On 12 November 2021 the Payment and Electronic Money Institution Insolvency Rules 2021 came into effect. These rules outline the procedure for a Special Administration regime (pSAR) for payments and e-money firms, introduced on 8 July 2021. The overarching aim of the pSAR is to provide specific legislative provisions to enable speedier and more efficient return of customers money in the event of an insolvency.
Prior to the Global Financial Crisis (GFC) in 2008, the objectives in an administration were to rescue a company as a going concern or maximise returns to creditors. The GFC exposed the inherent challenges of this system for consumers, and so the Banking Act 2009 introduced a special insolvency regime for financial institutions that refocused the objectives on protecting customer funds held by these institutions.
However, the rapid expansion of the payments and e-money sector over the past decade has revealed that these insolvency processes were still sub-optimal. The large number of creditors in these cases meant that insolvency practitioners (IPs) had great difficulties in efficiently winding down firms and returning money to consumers and other creditors. Administration cases involving payments and e-money firms can take years to resolve.
In the consultation paper for the pSAR published in December 2020, the FCA illustrated this point by highlighting that in six recent cases of payment and e-money institutions in insolvency proceedings (of which three had started in 2018), only one had returned funds to customers.
The Financial Services Compensation Scheme (FSCS) does not cover customers of payments and e-money firms, adding to the need for an effective insolvency regime.
An efficient insolvency process for the payments and e-money sector becomes particularly important when considering the nature of these businesses.
Firms are often asset-light. A significant portion of assets can be intangible, which quickly erode once a company is facing difficulties. Companies are reliant on their people (for example tech developers) who may also choose to leave the firm if the business is facing challenging times. In addition, in the first few years of business, many firms face liquidity constraints and are loss-making. This is not unusual for technology start-ups where significant upfront investment is needed for development and marketing.
Under the traditional administration rules, it was very challenging for an IP to provide a good outcome for creditors and consumers. In some circumstances, it would be questionable whether it was even possible to achieve the purpose of an administration, potentially leading to the liquidation of the business, which can be a very value destructive option.
Under the pSAR, in an insolvency an IP can utilise an expanded toolkit of powers. The intention is to facilitate an IP in keeping an insolvent institution operational for as long as possible – providing continuity for customer and to prioritise the return of customer funds.
An IP has a duty to achieve one of the following new objectives:
An IP must specify the priority given to each objective, although the FCA does retain power to direct the IP to focus on one particular objective if that is deemed to protect the stability of the financial sector.
The key features of the pSAR are designed to help an IP achieve one of the three stated objectives in a more cost-effective and efficient way, maximising the outcome for all stakeholders.
The introduction of the pSAR is timely. An FCA survey in January 2021 on the financial resilience of financial services firms revealed that payments and e-money institutions reported the lowest levels of liquidity. Many were judged as being at ‘heightened risk of failure’ because of COVID-19, with the withdrawal of government support only adding pressure. More certainty around any potential insolvencies in the sector is good news for both consumers and creditors.