant balances should not be viewed merely as an operational nuisance. They represent ongoing customer liabilities that remain subject to safeguarding requirements and regulatory expectations.
Conclusion
Although dormant accounts exist in both banking and electronic money sectors, the regulatory treatment differs fundamentally.
Banks protect dormant customer funds through the deposit-taking framework and, where applicable, FSCS. EMIs, by contrast, rely on safeguarding arrangements designed to preserve customer funds outside the firm’s own estate.
The practical consequence is that dormant balances within an EMI remain a live regulatory obligation long after customer activity has ceased. Firms must continue to safeguard those funds, maintain accurate records, and ensure that customers retain the ability to redeem their money. Inactivity does not diminish regulatory responsibility. Dormant accounts remain customer funds, and customer funds remain subject to safeguarding until they are returned to their rightful owner.
We await revisions to the EMRs, likely folding the current legislation into FSMA, and hope that this provides an opportunity to set out clear parameters of how EMIs might treat dormant accounts in the future.
How Complyport Can Help
Dormant balances can present complex operational, safeguarding and governance challenges for payment and electronic money firms.
Complyport assists firms with:
- Safeguarding framework reviews;
- CASS 15 implementation and gap analysis;
- Governance and Board effectiveness assessments;
- Regulatory compliance reviews;
- EMI and payment institution advisory support; and
- Preparation for FCA supervisory engagement.
If you would like to discuss your safeguarding framework or dormant account processes, contact Complyport to arrange a meeting with one of our Subject Matter Experts.
Book a meeting with a Complyport Subject Matter Expert today.
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