Draft Payment and Electronic Money Institution Insolvency Regulations 2021

Pat McFadden Excerpts

Wednesday 9th June 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for your chairmanship, Mr Davies.

Even by the standard of Treasury SIs, this is fairly technical material that we are discussing today, and I am grateful to the Minister for his explanation. Last night in the Chamber during a different debate, I challenged the Minister that legislation and regulation needed to keep up with financial innovation. In that context, we were talking about frauds, scams and such things, but the point still holds in respect of the regulations, so I am certainly not going to oppose their intention.

As the Minister said, the regulations have arisen on account of financial innovations and the growth of electronic money institutions and payment institutions and so on. The non-bank sector has become a far bigger part of the financial ecosystem. The Minister spoke of 1,300 firms to which the regulations could apply to ensure cover, and the impact assessment tells us that those firms currently hold about £17 billion of UK assets. It is true that as the financial sector changes, so must the regulatory and legal system around it.

The idea of resolution or winding up a failed financial company has been a much bigger policy priority since the financial crash, because that exposed how difficult some of the process is given interconnected payments, all sorts of different claims on assets and so on. After the crash, a special system was developed for investment banks. The collapse of Lehman Brothers involved a long, complicated process and it was thought that a special resolution regime was needed for such institutions. The Government are trying to take that idea and apply it to electronic money institutions. The policy aim is to speed up the process in the event of insolvency and stop it taking years to conclude.

A consultation on the regulations was carried out between December and January which pointed to six recent cases of insolvency in payments or electronic money institutions, some of which have gone on for three years or more and in only one case had people received some of their money back. The consultation only attracted 15 responses out of those 1,300 companies, so it was fairly thin, although in fairness, I think that the responses included one or two from trade bodies, so they may have represented a number of firms. Most of the responses broadly agreed with the Government’s action, so I have just few questions for the Minister.

The regulations relate to insolvency and ensuring continuity of service and payments where insolvency takes place. The regulations talk about an asset pool and the administrator having governance over that. The question in my mind goes back to Mr Micawber, and what if the asset pool is too small for the liabilities? Is that not the definition of insolvency, when someone has liabilities of 20 shillings and income or assets of 19 shillings? How can the administrator guarantee that people will get their money back from the asset pool if, by definition. the firm is insolvent? Are we talking about getting so many pence in the pound, rather than the full investment back? Or is it a question, as is often the case in insolvency, of a hierarchy of creditors, where some people—often the taxman—are first on the list and others are lower? What happens if the asset pool is too shallow to cover the liabilities.

The Financial Services Compensation Scheme does not cover the institutions in question, and that was raised in the consultation. Why is that? At least one respondent argued that the FSCS should have that remit. On capital requirements, I am sure that, like me, the Minister is regularly lobbied about how much capital institutions have to hold. One insurance policy against insolvency is to hold a reasonable amount of capital. Has the Government considered—I can hear the industry objecting to this as I speak—increasing the capital requirements to make insolvency less likely and to make the companies more resilient if they run into trouble?

As the Minister said, the regulations propose a bar date—a cut-off point—to avoid a long drawn-out process that takes years to conclude. The logic of that is completely understandable, but how will the administrator be guaranteed to make reasonable, in fact extensive, efforts to contact people who might have claims? The last thing we want is someone coming along and saying, “I never knew about this. I didn’t know it was insolvent. I have got assets in this”, and then a legal case pursuing.

Some of the firms will be involved in transferring remittances. That is a very important business for the UK as we have a population with roots all over the world. How will the regulations help consumers not to be hit with excessive costs in the event of foreign exchange transactions? That is already an issue, which we have debated in the context of other SI. If someone is sending a few hundred pounds to a relative possibly in a country that is much less wealthy than ours, the last thing they want is for a lot of that to be eaten up paying out to administrators.

Finally, when it comes to transferring assets, how will the insolvency practitioners deal with assets that are held abroad? Some of the organisations are international, with assets in the UK and assets abroad. Does the proposed regime just apply to UK assets or is the intention that the resolution process will also include assets abroad?