Banks hold all money deposited with them in general funds, and can (usually) lend it out to whomever they deem credit-worthy. However, If a customer does not repay a loan there is potential for the bank to run out of money.
In addition a bank can invest depositors money in a wide range of assets, and sometimes these go bad on them.
The FSCS is a lifeboat funded by all banks to reimburse depositors for up to £85,000 of their deposits should they have their money in a bank that shuts down insolvent.
An E-money institution cannot lend out depositors funds to third parties. In addition all the funds they receive are held in segregated ring-fenced accounts.
Accordingly if an E-money institution closes down insolvent, customers money is protected by the segregation as it is not held in the general funds of the e-money institution.
If an FSCS regulated firm ceases, depositors are guaranteed their funds back, up to £85,000, in a short period of time.
If a FCA regulated firm ceases, depositors are guaranteed, without limit, their funds back, but not in a specified period of time. As the e-money firm is technically being administered through the Liquidation processes there can be some delays before depositors receive their full balances.
There is also the remote possibility that if the general e-money institution recoverable assets fall short, that the Liquidator could pass some of his charges against Depositor funds.
Changes to the special regime for e-money institutions in 2022 mean that greater emphasis is now placed on the need to maintain services whilst an e-money provider is being closed down, and customer funds are paid out.