On 8 July 2021, the Payment and Electronic Money Institution Insolvency Regulations 2021 (the Regulations) will come into force in the UK and introduce a new special administration regime for insolvent payment institutions (PIs) and electronic money institutions (EMIs). The key purposes of the Regulations are to ensure that, if a PI or EMI becomes insolvent (and/or it is fair or expedient to put the institution into special administration), funds are quickly returned to customers and any shortfalls in the amounts available are minimised.
The payments and financial technology sector in the UK has seen rapid change recently—over the last decade, the sector experienced an annualised growth rate of 16%. This rapid growth has been the result of the development of a variety of companies, ranging from small money remittance firms to non-bank current account providers that target small and medium-sized enterprises. The services offered by these organisations often result in consumers and businesses being able to deal with their finances more quickly, cheaply and securely than before.
However, as is the case with any rapidly developing technology, existing regulation does not always align neatly with new business models and services. PIs and EMIs, which typically do not take deposits but are able to make credit and debit payments, don’t fit neatly into the existing insolvency regime, which has resulted in cases where customers have been left without access to their money for prolonged periods and received only reduced monies after the cost of distributions. 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 Expanded Toolkit
The Regulations introduce a new special administration regime for insolvent PIs and EMIs. The new regime provides insolvency practitioners (IPs) administering a PI or EMI insolvency with an expanded toolkit and commits them to achieving specified objectives. This toolkit allows IPs to keep an insolvent institution operational with the aim of ensuring continuity for consumers and prioritising the return of their funds.
These aims have translated into the creation of three special administration objectives, which IPs of PIs and EMIs will have a duty to follow. These objectives mirror the equivalent objectives of the special administration regime for investment banks. The three objectives are to:
- ensure the return of relevant funds as soon as is reasonably practicable;
- ensure timely engagement with payment system operators, the UK’s Payment Systems Regulator, and the Bank of England, HM Treasury and the Financial Conduct Authority (FCA); and
- either rescue the institution as a going concern, or wind it up in the best interests of the creditors.
The IP has the flexibility to prioritise these objectives as appropriate to achieve the best result for customers and creditors. However, the Regulations also give the FCA, in consultation with HM Treasury, the power to direct the IP to prioritise certain objectives to further specified public policy aims, including maintaining the stability of, and public confidence in, the financial systems of the UK.
The Special Administration and Continuing Supply
Insolvent PIs and EMIs will be able to enter into special administration under the Regulations via a court order. While creditors will be able to make an application for an order, it is expected that most applications will be made by the PI or EMI (as applicable) or the FCA as the regulator. The grounds for applying for an order will depend on the identity of the organisation making the application but, broadly, the organisation must show that the PI or EMI is (or is likely to become) unable to pay its debts within the meaning of the Insolvency Act 1986, or it is fair or in the public interest for the PI or EMI to enter into the special administration.
Typically, PIs and EMIs will have entered into multiple supply agreements as part of their business models. These may include agreements covering services relating to the safeguarding of customer funds, access to identity and financial information and data processing, cloud hosting and other outsourcing arrangements, as well as the purchase of hardware and software to ensure secure, electronic communication infrastructure and networks. When a special administration commences, the supplier is required to continue to provide the services or goods to the PI or EMI, as applicable, under the terms of the agreement unless the special administrator consents to the agreement terminating, or the supplier remains unpaid for more than 28 days, or the courts have granted permission to the supplier to terminate the agreement.
The Regulations are a welcome addition to the body of legislation that governs the fast-growing financial technology and payments sector and should serve to provide further clarity and ensure customers receive their funds more quickly in the event of an insolvency. This new regime joins other special administration regimes, such as those introduced for hospitals and investment banks, where the systemic interests and importance of continuing service are considered as having the potential to outweigh interests of direct stakeholders.
However, in attempting to strike a balance between enabling the sector to maintain its pace of growth and protecting consumers, several potential areas of reform, including increasing the relatively small capital requirements applicable to PIs and EMIs, have been excluded. In its responses to comments on the Regulations, the UK Treasury noted that some respondents had suggested that more stringent capital requirements or increased supervision of the sector should be introduced, and asserted that these points may be considered in the upcoming Payments Landscape Review. It remains to be seen how this delicate topic will be approached.
It would also be useful to see greater clarity on appropriate wind-down options for solvent PIs and EMIs which have decided to leave the market, particularly concerning the management of dormant e-money programmes during the six year post-termination redemption period. Indeed the Regulations might also prove helpful in resolving situations where no alternative can be found to administer such programmes for the full redemption period.