Consumers of payment services now have the comfort and a wide range of options thanks to FinTech’s widespread adoption and the expansion of the payments industry. However, progress most often results in the appearance of new hazards that are not properly anticipated at the outset. The insolvency of payment institutions (PIs) and electronic money institutions (EMIs) and the resulting impact on their consumers are two such hazards that have lately been recognised.
There is proof that the consumers are not well-served by the current insolvency procedure for PIs and EMIs. Consumers were denied access to their finances for extended periods and received lower payments after discounting the distribution costs in some notable administrative situations involving PIs and EMIs.
To address these problems, the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations were established last June 2021. This was developed with a specific administration regime to update the insolvency architecture for payment and e-money institutions in the United Kingdom.
Why was the Special Administration Regime Created?
The Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 were primarily built based on the Investment Bank Special Administration Regulations (IBSAR) of 2011. This is given the fact that it is much simpler for authorities and insolvency practitioners to adopt a structure they are accustomed to. This helped create a standard special administration regime for the firms under the FCA’s supervision and streamline the UK’s insolvency architecture.
However, the primary goals of the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 varied from those of IBSAR’s. The PI and EMI Insolvency Regulations 2021 brought the Special Administration Regime with three primary goals:
- To enable prompt recovery of relevant funds;
- To guarantee prompt communication with payment system administrators, the Payment Systems Regulator, the Bank of England, HM Treasury, and the FCA; and
- To save the organisation as a viable business or to close it down in the greatest advantage of the stakeholders.
The insolvency professional chosen to serve as the special administrator can choose which of these goals should be prioritised, but these all must be completed. When the FCA specifies that a specific goal must be prioritised, this general rule is subject to an exemption.
The FCA cannot set goals at whim and will always be required to act in good faith and the public interest, following consultations with the Treasury and Bank of England.
Who has the Authority to Initiate the Administration Procedure?
A judicial order can initiate the special administration. And for this to happen, a member of the parties involved should submit an application. According to Regulation 8 of the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021, the application can be submitted by:
- the institution itself;
- directors of the institution;
- creditors of the institution;
- person liable or alleged to be liable to contribute to the assets of the institution in the event of its being wound up;
- a combination of the aforementioned parties;
- the Financial Conduct Authority (FCA); or
- the Secretary of State.
The grounds for a judicial application will vary depending on the type of applicant. In general, these can be characterised in three types:
- the institution is, or is likely to become, unable to pay its obligations fully,
- a special administration order would be fair and just, or
- putting the institution into administration would be beneficial for the general good.
The first six parties mentioned above may submit an application using grounds a and b, i.e. the institution’s inability to pay its obligations or fairness. Meanwhile, the Secretary of State may apply the institution into a special administration under the grounds of b and c, i.e. fairness and public interest.
As previously mentioned, Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 were created in accordance with the IBSAR, which also uses the term “fairness” and, in both instances, denotes a more concise version of the phrase “just and equitable”, as stated in Banking Act 2009 section 93 (8).
This issue was brought up during the HM Treasury’s consultation, where it gave assurances that the court would assess what is fair, minimising any potential negative implications for the institutions that are still operating as going concerns. PIs and EMIs in the United Kingdom should not be very worried about such trifles since courts are required by law to determine what is fair and what is not.
How are Asset Pools Defined?
According to the Payment Services Regulations of 2017 (PSRs) and the Electronic Money Regulations of 2011 (EMRs), both payment and e-money institutions, both known as “relevant funds”, are subject to strict security measures regarding the assets of their clients.
Assets that are classified, deposited into an account, accepted in an account, or acquired in compliance with the EMRs or PSRs, as well as any proceeds from an insurance policy or guarantee that are kept in an account in accordance with the EMRs or PSRs, are included in the asset pool.
For electronic money institutions, relevant funds are those that have been collected in return for electronic money that has been released. Meanwhile, for both payment institutions and electronic money institutions that provide payment services unrelated to the issuance of electronic money, relevant funds include:
- sums acquired from a payment service consumer or for their benefit in order to execute a payment transaction; and
- sums received from a payment service provider in order to execute a payment transaction on the consumer’s behalf.
As stipulated in the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021, the administrator shall do a reconciliation as soon as possible after being appointed following the procedure used by the institution the last time it performed a reconciliation.
Reconciliation entails determining if the overall amount of relevant funds that a payment institution or electronic money institution must protect matches the total amount of relevant funds being protected. The institution’s record and statements as they appeared right after the previous reconciliation must serve as the foundation for the reconciliation.
This reconciliation procedure under the special administration regime aims to find potential excesses or shortfalls in the asset pool and reconcile them against the institution’s own financial account.
Furthermore, any shortfall in the asset pool that the administrator determines and cannot be covered by a deduction from the institution’s assets must be shared pro rata by all clients for whom the institution maintains the necessary amounts within the asset pool.
Additionally, in the case of e-money institutions that offer both payment services associated with electronic money and payment services unrelated to electronic money issuance, the administrator is not permitted to counterbalance any shortfall in one asset pool against any relevant funds or financial assets in the other. This entails that the asset pool of unrelated payment services cannot be utilized to make up a shortage in the asset pool made up of funds related to the issuing of electronic money, and vice versa.
Bar Date under the Special Administration Regime
The administrator may choose to set a “bar date” in order to provide the relevant funds to the institution’s clients as soon as is practical.
A bar date is a date by which creditors must file their claims. Without it, the administrator may have to wait a long time before they can actually pay claims. Under the bar date mechanism, the administrator can issue distributions based on relevant fund claims acquired by a certain date.
The administrator can set up two different kinds of bar dates: final bar dates, sometimes known as “hard” bar dates, and intermediate bar dates. Consumers must be provided enough period after the notification has been issued to estimate and file any monetary claims before the bar date.
Without the court’s permission, which it will grant when the administrator requests, the administrator may not set a hard bar date. The court may only grant permission to set the hard bar date in situations where:
- it is determined that the administrator has done everything within its power to locate and get in touch with anyone who might be eligible for the recovery of the relevant funds; and
- it believes that if a hard bar date is established, there will be no chance for the administrator to accept claims for the recovery of relevant funds after that time.
In summary, the placement of the hard bar date takes into account the general interests of consumers of the payment or e-money institution in question and that the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 stipulates specific guidelines to avoid potential late claimants.
Continuity of Services under the Special Administration Regime
The Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 demand that services that are necessary for effective administration should be provided continuously.
When an institution becomes an administration, payment to any unpaid fees owed by the institution that was accrued before the date of administration cannot be made a requirement by the supplier.
Therefore, if any charges were not fully compensated before the administration started, the main supplier will have to keep supplying the services or should not stop doing so because of the non-payment. The continuity of service for the below services is specifically mentioned under the special administration regime:
- services relating to the protection of relevant funds (such as the provision of a bank account for relevant funds or insurance guarantees);
- computer hardware or software used by the institution;
- financial information and business statements;
- infrastructure enabling digital communication services
- data processing and data warehousing
- secure information networks offered by an accredited network provider; or
- access to a relevant system by a sponsoring system participant.
However, this does not mean that the providers of the aforementioned services have no chance of ceasing their services to the institution in the administration; rather, there are a few circumstances in which they are permitted to do so. The supplier is allowed to stop services under below scenarios:
- any costs that were accumulated after the date of administration remain unpaid for more than 28 days;
- the administrator permits the termination of the service; or
- the supplier has the permission of the court, which may be provided if the supplier can show that the continued provision of the supply would cause the supplier to suffer hardship.
It goes without saying that the administrator dealing with the institution that is covered by a special arrangement must ensure that it will have a chance to assure the return of the cash to the clients, which is why the aforementioned constraints are put in place. Such limitations on the suppliers are required for these problems, the HM Treasury stated directly in its explanatory document devoted to the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021.
Transfer Arrangements under the Special Administration Regime
An administrator may organise for the transition of all or a portion of the payment or electronic money institution’s business to another institution in order to pursue objective 1 (i.e to enable prompt recovery of relevant funds) and, in some cases, concurrently pursue objective 3 (i.e. to save the organisation as a viable business or to close it down in the greatest advantage of the stakeholders). However, according to the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021, the administrator is prohibited from conducting a transfer agreement unless the below requirements are satisfied:
- The agreement contains any clauses that the administrator deems essential to guarantee that the users or holders of the relevant funds that are to be transferred will be able to exercise their rights in relation to those funds as soon as is reasonably practical following the transfer;
- The institution has secured a contractual agreement from the transferee to protect both the relevant money that will be transferred and any additional relevant funds of users; and
- The institution has secured a contractual agreement from the transferee to inform the customers, any dealers, and/or distributors within a period of 14 days starting on the day the arrangement is entered into.
Significantly, in accordance with regulation 27, agreements with consumers, agents, and/or distributors will be seen as having been made by the institution to which they are transferred rather than the institution that was in administration, immediately following the transfer.
When an institution is fully or partially transferred and meets the criteria, the Payment Institution (PI) and Electronic Money Institution (EMI) Insolvency Regulations 2021 give the authority to disregard customer, agent, and distributor consent requirements. This includes the requirement that the institution transmits all pertinent cash, along with all rights and obligations arising from associated payment or electronic money institution contracts. As a result, for the parties involved, the transfer arrangement will have the effect of novating the aforementioned agreement.
How can COREDO help you?
If you are in need of professional advice as an existing EMI client or a new individual in the field, we have the appropriate consultants for you who can help. You may view the services that we can offer through this link: https://coredo.eu.