FCA E-money and Payments Safeguarding Update - Clarity On Financial Services Compensation Scheme

The Financial Conduct Authority recently issued temporary updated guidance on the safeguarding obligations of e-money and payments institutions. There were several points that I raised during the consultation on the temporary guidance, but I acknowledge there might not have been adequate time or resources to address them. Indeed, they might be dealt with in the wider consultation due in 2020/21 on changes to the FCA's general guidance on e-money and payments regulation in the Approach Document. In the meantime, I have long been particularly interested in whether e-money and payments firms should be expected to explain the extent to which the Financial Services Compensation Scheme (FSCS) might protect deposits held by those firms with any bank that became insolvent. This is not a fanciful issue, as the insolvency of Wirecard AG has demonstrated. Wirecard's bank subsidiary is under 'emergency management' of the German financial regulator, while the FCA has allowed the e-money subsidiary to reopen after an unfortunate snap-freeze. I should point out that this post is for information purposes only, does not constitute legal advice and should not be relied upon to make any decision. Please contact me if you need assistance on any of the issues covered.

The FSCS covers eligible deposits held at banks, and not the services offered by or the electronic payment accounts of e-money or payment institutions. So the FCA is right to say that e-money and payments firms should not suggest to their customers that the FSCS applies to their activities or the accounts in their systems.  

However, there needs to be clarity on the extent to which there could be pass-through FSCS cover for the end-customers of e-money or payment institutions where money is held in an institution's ‘safeguarding' bank account at a bank which itself becomes insolvent (as opposed to the e-money or payment institution becoming insolvent), under the provisions of the Depositor Protection rules in the Prudential Regulation Authority Rulebook.

For convenience the relevant provisions are:

• Paragraph 1.26 of the updated FCA guidance states (as does the Approach Document): 

Payment and e-money firms should also avoid suggesting to customers that the relevant funds they hold for them are protected by the Financial Services Compensation Scheme. 

"relevant funds" are either funds that have been received in exchange for issued e-money or sums received from, or for the benefit of, a payment service user for the execution of a payment transaction or sums received from a payment service provider for the execution of a payment transaction on behalf of a payment service user; and they must be held in a certain type of bank account ('safeguarding account') or be appropriately insured.

• DP 6.2(5) contains the obligation on the FSCS to pay compensation where the bank account holder is not absolutely entitled to the eligible deposit, and another person (A) is absolutely entitled (see DP 6.10 below);

• DP 6.3 mentions trustee (other than bare trustees) and entitlements of beneficiaries, without being specific as to whether these might be statutory or non-statutory trust arrangements; and

• DP 6.10 provides: 

“For the purposes of this Part, the cases in which A is absolutely entitled to the eligible deposit include where:

(a) A is a beneficiary under a bare trust;

(b) the account holder is a nominee company which is holding money in the account for A;

(c) A is a client in respect of money which the account holder is treating as client money of A in accordance with FCA rules, the SRA Accounts Rules 2011 or an equivalent regime; or

(d) the FSCS is otherwise satisfied that A is absolutely entitled to the eligible deposit taking into account any information that the FSCS considers relevant.”

Therefore, it seems to me that, in the event of the insolvency of the bank where an e-money or payment institution's safeguarding account is held:

• the end-customer of the e-money/payments institution should have recourse against the bank under Depositor Protection rules for money in the safeguarding account (to which he or she is beneficially entitled via a claim on the relevant funds under the E-money/Payments Regulations) up to the £85,000 limit (extended in some cases for temporary high balances). This would be consistent with the position in relation to funds held in bank accounts covered by the FCA's client money rules (CASS), as well as other arrangements under the Solicitors Regulatory Authority rules relating to solicitors client accounts, for example. The PRA made clear this applied to peer-to-peer lending platforms, before those platforms became regulated by the FCA and were generally operating as bare trustees.

• In addition, while they could not be entitled to be compensated twice, under trust principles, end-customers should also be entitled to receive a proportion of any FSCS pay-out that the e-money or payment institution might receive as a customer of the bank in its own right in relation to the safeguarding account, according to the proportion that those end-customers’ funds bear to the total amount held in the safeguarding account. 

I would be interested to know the views of any other practitioners in this area.

Again, this post is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article. Please contact me if you need assistance on any of the issues covered.