New German rules on safeguarding accounts - what PSPs need to know

As part of its omnibus act on urgent legislation in the financial sector, the German legislator has changed the safeguarding rules  for client funds under Sec. 17 of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, “ZAG”). With effect from 9 April 2025, German Payment Institutions (“PIs”) and E-money Institutions (“EMIs”) are no longer required to use so-called open trust accounts when safeguarding client funds with credit institutions. Further, the additional alternative to safeguard client funds with central banks has been implemented into German law.

In this post, we summarise the main implications for PIs/EMIs, point to potential benefits and indicate open questions. 

Understanding Sec. 17 ZAG

Sec. 17 ZAG, implementing Art. 10 PSD2 and Art. 7 of the Second E-Money Directive, lines out what firms are required to do to ensure that client funds are protected in the event of the firm's insolvency. In its current form, Sec. 17 ZAG requires PIs and EMIs to safeguard all funds which have been received from payment service users (or in exchange for electronic money that has been issued) applying one of three methods:

• they shall be deposited in an open trust account (“offenes Treuhandkonto”) in a credit institution;
• they shall be invested in secure, liquid low-risk assets;
• they shall be covered by an insurance policy or some other comparable guarantee from an insurance company or a credit institution (which does not belong to the same group as the PI or EMI).

In Germany, the dominant safeguarding method has long been to deposit funds on open trust accounts with credit institutions. 

By referring to an “open trust account”, Sec. 17 ZAG refers to a type of account shaped by a body of German case law over several decades. In this case law, the German Federal Court of Justice has outlined several principles that determine whether a beneficial owner of funds held on an account can claim these funds if the account holder becomes insolvent. Crucially, the so-called “Principle of Immediacy” (Unmittelbarkeitsprinzip) requires that these funds are generally  transferred directly from the beneficial owner to the account. While the principle has been watered down by courts over decades, in practice, the German regulator BaFin still requires PIs and EMIs to ensure that client funds are transferred directly from clients to the trust accounts and are not “tainted” by temporarily commingling such funds with proprietary funds of the firm. In addition, the specific nature of trust arrangements requires firms to closely align contractual arrangements with clients and actual fund flows to prevent any deviations that would call into question the insolvency protection of funds.

Separate Account instead of Trust Account

The omnibus act on urgent legislation in the financial sector makes two key amendments to Sec. 17 ZAG:

1. Instead of referring to depositing client funds with open trust accounts (offene Treuhandkonten), the revised Sec. 17 ZAG will refer to separate accounts (gesonderte Konten). 
2. Further, Sec. 17 ZAG now explicitly states that depositing clients funds on a separate account will have the effect that these client funds are not available to creditors of the PSP/EMI. 

Implications for PIs/EMIs

At the outset, the change merely aligns the current wording of Sec. 17 ZAG with the wording of Art. 10 PSD2.  However, the amendment comes with two main benefits for German PIs/EMIs:

• Less operational complexity: Firms are allowed to temporarily hold client funds on their settlement accounts before passing such funds on to the separate account(s). According to the legislative materials, firms may also transfer funds from their proprietary accounts to the separate account if they do so to top-up any shortfall amounts. 
• More legal clarity: Instead of having to rely on compliance with a complex body of case law to achieve insolvency protection, clients benefit from a  statutory right to segregate funds in a PIs/EMIs insolvency if those funds are held on a separate account. 

While these changes should be helpful, uncertainties on the implications of the new regime remain. The legislator has, for example, not clarified whether insolvency protection requires that firms overall comply with their contractual obligations in relation to the handling of client funds. Further, the concept of a trust arrangement has been a reference point for other provisions, such as the implied obligation of PIs/EMIs to ensure that client funds enjoy deposit protection as well as the German Deposit Protection Act (Einlagensicherungsgesetz, “EinSiG”) which provides that the coverage level depends on the beneficial owner, provided that funds are held in open trust accounts.

What about safeguarding with central banks? 

With a further change to Sec. 17 ZAG, the omnibus act introduces the possibility for PIs and EMIs to safeguard customer funds in an account held with Deutsche Bundesbank or another EU central bank, implementing a safeguarding option that was introduced on the EU level by the so-called Instant Payments Regulation, amending PSD2. 

In practice, however, PIs and EMIs will continue to have to safeguard client funds in accounts with credit institutions. In its decision of 27 January 2025 (ECB/2025/2), the ECB clarified that the Eurosystem central banks will not provide separate accounts within the meaning of Sec. 17 ZAG for PIs and EMIs. Although such firms may be granted access to central bank payment systems such as TARGET, the use of central bank accounts provided for this purpose to safeguard customer funds is expressly excluded in the ECB's decision.

Will the change also affect investment firms?

References to (open) trust accounts are not exclusive to safeguarding accounts of PIs/EMIs. Investment firms labor under a similar safeguarding requirement pursuant to Sec. 84 of the German Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”). Sec. 84 WpHG requires investment services to hold client funds received in connection with the provision of investment firms on (open) trust accounts held with credit institutions or central banks, unless clients agree that those funds are invested into qualifying money market funds. 

While the wording of Sec. 84 WpHG implies that firms can first receive funds before complying with the segregation requirement in a second step, the reference to trust accounts incorporates much of the same concerns that the legislator has addressed with the revised Sec. 17 ZAG. It would therefore seem prudent if Sec. 84 WpHG was revised accordingly, not least since Commission Delegated Directive (EU) 2017/593 does not prescribe the use of trust accounts either. However, at least for the time being, German investment firms must still make use open trust accounts.

Conclusion

The changes to Sec. 17 ZAG are a helpful step towards a more flexible safeguarding regime for client funds in Germany. PIs and EMIs should revisit their safeguarding setup to identify operational inefficiencies that could be addressed under the revised rules.

At the same time, residual uncertainty on how to interpret the outer boundaries of the revised Sec. 17 ZAG remains. While the legislative materials explicitly allow firms to channel client funds through proprietary settlement accounts and “top up” any shortfall amounts using firm money, the available guidance on the “dos and don’ts” is still a long way from the detailed guidance set out, for example, in UK client money rules.  Accordingly, firms should treat carefully to avoid any pitfalls when making use of the more flexible regime. 

Finally, the use of central bank accounts to safeguard client funds remains a theoretical proposition. Any aspirations by firms to make use of the option in light of the revised Art. 10 PSD2 have received a cool shrug by the ECB in its decision of January 2025.