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HMT proposes insolvency changes for payment and electronic money institutions

  • United Kingdom
  • Banking and finance
  • Payment systems and digital commerce
  • Financial services


On 3 December 2020, HM Treasury issued a consultation and draft regulations for a new special administration regime for payment institutions (“PIs”) and electronic money institutions (“EMIs”). This was followed by the publication on 17 December 2020 of a supplementary annex to the consultation, which provides details on the proposed rules that will govern the regime. In summary, HMT proposes to introduce bespoke Special Administration Regulations (“SAR”) for PIs and EMIs based on the Investment Bank Special Administration Regulations 2011 ("Investment Bank SAR”). While the proposed rules (the “PI and EMI SAR Rules”) will incorporate many provisions equivalent to those in the Investment Bank SAR rules, there will be some differences such as where the Investment Bank SAR rules (e.g. rules on deposit taking activities) are irrelevant for PIs and EMIs.

Subject to certain exclusions, HMT proposes that the SAR regime should apply to all PIs and EMIs and have limited application to small PIs and small EMIs. Under the current proposal, a special administration may be ordered by the court on the application of a range of applicants including the firm itself, any directors of the firm, any creditors of the firm and the FCA. The proposal provides for three grounds for such an application (although reliance on a particular ground will depend on who the applicant is):

  • Ground A: the firm is or likely to become unable to pay its debts
  • Ground B: it would be fair to put the firm into SAR administration
  • Ground C: it is expedient to the public interest to put the firm into SAR administration

Upon appointment, the special administrators’ key obligations will include:

  • advertising and notifying certain relevant parties of their appointment;
  • conducting a post-administration reconciliation of customer funds based on the reconciliation method previously adopted by the firm (although note that this requirement will only apply where the firm has previously performed such reconciliation);
  • constituting the asset pool using “reasonable measures” (as outlined in the PI and EMI SAR Rules) to include any identifiable customer funds and assets in the asset pool, including relevant funds (as defined by the PSRs and EMRs) which should have been safeguarded;
  • identifying Payment Service Users (“Users”) and e-money holders (“Holders”) who have an entitlement to the funds in the asset pool and determining those entitlements; allowing those Users and Holders to vote as unsecured creditors in respect of any shortfall they suffer arising due to insufficient relevant funds being available in the asset pool for distribution;   
  • setting deadlines to receive claims and make distributions, and giving notice of these deadlines to those parties whom the administrators believe have a right to assert a security interest or other entitlement over the client assets; and
  • giving further notification, after a deadline has passed, to any Users or Holders that have not made a claim where the special administrators expected them to do so.

The special administrators will need to consider the three SAR objectives, namely (1) to return customer funds as soon as is reasonably practicable; (2) to facilitate timely cooperation with payment systems and authorities; and (3) to rescue the institution as a going concern or wind it up in the best interests of the creditors. Unless the FCA directs otherwise, the special administrator will be able to prioritise one objective.

Under the proposal, the special administrators’ expenses in constituting, reconstituting and reconciling the asset pool can be paid from the asset pool. Costs arising from breaches of the safeguarding requirements will be borne out of the general estate, and shortfalls from the asset pool will be borne pro rata across all customers with claims against the pool. Costs and expenses incurred in connection with returning post-insolvency receipts will be allocated on an individual User/Holder basis (rather than mutualised across all Users/Holders). The PI and EMI SAR Rules will also set out how expenses are to be allocated between asset pools where more than one asset pool is constituted (i.e. where an institution carries on both PI and EMI functions and therefore has separate pools for each type of business). They will also provide details on reviews of remuneration, how remuneration can be revised, excessive remuneration and the apportionment of remuneration if a new special administrator takes office.

The proposed SAR will enable both partial and whole business transfers to other firms and, where the firm in administration has a solvent agent or distributor, the SAR propose that the transfer could take place without the consent of the agent or distributor. HMT also proposes to apply Part 24 of FSMA to all PIs and EMIs, so as to extend the FCA’s right to participate in an insolvency process for PIs and EMIs as it does for other FCA supervised firms.

HMT’s consultation (including a draft of the new regulations) can be found here. Responses are requested by 14 January 2021. For responses specifically on the supplementary annex on the proposed rules, which can be found here, responses are requested for 28 January 2021.

Please get in touch with us if you wish to respond to the consultation and/or would like to discuss how the proposed regime could impact your business.