Changes loom for insolvency rules concerning UK payment and electronic money institutions. The changes to the rules are outlined in a consultation published by HM Treasury.
Payments in the UK have seen rapid change over recent years with people increasingly using card, mobile and electronic wallets to make payments. These changes offer opportunities for UK businesses and consumers, with many making payments faster, cheaper and more securely. However, and as will always be the case with a rapidly changing technological landscape, they also present new challenges and risks.
The Payment Institutions (PIs) and Electronic Money Institutions (EMIs) providing these services have diverse business models that range from small money remittance firms to non-bank current account providers targeting SMEs, the under- banked, and the digital generation. Consumers and businesses are increasingly using PIs and EMIs as their transactional banking provider to, among other things, access their salaries and savings as well as make payments.
There is evidence that the existing insolvency process for PIs and EMIs is suboptimal with regards to consumers. Recent administration cases involving PIs and EMIs have taken years to resolve in some cases, with customers left without access to their money for prolonged periods and receiving reduced monies after the cost of distribution. In six recent cases of PIs and EMIs in insolvency proceedings (of which three started in 2018), only one has so far returned funds to customers.
The Government is therefore proposing to introduce changes that will help protect customers in the event of a PI or EMI being put into insolvency. As these changes can be delivered relatively quickly and could mitigate harms from any future insolvencies, the Government believes it is appropriate to progress these changes before the conclusion of the Payments Landscape Review is published.
To address the shortcomings of the current insolvency regime, the Government proposes introducing a bespoke Special Administration Regime (SAR) for PIs and EMIs.
The proposed SAR is intended to have the following key features:
- an explicit objective on the special administrator to return customer funds as soon as reasonably practicable;
- a bar date for client claims to be submitted to speed up the distribution process;
- a mechanism to facilitate the transfer of customer funds to a solvent institution;
- a post-administration reconciliation to top-up or drawdown funds to or from the safeguarding process;
- provisions for continuity of supply to minimise disruption;
- rules for treatment of shortfalls in the institutions’ safeguarding accounts;
- rules for allocation of costs;
- an explicit objective on the special administrator for timely engagement with payment systems and authorities.
The Financial Services and Markets Act 2000 (FSMA) Part 24 provides the Financial Conduct Authority (FCA) with specific powers to protect consumers in an insolvency process of an FCA authorised firm. While the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) incorporate some FSMA insolvency provisions, the Government proposes extending the full suite of provisions to PIs and EMIs so that the FCA has the same rights to participate and protect consumers in an insolvency process for PIs and EMIs, as it does for other FCA supervised firms.
The consultation closes at 11:59pm on 21 January 2021.