EMI License for Sale. The hidden truth. 24 essential check-points if you want to buy a small payment institution, PI or e-money firm.
We often get asked whether we have any PI license or EMI license for sale. Most of such inquiries are relating to a purchase of an empty shell, i.e., EMI/PI that is already authorised but has not done any business. The nature of such questions and the manner they are asked got us thinking that the market participants or new startups are often confused and misinformed when it comes to buying/selling an existing and duly authorised electronic money or payment institution. We decided to write this article to provide relevant guidance to EMI/PI sale/purchase transactions and assist market participants in avoiding costly mistakes. While we called this article “EMI license for sale” it is still relevant if you want to buy a small payment institution (SPI), authorised payment institution (PI or API), or a small electronic money institution (small EMI) in the UK or any EU MS (e.g., Lithuania).
Furthermore, in the middle of this article, you will find a standard checklist that will assist you to conduct due diligence and ensure that you have at least considered the key points related to the acquisition of an authorised entity.
EMI license for sale – debunking two myths about the speed of the process
Usually, a person who wants to buy a small payment institution, an authorised payment institution or an e-money institution is motivated by time considerations. It is generally considered that buying an already licensed institution allows starting operations faster than applying for authorisation from scratch.
Very often potential buyers are under the illusion that a purchase of an existing and authorised EMI or PI entails a shorter timeframe for the market entry when comparing to the new authorisation process. Such assumptions are incorrect, as any responsible buyer should first of all conduct robust due diligence of the acquisition target, then prepare all necessary documentation for the change of control, submit an application for the change of control to the regulators and then communicate with the regulator and answer their questions, related to the envisaged business model of the buyer. We have observed that the change of control process starting from the due diligence and ending with the receipt of permission takes pretty much the same time as the new authorisation process from A to Z – and may take anywhere from 6 to 8 months (the regulatory approval process is discussed further in more detail). You should also take into account how much time you will spend to find a suitable company with the types of permissions you need (e.g., you may need to find an EMI with permissions to provide card issuing services).
Another important misconception is that a purchase of an existing and authorised EMI or PI entails a shorter time frame for the rollout of buyer’s products and services. It would be risky for the buyer and questionable by the regulator if the buyer starts rolling out his products and services before the change of control application is approved by the regulator.
Let’s have a glance at the UK legislation governing the conduct of e-money institutions and payment institutions. The Electronic Money Regulations 2011 (EMRs 2011) and the Payment Services Regulations 2017 (PSRs) oblige a company with e-money license UK or UK PI, to notify the FCA in case of changes in circumstances (see Reg. 37 PSRs 2017 and Reg. 37 of EMRs). You should also remember that since summer 2019, EMIs and PIs are subject to PRIN. Principle 11 “Relations with regulators” obliges EMIs and PIs to disclose to the FCA appropriately any significant matter, relating to the EMI/PI, that the FCA would reasonably expect to be notified about. This type of notification usually requires the submission of SUP 15 form.
The rollout of any product/service requires revision of the acquisition target’s risk management policies and procedures to ensure that they cover all the traits of the buyer’s products and services. In some instances, it would be just impossible, as EMI or PI infrastructure is not adequate to such products, or the end-user (customer) agreement has to be changed accordingly and based on regulations, such change requires a 60 days’ notice to the end-user. In some instances, the rollout of such products/services is not possible because the EMI or PI does not have sufficient permissions. For example, if the acquisition target does not have permission for acquiring/issuing of the payment instruments, it simply can’t offer such a service. The same principle applies to the programme of operations and business plan of the EMI/PI, which was previously approved by the regulator, the buyer that entered into the agreement with the seller can’t push the seller to rollout product/services that were not previously approved by the regulator, for example, if originally EMI got authorisation on the basis that it will only provide e-commerce acquiring service, it cannot start issuing payment cards, even if their permissions says: “acquiring/issuing of the payment instruments”. In order to have the possibility of offering card issuance under such permission, the company would need to inform the regulator about such intention and receive the approval before the launch of card issuing services.
EMI license for sale – regulatory considerations and approval process
Any potential person looking for an EMI license for sale has to understand simple and straightforward principles of the regulator’s approach when it comes to the change of control transactions:
1. Buyer is not permitted to take over control of the management of the EMI/PI until the change of control permission is granted, unless the directors and senior management, representing the buyer are approved by the regulators as related to the target. Usually, the buyer is seeking approval of the new directors and senior management at the same time when the change of control application is submitted.
2. Change of control entails a new business model, programme of operations, and financial model, that must be submitted to the regulators alongside the change of control application. Re-submission of the EMI/PI existing programme of operations, business plan, and financial model under which the EMI/PI was originally authorised is not going to cut it.
3. Change of control usually entails a change in products and services, thus a new/updated risk management framework has to be developed. Re-submission of the EMI/PI existing risk management policies and procedures, under which the EMI/PI was originally authorised, is unlikely to satisfy the regulators.
4. Overall, the change of control is seen by the regulators as equivalent to the new authorisation, so do not fall into a trap of illusion that if the EMI/PI is already authorised, change of control is going to be a walk in the park, it won’t be.
5. Given the fact of the recent FCA’s publication on the financial stability of the solo regulated firms, the FCA has identified that the payments & E-money sector has the lowest proportion of profitable firms. We believe that this trend is prevalent in other European countries as well. Therefore, expect heightened scrutiny of the regulators to the viability and sustainability of your business model and financial projections.
EMI license for sale – due diligence and regulatory compliance considerations
If after reading the aforementioned facts you still decided to seek an EMI license for sale or PI license for sale you should bear in mind that entering into the purchase-sale transaction and closing it without proper due diligence could be damaging to both the reputation and investment, therefore even if you are acquiring an empty shell in a form of an EMI or PI, please consider conducting in-depth due diligence of the acquisition target, with particular focus on these points:
6. Pretty much any regulator in Europe is requiring an authorised EMI or PI to start provision of services within 12 months from the date of authorisation. If your acquisition target has not started the provision of services within 12 months, the regulators can withdraw authorisation. Therefore, you are at risk if you are buying a company that is older than 12 months and they have not reported any customer activity within that period. One of the solutions to the problem is to inform the regulator about it at the time of submission of the change of control application and seek assurance from the regulator that you can enter into such a transaction and that the authorisation will not be withdrawn.
7. Check carefully all regulatory reports submitted by the company, verify the accuracy of the information provided by inspecting working files of such reports, and verifying customer funds balances and balances on safeguarding bank accounts and the company’s own accounts.
8. Check the correctness of the ongoing capital adequacy calculations, specifically where it concerns intangible assets, such as capitalised software development costs, IPs, trademarks, and other intangibles that do not constitute eligible capital for the regulatory requirements.
9. Check the correctness of the safeguarding reports (internal and external), verify several samples of the daily safeguarding reconciliations, verify directly with the bank remaining balances on the safeguarding bank accounts. Any non-compliance with safeguarding obligations can catch up with the buyer at a later stage.
10. Carefully check all communication between the company and the regulators, as well as competent authorities, such as financial services ombudsman, tax office, financial crime investigation agencies, etc. Quite often open-ended investigations/complaints are outstanding that could potentially damage the company and the new shareholders.
11. Check for off-balance sheet items, such as any guarantees granted, any customer’s funds not included in the company’s books, any debt instruments issued and not accounted for, etc.
12. Request assurances from the management and shareholders of the company that there are no agency or distributorship agreements signed and not disclosed to the regulators and buyers, as these may entail contingent liabilities and potential reputational damage. Read our article on EMD distributors and PSD agents which debunks myths surrounding this topic.
13. Carefully check all agreements with the third-party providers, such as software suppliers, landlords, as very often they have high minimum fees, and cancellation is either not possible or there is a penalty for an early cancellation, which often amounts to the full costs of the agreement for remaining years. Consider carefully which of these contracts you will have to terminate and what will be the financial damage, seek to discount the purchase price for the equivalent amount.
14. If the EMI/PI has developed its own information technology platform and systems, and if such technology’s IP rights are included in the purchase price, ensure that nobody else has the right to use this IP. Seek assurances from the sellers that the IP was not transferred to any third party and no reserve copies of the source code, technical documentation, development files will be retained by the owner, employees, and the management.
15. Analyse all employee, directors, and management employment/service agreements as they may have provisions for additional bonuses and compensations in case of termination. Make sure that are no golden parachutes or outstanding non-financial compensations (in form of company stock, for example) for the top management.
16. If the acquisition target has started provision of services, conduct an in-depth review of the company’s anti-money laundering, counter-terrorism financing, anti-bribery and corruption, financial crime prevention policies and procedures and conduct analysis of the client sample from different products and services to determine if such policies and procedure were followed and if there is any potential risk embedded in the client portfolio. Non-compliance with AML/CTF/KYC requirements is one of the key risks that the buyer of the EMI/PI is facing. You need assurance, including representations, warranties, and indemnity, that any wrongdoing of the customers is not going to catch up with you later.
17. Prepare a robust purchase/sale agreement that clearly defines the stages of the transaction, steps, and conditions for the closure, all of these should be subject to regulatory approvals. Do not insert fixed time frames for the due diligence and regulatory approvals, these are unpredictable, dependent largely on the seller and can take much longer than anticipated. Our experience tells us that just gathering all necessary due diligence documentation from the sellers can take months, so do not fall into the trap of promises that are beyond your control.
18. Use a reputable third-party escrow agent for the closure of the purchase/sale agreement, all payments should be subject to the deliverables and pass through the escrow agent, including the advance payment.
19. Consider engaging professional payments/e-money regulatory compliance consultants for conducting the due diligence on the acquisition target, as regular accounting/auditing firms would not necessarily possess in-depth knowledge of the industry and intricacies related to the regulatory obligations.
EMI license for sale – business and operational considerations
There may be several stakeholders that must be accounted for whenever planning the acquisition. If this aspect will not be considered from the onset the business of the firm may be paralysed later on. The points which should be considered in this regard are as follows:
20. If the acquisition target has started the provision of services, analyse the client portfolio, pricing, terms, and conditions, etc. Take into account that once the change of control is completed, you may have to discontinue certain provision of services, increase pricing, discontinue certain customer relationships (think de-risking) and that most of such changes will require 60 days’ notice to the customers, which may prompt new complaints to the financial services ombudsman and regulator. Keep in mind that the current revenue stream may reduce significantly or dry out completely, seek to discount purchase prices accordingly, if applicable.
21. Carefully consider the risks related to the agreements concluded by the EMI/PI with the partners, especially with the acquirers, issuers, and banks. In many instances, the change of control implies a requirement to seek a third party’s permission for such change of control. In many instances, such partners will have to initiate new due diligence on the buyer, new directors, and senior management, new business model, products and services. Technically speaking, you may have counted on these relationships when considered an investment, but you may have to start from scratch the onboarding process with these partners after you acquire a company.
22. There is a significant risk that such partners may temporarily freeze the provision of services to the EMI/PI if the buyer did not follow the procedures stipulated in the agreements, such freeze may negatively impact the company’s revenue stream, prompt complaints from the end-users that can even escalate to the financial ombudsman office and/or the regulator.
23. The transition of management of the company is also prone to the risks related to the change of authorised signatories in respect of the partner contracts, especially when it concerns the banks. You will be surprised to learn that with some banks it takes months to change the authorised signatories on the account, in one instance a company has waited for 10 months for the change of authorised signatories on the account, and all this time the customer’s funds were paralysed on that safeguarding bank account, as there were no legitimate means of signing the money transfer orders. Also keep in mind Covid-19 restriction to travel as well, since some of the old-fashioned banks require face-to-face identification.
24. Carefully consider the employees of the acquisition target, as you may have to replace certain members of the team, conduct additional training, arrange additional qualification courses, etc. Moreover, do not forget about statutory employee protection and termination procedures that you will need to follow. Any EMI/PI is just a set of people and IT technology, so do not underestimate the importance of a cohesive and professional team and related investment that may be required in that regard.
Looking for an EMI license for sale? Be careful with a contract. Comments from PSP Lab legal department.
Whether you are seeking an EMI license for sale or considering buying a small payment institution, you must have an expert on your side who can read a contract on your behalf and explain all of the shortcomings. We’ve seen so many low-quality, unfavourably disadvantageous contracts that buyers have signed, and we have only one explanation. After spending so much time on finding a suitable company, due diligence, and regrets about not applying for a new license from the beginning, buyers are desperate to sign anything without spending more of their valuable time.
Of course, we are talking about low-value deals up to £1,5 million. As a general rule, no qualified lawyers are involved in these deals. Who wants to pay top-notch lawyers in such kind of deals? Usually, a buyer doesn’t negotiate anything but price and ends up buying a pig in a poke.
From this article, you must have already learnt one thing. Buying a regulated financial services business is not similar to purchasing shares of an unregulated business. People offering you an EMI license for sale do not have an incentive to notify you about different risks, and that these risks must be reflected in a contract. We are not even speaking about the choice of the completion mechanisms (lockbox or closing accounts). We just want to remind you to consider covenants, representations, and warranties carefully. You can consider seeking indemnification from liability due to previous business practices. Think twice whether you want to submit to the FCA a letter of intent, which may be in fact binding regardless of a non-binding disclaimer, or a contract with a condition precedent (the FCA’s approval of directors and change of control).
If a seller has some understanding of the M&A process applicable to regulated businesses, it will try to protect himself from the FCA’s rejection by having compensation for the time wasted. Buyers need some protections too, and usually, unless they have some M&A experience or they are represented by a professional, they are left almost non-protected.
We want to underline one more time that contracts were created to get some protection if something goes wrong. Most people are focused on the social aspects of contracting rather than the legal aspects. They believe that, most likely, everything will be alright as the seller’s reputation is at stake. Unfortunately, things can go wrong. In the UK, where a buyer in business transactions is not protected in accordance with the caveat emptor principle, it is always good to have a good contract in place to sleep well regardless whether you buy a small payment institution or e-money firm.
EMI license for sale vs new EMI license – PSP Lab opinion
When it comes to considering EMI/PI license for sale vs a new EMI/PI license, the timeline of receiving change of control approval or a new authorisation is not a factor, as both are comparable in that regard. Purchase of an empty shell EMI/PI license or an EMI/PI that has developed very little and does not have valuable IP technology, products/services, third party contracts, and customer portfolio, in our opinion is not worth it, as premiums asked on the market are often not justified by any underlying value apart from the license itself. Below is a short comparison of the EMI license for sale vs the new EMI license:
As you can observe from the two tables above, comparing to the EMI license for sale license route, the new EMI authorisation route will take the same time as a purchase route and can be as much as 3.5 times cheaper than purchasing an expensive shell EMI (what we call EMI license for sale road). In addition to that, with the new authorisation, you don’t have to worry about contingent liabilities, hidden obligations, legacy issues, customer complaints, and many other important issues that may hamper your start-up on the way to unicorn status.
The purchase route only makes sense if you are acquiring an existing profitable business, proprietary technology of the acquisition target, and/or customer base to roll out your own products. Thus, when you see an ad like “Buy Payment Institution in Lithuania” or “EMI License UK for sale” you should think twice about whether to spend your time reacting to these ads. To find an EMI license for sale may not be that hard, to have a successful transaction that is the real challenge.
If you still prefer to seek an EMI license for sale, buy a small payment institution, authorised payment institution in the UK or an EU MS (e.g., Lithuania) and need any assistance with the due diligence, change of control applications, or new EMI/PI authorisation, PSP Lab can assist you with any task, no matter how easy or complex it is. Book your free 30 minutes consultation here.