E-MONEY
Released On 15th Mar 2022
In a world where transactions are increasingly global and carried out remotely through our devices, the importance of e-money (non-physical money held in electronic form) has been on the rise for a long time.
Whilst initially this was largely limited to banking institutions, the growth of the fin-tech sector, a global pandemic and the rise in the move away from physical fiat currency for everyday transactions means that e-money has moved in to other areas, and increasingly away from banks.
Firstly, a definition; e-money is not crypto-currency, but an electronic representation of fiat currency, which can be exchanged (at par) for it. Crypto can be bought and sold in an equivalent value in fiat currency, but that value fluctuates over time. As an example, PayPal would represent an E-Money Institution (EMI). It is not a bank, but if you are a customer it will hold, receive, and pay funds on your behalf, meaning to most, it resembles a bank.
The problem arises from the fact that we have refined the banking system over centuries, both for better and worse, but EMIs fall outside this system.
This is not an entirely unregulated area – the FCA has the authority to monitor and authorise EMIs and Payment Service Providers (PSPs). The problem arises, however, with what to do when it all goes wrong. We have been appointed on a number of these organisations over the last couple of years and they do present some particular challenges.
The FCA issued some guidance last year on its view and approach. As Insolvency Practitioners, we often find the relationship between insolvency legislation and those relating to other areas is problematic. The FCA is clear, the most important thing to do is to reduce harm to those engaging with these businesses. However, that does not necessarily mirror the obligations of the insolvency practitioner, which is to treat all creditors equally.
The first thing to note is that the Insolvency Practioner takes over the regulatory obligations, these do not stop by the commencement of insolvency. Accordingly, all the requirements on the company remain in place and will need to be adhered to. The extent to which this has an impact will alter depending on the trading strategy adopted, but having a clear plan at the outset and understanding the regulatory implications of them is crucial.
FCA regulated businesses are encouraged to draw up and continually review a “wind-down plan” to consider the steps it would take should some form of cessation of trade (or authorisation) occur or be foreseen. Along the same lines as Disaster Recovery Plans, these can be treated with disdain by some, but are a very important way of stress testing a business and ensuring that the structure created is flexible enough to handle such a scenario. As with Disaster Recovery Plans, the reason why you cease trading doesn’t matter.
From an Insolvency Practioner’s point of view, such a document is useful and helps identify areas of potential concern, although it is important to understand that it isn’t likely to cover all of the problems which may arise.
Engagement with the FCA early is crucial to ensure that they are aware of the strategy being pursued and can be satisfied that individual customer interests are being safe-guarded appropriately.
Much of this will centre around the handling and managing funds held. Some of these will be held on trust, and each will require slightly different treatment depending on nature of the funds and the relationship with the customer. There has been a great deal of case law on this subject over the last few years, much of it spinning out of Lehman Bros’ demise but no less relevant to smaller enterprises where trust funds and fiduciary responsibilities exist.
There is also currently disagreement between the FCA and the courts over the treatment of funds and the existence of trusts in certain circumstances. In the Ipagoo (in administration) [2021] EWHC 2163 (Ch) case, the court found that a company registered in accordance with Electronic Money Regulations and operating as the FCA would normally dictate, would not hold its customers funds on trust, but that a creditor/debtor relationship existed, with some form of proprietary right over the segregated funds.
This contrasts starkly with the decision in Supercapital Ltd [2020] EWHC 1865 (Ch) , a company registered under the Payment Services Regulations, where the funds were deemed to be held on trust.
The Ipagoo judgement is awaiting appeal, but at present, there is certainly no clear route for an IP to take when dealing with the funds within their possession and care needs to be taken.
Milsted Langdon worked hard with the FCA and other stakeholders on the cases in which we have dealt to ensure that the right outcome is achieved and that all parties’ interests are safe-guarded.
