Payment and Electronic Money Institution Insolvency Regulations 2021

Baroness Penn Excerpts

Thursday 10th June 2021 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Payment and Electronic Money Institution Insolvency Regulations 2021.

Relevant documents: 1st Report from the Secondary Legislation Scrutiny Committee

[Baroness Penn (Con)]

My Lords, the UK’s payment sector has changed rapidly over the last decade, with an increasing use of card, mobile and electronic wallets to make payments. Firms today range from small remittance firms on the high street to fintech giants with millions of customers.

The growth of the payment sector has offered opportunities to UK businesses and consumers, with many using payment and electronic money institutions not only to make payments but as their transactional banking provider, to access their salaries and savings. Customers are now able to make faster, cheaper and more secure payments. However, as the sector has grown, this has increased the number of customers exposed to risk if these firms fail and enter insolvency.

There is evidence that the existing insolvency regime for payment and electronic money institutions is suboptimal for customers. Recent administration cases involving these types of firm have taken years to resolve, with customers left without access to their money for prolonged periods of time and receiving reduced money as a result of high distribution costs. This legislation therefore proposes to introduce a new special administration regime for payment and electronic money institutions and an extension of provisions under the Financial Services and Markets Act 2000 to these firms. The new regime is modelled on the 2011 special administration regime for investment banks.

HM Treasury conducted a public consultation during December and January and received useful responses from a number of trade bodies, relevant firms and other interested parties. Officials also met with industry groups before and after the consultation and spoke with the Banking Liaison Panel.

These changes will help to make managing insolvency of a firm quicker and clearer, ultimately leading to customers receiving their funds more quickly and giving continuity and confidence to consumers and businesses in the event of a payment and electronic money firm being put into insolvency. The legislation also corrects a minor defect in the recent legislation which transposed and onshored the Bank Recovery and Resolution Directive II.

The special administration regime for payment and electronic money services is a new insolvency process that provides consumer protection objectives and a toolkit for insolvency practitioners to aid them in efficiently managing an insolvent payment or electronic money institution. The key provisions of this regime include: bespoke objectives for an insolvency practitioner to ensure the return of customer funds as soon as reasonably practicable, to engage with the relevant authorities and to either rescue or wind up the institution in the best interests of creditors; continuity of supply provisions that will allow an insolvency practitioner to keep the firm’s key functions operational for customers; provisions to ease the transfer of business processes such that a new firm can take on the incumbent’s business and provide continuity for customers; and bar date provisions to allow the insolvency practitioner to set a deadline for consumers to claim and thus enable an earlier distribution of customer funds.

I note that additional work is required to apply the special administration regime to firms located in Northern Ireland and partnerships or limited liability partnerships located in Scotland. Around 1% of the 1,300 UK payments and electronic money firms are located in Northern Ireland, and there are no firms that are partnerships or LLPs based in Scotland. The Economic Secretary has written to his counterparts in the Northern Ireland Executive and Scottish Government, committing to rectify this as soon as is practicable in future legislation. In the interim period, consumers will still benefit from the changes to the Financial Services and Markets Act and from the protections offered to the 99% of eligible firms, as it does not matter where in the UK the customer is located.

The instrument also provides for Part XXIV of the Financial Services and Markets Act 2000 to be applied to payment and electronic money institution insolvencies. The extension of these provisions will provide the FCA with the same powers to participate and protect consumers in an insolvency process for these sectors as it does for other FCA-supervised firms. This includes the right for the FCA to speak at court hearings regarding the insolvency and a requirement for the administrator to work with the FCA during the insolvency process.

These regulations will provide a modern and effective insolvency process for a world-leading British financial services sub-sector, inspiring confidence from investors and customers alike. I therefore hope that the Committee supports them, and I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for this short but productive discussion on the statutory instrument. This is an important issue and I am glad to have had the opportunity to debate it. They raised a number of points that I will try to cover.

I hope that a potential duty of care or other new duty towards consumers is not too contentious. As the noble Lord, Lord Tunnicliffe, will know, the Financial Services Act required the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. In accordance with that, the FCA launched a consultation in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to deliver them. The consultation proposes a new consumer duty that seeks to set higher and clearer expectations for the standard of care provided by firms to consumers. The FCA is seeking stakeholder views on its proposals in the ongoing consultation, which is due to close on 31 July.

The noble Lord, Lord Tunnicliffe, also asked what would happen in an insolvency process where asset pools were too shallow for consumers to get their money back. Although the changes made through the statutory instrument will help to ensure that consumers get more of their money back more quickly, the regime will not be able to correct for any previous safeguarding failures that would cause consumers to receive less than all their money back. While the regime should help to make administration more efficient, it cannot itself prevent customer loss if the asset pool is too shallow for any distribution to be made.

The noble Lord, Lord Tunnicliffe, also asked what paths to recourse, if any, consumers would have if they disagreed with the court’s determination that the administrator had taken all reasonable measures to initiate contact with affected persons in the case of the use of the bar date provisions. I am not aware of any further recourse for a customer who feels that the administrator has not taken all reasonable measures to initiate contact with affected persons. However, there are safeguards provided within the regime, such as the objectives of the administrator and the Financial Conduct Authority’s scrutiny of the administrator in its role.

The noble Lord also asked who pays the remuneration and costs of the special administrator, and whether they come out of the asset pool. The rules that will be made subsequent to this SI will consider which costs are to be paid out of the institution’s assets and which are to be paid out of the asset pool. However, the regulations set out that where costs are incurred due to safeguarding failures, they will in the first instance come from an institution’s assets. If an institution’s assets are insufficient to meet these costs, the remaining money will come out of the asset pool.

Both noble Lords raised questions about the Financial Services Compensation Scheme. Payments and e-money firms are not currently covered by the FSCS, as they rightly identified. However, funds held by payment institutions and e-money institutions are required by legislation to be protected via safeguarding. These insolvency regulations will complement and enhance the consumer protections provided by the existing safeguarding regime. Indeed, on 18 May the FCA sent a Dear CEO letter to all e-money institutions setting out its concerns about those institutions comparing their services to traditional banks, or holding themselves out to be an alternative to banks in their financial promotions. It has asked e-money firms to write to their customers within six weeks to remind them that their money is protected through safeguarding and that FSCS protection does not apply in those cases.

I referred to the further rules that need to be made for the special administration regime, and the noble Lord, Lord Tunnicliffe, asked about the timing of further statutory instruments on that matter. We expect them to be laid in Parliament later this year, following which the changes to the regime are expected to come into full effect.

The noble Lord, Lord Davies, asked about the interpretation of the three objectives for this process. In May, the FCA published further guidance for insolvency practitioners. The special administration regime allows the FCA under certain circumstances to direct the administrator to prioritise a particular objective. Further, if an insolvency practitioner is unclear, it can apply to the court for direction if any meanings are not clear in administering the scheme.

The noble Lord, Lord Davies, was correct in identifying a typo in the Explanatory Memorandum. I apologise to him for that. I do not have the substance of his inquiry on that point before me, so I undertake to write to him and the noble Lord, Lord Tunnicliffe, if there are any remaining questions that I have not answered. With that, I commend the instrument to the Committee.

Motion agreed.