The best explanation of the special administration regime under the Payment and Electronic Money Institution Insolvency Regulations 2021
Wider adoption of FinTech and growth of the payments sector has offered convenience and a variety of choices for the payment service users. Nevertheless, innovation is almost always accompanied by the emergence of novel risks that are not appropriately accounted for from the onset. One of such risks, which was recently identified, is the insolvency of payment institutions (PIs) and e-money institutions (EMIs) and corresponding effects on their customers.
There is evidence that the previously existing insolvency process for PIs/EMIs is not ideal for the customers. Some of the recent administration cases involving PIs/EMIs have taken years to resolve, with customers left without access to their money for prolonged periods and receiving reduced monies after deducting the cost of distribution.
To remedy these issues, in June 2021, an update to the insolvency framework for payment and e-money institutions in the UK came into force in the form of the Payment and Electronic Money Institution Insolvency Regulations 2021, which creates a special administration regime. Further in this article, we will consider the main objectives of the aforementioned legislation and what measures were introduced in order to accommodate them.
Objectives of the special administration regime
The Payment and Electronic Money Insolvency Regulations 2011 are broadly modelled on the Investment Bank Special Administration Regulations 2011 (IBSAR), as it is easier for the insolvency practitioners to apply an already familiar framework. Hence, somewhat streamlining the insolvency framework in the UK and establishing a consistent special administration regime for the entities supervised by the FCA.
Nevertheless, the Payment and Electronic Money Institution Insolvency Regulations 2021 have different objectives from that of IBSAR. The special administration regime under the Payment and Electronic Money Institution Insolvency Regulations 2021 has in mind 3 main objectives:
- To ensure the return of relevant funds as soon as it is reasonably practicable;
- To ensure timely engagement with payment system operators, the Payment Systems Regulator and the Bank of England, HM Treasury and the FCA; and
- To either rescue the institution as a going concern, or wind it up in the best interests of the creditors.
The insolvency practitioner appointed as a special administrator can decide which of these objectives should take priority but must work through them all. This general rule is subject to exception in instances when the FCA directs that a particular objective must be prioritised. The FCA cannot set objectives arbitrarily and it will always be subject to the necessity of acting in line with the public interest and after prior consultations with the Treasury and Bank of England.
Who can commence the administration process under the Payment and Electronic Money Institution Insolvency Regulations 2021?
The special administration can be commenced by a court order. Of course, for this to happen there must be an application from one of the interested parties. As per regulation 8 of the Payment and Electronic Money Institution Insolvency Regulations 2021 the application can be made by
- PI/EMI itself;
- directors of PI/EMI;
- creditors of PI/EMI;
- person liable or alleged to be liable to contribute to the assets of PI/EMI in the event of its being wound up;
- a combination of the aforementioned parties listed in (1) to (4);
- the FCA; or
- the Secretary of State.
The grounds for an application to the court will depend on the type of applicant. But generally speaking, three kinds can be distinguished:
(a) that PI/EMI is, or is likely to become, unable to pay its debts,
(b) that a special administration order would be fair, or
(c) that it would be expedient in the public interest to put PI/EMI into administration.
The persons from points (1) to (6) in the paragraph above may rely on the grounds (a) and (b), i.e. PI/EMI being unable to pay its debts or fairness. The Secretary of State may apply for putting the PI/EMI into special administration on the grounds (b) and (c), i.e. fairness and public interests.
As it is already noted, the Payment and Electronic Money Institution Insolvency Regulations 2021 were drafted in line with the IBSAR which also refers to “fairness” and in both cases, it means a shorter modern equivalent of the expression “just and equitable” as per Banking Act 2009 section 93(8). This ground was raised as a concern during the HM Treasury’s consultation where it reassured that fairness will be left for the court to decide therefore minimising any possible adverse effects for the payment and e-money institutions that continue to be a going concern. Since courts by their nature are made to decide what is fair and what is not, UK PIs/EMIs should not be very concerned with such trivialities. The ground of public interest on which the Secretary of State may rely is listed within section 124A(1)of the Insolvency Act 1986 (IA 1986) and is overall the same as in regular administration proceedings.
What constitutes an asset pool under the Payment and Electronic Money Institution Insolvency Regulations 2021?
Both payment and e-money institutions are subject to stringent safeguarding requirements concerning the funds of their clients, which as per Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs) are known as “relevant funds”. I will not go into much detail regarding the safeguarding arrangements in this article since we have covered this topic in detail already on many occasions and you can read more regarding safeguarding requirements here and how they work in practice here.
What is important concerning the insolvency is that an asset pool is comprised of any relevant funds or assets that are segregated, placed into an account or received in an account in accordance with the EMRs or PSRs, or any proceeds of an insurance policy or guarantee held in an account in accordance with the EMRs or PSRs. In the case of electronic money institutions, relevant funds are funds that have been received in exchange for electronic money that has been issued. For payment institutions and electronic money institutions that undertake payment services unrelated to electronic money issuance, relevant funds include:
- sums received from, or for the benefit of, a payment service user for the execution of a payment transaction; and
- sums received from a payment service provider for the execution of a payment transaction on behalf of a payment service user.
In accordance with the Payment and Electronic Money Institution Insolvency Regulations 2021, the administrator must carry out a reconciliation immediately after appointment using the method adopted by the institution when it last carried out a reconciliation. Reconciliation involves assessing whether the total amount of relevant funds that payment or e-money institution is required to safeguard is corresponding with the total amount of relevant funds which are being safeguarded. The reconciliation must be based on the records and accounts of the PI/EMI as they stood immediately after the last reconciliation.
The aim of this process under the special administration regime is to identify any shortfall or excess in the asset pool and to settle that shortfall or excess against the institution’s own funds account. Notably, if there is a shortfall in the asset pool as determined by the administrator and it cannot be satisfied by making a subtraction from the own funds of PI/EMI, such shortfall must be borne pro rata by all customers for whom the institution holds relevant funds within the asset pool.
Moreover, in the case of e-money institutions that provide both electronic money related and payment services unrelated to electronic money issuance, the administrator may not offset any shortfall in one asset pool against any relevant funds or assets held in the other. This means that if there is a shortfall in the asset pool comprising from the funds which relate to the issuance of electronic money the funds from the asset pool of unrelated payment services may not be used to correct it and vice versa.
A bar date for the relevant customers under the special administration regime
In order to return the relevant funds as soon as it is possible to the customers of the PI/EMI, the administrator has the option of setting a “bar date”.
A bar date is a deadline by which claims of the creditors have to be submitted. Without this, there could be a severe delay before the administrator can start paying out claims. The bar date mechanism enables the administrator to make distributions based on relevant fund claims received by a given date.
There are two types of bar dates that the administrator can establish, one being intermediate and another final, the latter is also commonly known as a “hard” bar date. A reasonable time must be given after the notice has been published for affected customers to be able to calculate and submit relevant funds claims before the bar date.
The administrator must not set a hard bar date without the approval of the court given on application by the administrator. The court may approve the setting of the hard bar date only in cases that
- it is satisfied that the administrator has taken all reasonable measures to identify and contact persons who may be entitled to the return of relevant funds; and
- it considers that if a hard bar date is set, there is no reasonable prospect that the administrator will receive claims for the return of relevant funds after that date.
As such, the setting of the hard bar date keeps in mind the overall interests of the customers of payment or e-money institution in question and the Payment and Electronic Money Institution Insolvency Regulations 2021 have specific safeguards aimed at ensuring that there won’t be any late claimants.
Continuity of services under the Payment and Electronic Money Institution Insolvency Regulations 2021
The Payment and Electronic Money Institution Insolvency Regulations 2021 require the continuity of supply of key services, which are essential for an appropriate administration. When a PI/EMI goes into administration, the essential supplier cannot make a condition of the supply of goods/services that any outstanding fees owed by the institution to that supplier, which were incurred before the date of administration, are paid. Henceforth, if some of the fees weren’t appropriately paid prior to the commencement of the administration, the key supplier will need to continue providing services/goods and will not have the possibility to terminate the supply due to the non-payment. The continuity of supply of the following services is explicitly covered under the special administration regime:
- services relating to the safeguarding of relevant funds (for example, the provision of a bank account for relevant funds or insurance guarantees);
- computer hardware or software or other hardware used by the institution;
- financial data;
- infrastructure permitting electronic communication services;
- data processing (for example, data storage);
- secure data networks provided by an accredited network provider; or
- access to a relevant system by a sponsoring system participant.
Notably, it is not to say that there is no possibility for the suppliers offering the aforementioned services to cease the provision of services to the PI/EMI in the administration; rather there are limited instances when they are allowed to cease provision of services. The key suppliers can stop providing a service only in three following instances:
- any charges in respect of the supply that are incurred after the commencement of special administration remain unpaid for more than 28 days;
- the administrator consents to the termination of the service; or
- the supplier has the permission of the court, which may be given if the supplier can show that the continued provision of the supply would cause the supplier to suffer hardship.
Needless to say, it is essential for the administrator dealing with the institution that is subject to a special arrangement to make sure that it will have a possibility to ensure the return of the funds to the customers and therefore the aforementioned restrictions are imposed. The HM Treasury specifically noted in its explanatory memorandum dedicated to the Payment and Electronic Money Institution Insolvency Regulations 2021 that such restrictions on the suppliers are necessary for these matters.
Transfer arrangements under special administration regime
In the pursuit of objective 1 and in certain instances simultaneously of objective 3 (both of which were discussed at the beginning of this article), an administrator may arrange the transfer of whole or part of the payment or electronic money institution’s business to another payment or electronic money institution. Nevertheless, the Payment and Electronic Money Institution Insolvency Regulations 2021 provide that the administrator may not enter into a transfer arrangement unless the following conditions are met:
- The arrangement includes such provision as the administrator thinks necessary to ensure that users or holders whose relevant funds are to be transferred will be able to exercise their rights in relation to those funds as soon as reasonably practicable after the transfer;
- The PI/EMI has obtained a contractual undertaking from the transferee that the transferee will (i) safeguard the relevant funds to be transferred, and (ii) safeguard any further relevant funds of users; and
- The PI/EMI has obtained a contractual undertaking from the transferee that the transferee will, within a period of 14 days beginning with the day on which the arrangement is entered into, notify the customers and any agents and/or distributors.
Importantly, according to regulation 27, the agreements with the customers and agreements with agents and/or distributors will be read, immediately after the transfer, as if made by the institution to which they are transferred rather than the institution that was in administration.
The Payment and Electronic Money Institution Insolvency Regulations 2021 also provide for the power to override customer, agent and distributor consent requirements where there is a whole business transfer or there is a partial transfer that meets certain conditions. This includes the condition that all of the relevant funds held by the institution and all of the rights and liabilities under the corresponding payment or electronic money institution contracts are transferred. As such, the transfer arrangement will create the effect of novation of the aforementioned agreement for the parties concerned.
How PSP Lab can help
PSP Lab is a FinTech consultancy focused primarily on the payments and e-money services sector. We help companies to remain compliant with their regulatory obligations and streamline internal operations. Whether you are new to the sector or have been in operation for quite some time engaging a niche consultancy firm, such as PSP Lab, can help you with the appropriate management of the firm. This, in its turn, will minimise the negative effects even of such events as the winding down of your business and will allow for the management and shareholders to save their face.