In January 2023, the Treasury issued a review of the Payment Services Regulations 2017 (PSRs) with an associated call for evidence from the industry. The PSRs have acted as the regulatory base for payments and e-money firms, although the rapid evolution of the sector has led to additional regulatory initiatives – including Open Banking in 2018 and a new special administration regime in 2021 – to cater for sector challenges that have emerged.
There's now widespread recognition that the PSRs need to be updated to ensure that regulation is, as noted in the review, "future-proofed, agile and proportionate".
There are over1,300 firms authorised as payment and e-money institutions in the UK and the sector is recognised as a huge asset for the UK. Investment into UK fintech, of which payment and e-money firms represent a major part, was USD 9.1 billion in the H1 2022 – more than the rest of Europe combined.
Market sources estimate that over the last reporting period, £17 billion of customer funds were safeguarded by payment and e-money firms. This illustrates the magnitude of potential consumer harm should something go wrong, particularly in an industry where the frequency and speed of transactions is constantly evolving.
And of course, things do go wrong.
There have been a number of failures in the industry over the past few years (Monneo Limited - special administration, 2023; Xpress money Services - special administration, 2022; Supercapital - administration, 2019; Allied Wallet - liquidation, 2019; Ipagoo - administration, 2019). These have resulted in long delays in the return of funds and consumers have lost significant amounts of money impacting their confidence in the sector.
FCA concerns about the level of safeguarding within the industry were stated in a Dear CEO letter to the industry back in March 2023. The regulator highlighted that many firms "do not have sufficiently robust controls", and therefore present "an unacceptable risk of harm to their customers". Designing new rules around the safeguarding of customer funds is therefore one of the major priorities in this review of the PSRs.
In its UK Finance's response to the Treasury's call for evidence, the industry body argued that any new safeguarding rules should adopt features of schemes, such as the Financial Services Compensation Scheme (FSCS), which would guarantee the timely return of customer funds, up to a specified limit. At this juncture, there's no indication as to the Treasury's response.
Regulators face a challenge when looking to design safeguarding rules for the benefit of consumers.
Fundamentally, at the heart of safeguarding lies a contradiction: payments are about moving money, whereas safeguarding is about ring-fencing money in accounts. The more countries a firm operates in, or the more firms involved in a chain of payments, the more complicated safeguarding becomes.
Current safeguarding requirements in the PSRs are very high-level. In the absence of more detailed guidelines, when a firm has failed, insolvency practitioners (IPs) have needed to seek court directions. This inevitably takes considerable time and costs money, thereby leaving less available for the return to customers. There's also the potential for external challenge due to the complicated issues involved.
The judgement for Ipagoo, a payment services provider that went into administration in 2019, provides a good example of this. In this case, the court found that the Electronic Money Regulations don't create a statutory trust over safeguarded funds, which contrasts with the FCA’s Client Asset sourcebook and general market practice.
While the judgement did broaden the definition of relevant funds, to effectively create a similar practical outcome, the Treasury recognises that this uncertainty raises "additional issues regarding the insolvency process, potentially adding further to the cost, and time burden, and risk of consumer harm, with insolvency practitioners likely to continue to seek court directions on these areas of ambiguity".
A well-thought-through wind-down plan can help immeasurably with the return of customer funds in an expedient manner in the event of a solvent wind-down or firm failure.
A common issue that insolvency practitioners face when stepping into an administration is customer communication. We deal with instances where customer support teams have closed, leaving no way of identifying or contacting customers. Considerable time and expense are required to reach out to these people. There can also be difficulties when reconciling ownership of funds in accounts where there are out-of-date records. All of these issues make the return of customer funds challenging and time-consuming, eroding funds available for customers.
A good wind-down plan will mean these issues are thought through in advance, and that risk mitigation solutions are considered. This helps to ensure that relevant data, accounts, functions and key personnel remain in place to allow the expedient return of customer funds. In this way, consumer harm is minimised.
Regulatory concerns about the quality of wind-down plans within the payments and e-money sector have been repeated and ongoing. In the Dear CEO letter written in March 2023, the FCA stated that many firms had not yet created a wind-down plan – despite guidance issued in July 2020 making it clear that having a wind-down plan was a condition of authorisation. Those that do have a wind-down plan in place are frequently failing to meet FCA expectations.
A wind-down plan must be realistic and keep up with changes in the business. It should be a living, breathing document that is actively useful in a situation when a trigger is met, and a wind down – either solvent or insolvent – is required.
Our team has developed an innovative and market leading methodology for reviewing, producing and assisting in the preparation of wind-down plans. For more insight and guidance on preparing your wind-down plan, contact Chris Laverty or Will Stagg.
