EMI Safeguarding in Estonia — Segregation, Reconciliation, Accounting Treatment

Two safeguarding options under PSD2 Article 10

Article 10 offers EMIs two acceptable methods. Method A: place client funds in a segregated account at an EEA credit institution, held on trust for the clients and never commingled with the EMI's own operating balances. Method B: invest client funds in secure, liquid, low-risk assets approved by the competent authority, held in a segregated custody arrangement. Many Estonian EMIs operate Method A exclusively; larger EMIs sometimes combine both to optimise interest income while remaining conservative.

A third, rarely used variant is a safeguarding insurance policy or comparable guarantee. Finantsinspektsioon's practical bar for this route is high; most firms do not pursue it.

Segregated-account operational detail

Under Method A the safeguarding account must be at an EEA credit institution, titled to reflect the trust nature of the holding, and subject to a written agreement with the bank acknowledging that the funds are not available to satisfy the EMI's own creditors. The EMI must be able to identify, at any point in time, how much of the balance belongs to each client — typically via a sub-ledger reconciled daily to the bank statement.

Two operational failure modes are common in new EMIs: (1) lag between customer deposit and sweep to the safeguarding account creating a brief commingling window; (2) end-of-day reconciliation that only catches net, not gross, positions. Both are findings waiting to happen at the next Finantsinspektsioon review.

Written policy, daily reconciliation, clear ownership

Finantsinspektsioon expects a written safeguarding policy naming the accountable individual, defining the reconciliation frequency and exception-handling procedure, specifying the counterparty bank(s), and describing how Method A / Method B boundaries are maintained. Daily reconciliation is the operating standard; weekly is not acceptable for a going concern. Exceptions are escalated and logged.

Clear internal ownership means one named person — usually the CFO, finance director or head of treasury — is responsible and accountable for the control. A "someone in ops handles it" answer during a supervisory visit is a finding.

Accounting treatment and chart-of-accounts implications

Client funds are not the EMI's assets. The chart of accounts must reflect this: safeguarding-account cash sits alongside a matching client-liability line; interest earned on safeguarding balances follows the client-vs-EMI split set out in the T&Cs and safeguarding policy. Float-income recognition, custody fees and bank charges must not distort the safeguarding reconciliation.

For group reporting, the safeguarding balances are disclosed on a gross basis rather than netted against the client liability, following IFRS presentation norms for trust-held balances. We set this up during onboarding and test it monthly.

Finantsinspektsioon audit expectations

The annual statutory audit will test: (a) the existence of the safeguarding agreement and its terms; (b) daily reconciliation evidence for sampled dates; (c) adequacy of the written policy and governance attention; (d) accounting treatment in the financial statements. Audit-trail gaps surface fast. We structure the controls so the audit is a confirmation, not a discovery exercise.