Wirecard UK's Customers Should Get Their Money Back...

The sudden closure of Wirecard Card Solutions, the UK e-money institution, highlights confusion over whether customer's prepaid funds are protected. Here's a quick explanation. The Financial Conduct Authority also has published an explanation. If you have any queries about how these rules operate, please let me know.

The Financial Services Compensation Scheme (FSCS) covers bank deposits but not the 'electronic money' or other payment services offered by e-money institutions or payment institutions.  The Financial Conduct Authority’s guidance in its “Approach” to regulating such payment service providers states:

In providing customers with details of their service, PSPs and e-money issuers must avoid giving customers misleading impressions or marketing in a misleading way, e.g.:

- misleading as to the extent of the protection given by safeguarding

- suggesting funds are protected by the Financial Services Compensation Scheme, or displaying the FSCS logo

However, the actual funds that correspond to the electronic balance in an e-money institution's prepaid account, or the funds that a payment institution is handling in the course of executing payment transactions, must be 'safeguarded' in certain types of bank accounts ('safeguarding accounts') or be insured.

If the funds are held in the safeguarding account in accordance with the relevant regulations, then they form a 'pool' of money that is separate from the e-money or payment institutions own funds, and can be passed back to the customers who are entitled to them rather than be used to pay the institution's other creditors. This can take some time, however. The safeguarding process can also breakdown, for instance, where the institution mixes its own funds in those accounts, or moves 'relevant funds' to non-safeguarded accounts.

E-money and payment institutions are also required to ensure that their registered agents also safeguard relevant funds. Registered agents could include firms that issue prepaid debit/payment cards or otherwise operate prepaid card or e-money programmes on behalf of the e-money institution.

There remains the question of what happens in the event of a failure by the bank where the safeguarding account is held (as opposed to the failure of the e-money or payment institution that safeguarded its customers funds there, as in the Wirecard case).  In that event, there should be pass-through FSCS cover for the end-customers of payment institutions and e-money institutions because:

• there must still be recourse to assets to which the end-customer is beneficially entitled (their claim on the pooled safeguarding account), so as the underlying beneficiary the end-customer should have a claim for up to the £85,000 limit (extended in some cases for temporary high balances) against the FSCS (under Depositor Protection 6.3 in the Prudential Regulatory Authority Rulebook). This is the position in relation to funds held in bank accounts covered by the FCA's client money rules (CASS), as well as other non-financial trust fund arrangements such as those for law firms under the rules of the Solicitors Regulatory Authority.  The PRA made clear this applied to peer-to-peer lendingplatforms, albeit this was before the platforms became regulated, when they were generally operating trusts, so it would be surprising if this were different for payment services providers who are not banks.

• In addition, while they could not be entitled to be compensated twice, the principles of trust law should mean that customers would also be entitled to receive a proportion of any FSCS pay-out that the payment service provider receives as a customer of the bank in its own right in relation to the safeguarding account held in its name, according to the proportion that those customers’ funds bear in relation to the total amount held in the safeguarding account.

If you have any queries about how these rules operate, please let me know.