Last year’s high-profile insolvency of German fintech giant Wirecard may be followed by more failures among payment firms and electronic money (e-money) institutions (EMIs), the UK financial markets regulator, the Financial Conduct Authority (FCA) has warned.
According to the FCA, the coronavirus-related economic slowdown has increased the risks of further insolvencies.
“Covid is impacting payments and e-money firms in different ways,” said Paul Roe, head of the department for payments supervision at the FCA.
“Many payments and e-money firms are struggling with lower levels of economic activity. Some firms will probably fail.”
Roe was speaking during an online event on payments and e-money safeguarding, organised by the FCA.
“Some firms are benefiting from the acceleration of an existing trend away from cash and in-person transactions,” said Roe.
“However, many payments and e-money firms are struggling with lower levels of economic activity,” Roe said.
He warned that many firms have negative cash flow and are reliant on the support of their funders.
“Many firms are loss-making and the continued willingness of investors to support them cannot be taken for granted,” he said. “Some firms will probably fail.”
“Where firm failure does occur, we look to minimise harm to customers.”
Roe said the regulator’s responsibility in this case was to set out a framework to reduce the possible disruption.
“It is not the FCA’s job to prevent a firm from failing,” said Roe. “But where firm failure does occur, we look to minimise harm to customers. For payments and e-money firms, this involves having robust safeguarding and wind-down planning in place.”
“These are not tick-box exercises,” Roe said. “They are fundamental requirements.”
In the case of the Wirecard failure, the FCA stepped in in June to reverse an earlier decision to freeze the activities of the German firm’s UK payments processing arm.
The reversal came after millions of clients of pre-paid debit card firms that had used the UK Wirecard subsidiary to administer their cards suddenly found themselves without access to their money.
During today’s webinar, the FCA sounded a warning that levels of compliance with regulatory requirements among payment firms and EMIs are low.
“Our engagement with firms has shown that many are falling far short of our expectations, not understanding what is required and not giving full attention on a consistent basis,” said Roe.
“This creates a potentially significant risk of harm in the event of firm failure,” Roe went on.
Roe said it is not the FCA’s job to dictate to payment firms and EMIs how to manage their safeguarding and wind-down procedures. But he warned that a failure to improve standards could lead to wider repercussions in the financial markets, as well as to clients losing money.
“Increased distribution costs as a result of poor practices will eat into customer funds.”
“Given that payments business models vary and are often complex,” Roe said, “a one-size-fits-all approach to regulatory compliance is not appropriate. Generic wind-down plans would be unsuitable to identify the point at which a firm should trigger an orderly wind-down, and could potentially create adverse impacts on clients, counterparties and markets.”
“Poor safeguarding practices will prevent consumers from getting their money back promptly and increased distribution costs as a result of poor practices will eat into customer funds.”
There is already a precedent for clients losing money in a payment firm/EMI insolvency.
In last year’s failure of an EMI called Supercapital, which provided FX and international payments services, the insolvency firm deducted 10.5 percent of clients’ e-money balances to cover the costs of administration, while clients had to wait several months to get the remaining 89.5 percent of their funds back.
By contrast, deposits in UK banks are protected by government insurance—called the Financial Services Compensation Scheme, or ‘FSCS’—up to a maximum of £85,000 per institution. The FSCS promises to return the deposits of those caught up in a bank failure within seven days.
Earlier this month, fintech giant Revolut said it was seeking to switch from EMI to bank status, a step that comes with heavier compliance costs and more intrusive supervision.
Revolut’s CEO said that customer surveys had shown half of UK-based respondents were reluctant to have their salaries paid into the app because of the current lack of such a deposit insurance scheme.
In today’s webinar, FCA executive Peter Charles said that spot-checks conducted by the regulator on a sample of payments firms and EMIs had shown that 57 percent did not have adequate wind-down plans, enabling insolvency practitioners to identify quickly where customer funds are held and how to return them.
And only 36 percent of the firms surveyed by the FCA had considered the costs and funding of the wind-down procedures, Charles said.
“In some cases firms will need need to fund settlement of payments from their own resources.”
During the webinar, the FCA made it clear that any costs of administration of a failing payments firm or EMI would be paid by customers from their safeguarded funds, as in the Supercapital case.
Answering a question from a webinar attendee about how long a firm should safeguard client funds—up until the point at which the money has left its account or up until the point where it has arrived in the payee’s account at another firm, FCA executive Olivier Bogaerts said it was the latter, an interpretation of the rules that could impose extra costs on fintechs.
“The safeguarding obligation remains in place until funds are no longer held by the institution,” said Bogaerts.
“In practice, this means that the institution should generally continue to safeguard until funds are paid out to the payee or the payee’s payments services provider,” he said.
“This could mean in some cases that firms will need need to fund settlement of payments from their own resources,” he said.
Sign up here for the New Money Review newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes
