Special administration regime for the insolvency of payment institutions and e-money institutions –

The payment and electronic money institution insolvency regulations 2021 came into force on 8 July 2021 and created a new insolvency procedure, the special administration regime for payment and authorised electronic money institutions. It applies, with modifications, part 24 of the Financial Services and Markets Act 2000 (which makes provision for insolvency) to those institutions except in respect of special administration.

The special administration regime was created with a view to addressing the growth of the payments sector and the risks that have been identified with the insolvency of authorised payment institutions (PIs) and e-money institutions (EMIs) and the corresponding effects on the customers of such institutions. It will enable the special administrator to keep an insolvent institution operational with the aim of ensuring continuity for consumers and prioritising the return of their funds.

The regime is available for PIs and EMIs incorporated in or formed under the law of any part of England, Wales, or Scotland (other than limited liability partnerships or partnerships formed under the law of Scotland).

Special administration order

The special administration is commenced by a court order on the application of one of the interested parties set out in regulation 8 of these regulations:

 

(a)     the institution,

(b)     the directors of the institution,

(c)     one or more creditors of the institution,

(d)     the designated officer for a magistrate’s court in the exercise of the power conferred by section 87A of the Magistrates’ Courts Act 1980,

(e)     a person liable or alleged to be liable to contribute to the assets of the institution in the event of its being wound up,

(f)      a combination of the parties listed in (a) to (e),

(g)     the Secretary of State, or

(h)     the Financial Conduct Authority (FCA).

The grounds for an application to the court will depend on the identity of the organisation making the application but broadly, the organisation must show that:

(a)     the PI/EMI is, or is likely to become, unable to pay its debts,

(b)     a special administration order would be fair, or

(c)     it would be expedient in the public interest to put the PI/EMI into administration.

With the exception of the Secretary of State, the parties listed above may rely on the grounds (a) and (b), i.e., the PI/EMI being unable to pay its debts or fairness. The Secretary of State may apply for putting the PI/EMI into special administration on the grounds (b) and (c), i.e., fairness and public interests.

A special administration order is an order appointing a person as the special administrator of an institution. An institution enters special administration when the appointment of the special administrator takes effect and is in special administration while the appointment of the special administrator has effect.

Special administrator

A special administrator must be qualified to act as an insolvency practitioner and will be an officer of the court when appointed.

 

The provisions of Schedule B1 of Insolvency Act 1986 (IA86) are to have effect in relation to special administration orders as applied and modified by these regulations.

Objectives

There are three objectives to the special administration:

 

(1)     To ensure the return of relevant funds as soon as is reasonably practicable.

 

PIs and EMIs should ring-fence customer funds from the remainder of their assets (known as the “safeguarding” requirements, note the exception for small institutions). Upon appointment, the special administrator should identify what funds are ring-fenced and what funds should be ring-fenced and reconcile the two using the method adopted by the PI or EMI when it last carried out a reconciliation. The aim of this process is to identify any shortfall or excess in the asset pool and to settle that shortfall or excess against the institution's own funds account. If there is any shortfall that cannot be satisfied in this way, the shortfall will be borne pro rata by all customers for whom the institution holds relevant funds within the asset pool. If an EMI has two asset pools these may not be set-off against each other.

Reconciliation will not apply to any funds that were transferred after the special administration commenced. Any such funds should be returned to the customer less any costs for doing so.

In order to return customer funds expeditiously, the special administrator may set bar dates for submitting claims; one being intermediate and one a final or hard bar date which, subject to court approval, gives a cut-off date for claims. Notice must be given for each date to anyone the special administrator reasonably identifies as having a claim.

(2)     To ensure timely engagement with payment system operators, the Payment Systems Regulator, the Bank of England, HM Treasury, and the Financial Conduct Authority.

 

The special administrator will work with the payment system operators to resolve problems arising out of the special administration and to facilitate the prompt transfer, settlement, or cancellation of payments (as applicable). The special administrator will also work with the noted authorities to ensure customers are adequately protected and that there is minimal disruption to the market.

(3)     To either rescue the institution as a going concern, or to wind it up in the best interests of the creditors.

 

This can be by either going through a winding up process or by transferring all or part of the property, rights, and liabilities, and all or some of the relevant funds to another institution so effectively the transferee becomes the PI or EMI. However, the regulations provide that the special administrator may not enter into a transfer agreement unless:

(a) the special administrator believes that customers will have access to their funds as soon as reasonably practicable after the transfer,

(b) there is an undertaking from the transferee that current funds and any future funds will be ring-fenced, and

(c) within 14 days, all customers, agents of the PI or EMI or any distributors of the EMI will receive a notice indicating that the funds are ring-fenced.

 

In order to expedite the process, any such transfers will automatically have the underlying contracts novated to the transferee.

 

If a transfer will only occur for part of the PI’s or EMI’s business, the special administrator must be satisfied that the customer would receive the same or more return by entering into the transfer.

 

It is for the special administrator to prioritise these objectives as appropriate in order to achieve the best result overall for customers and creditors (though each objective must be tried and the order of prioritisation stated upon commencement of work). This general rule is subject to exception if the FCA considers it necessary to protect the stability of the UK financial system or to maintain public confidence in such systems and directs the special administrator to prioritise one objective over another.

 

Continuity of supplies

The regulations require the continuity of supply of key services, which are essential for an appropriate administration and these suppliers will not have the possibility to terminate the supply due to the non-payment of supplies. The continuity of supply of the following services is covered under the special administration regime:

 

·         services relating to ring-fencing customer funds,

·         computer hardware and software,

·         financial data and data processing,

·         infrastructure allowing electronic communication, and

·         secure networks.

 

The key suppliers can stop providing a service only in three following instances:

 

(1)     the special administrator consents to the agreement terminating,

(2)     the supplier remains unpaid for more than 28 days,

(3)     the court has granted permission to the supplier to terminate the agreement.

 

Further reading

 

Explanatory memorandum to the Payment and Electronic Money Institution Insolvency Regulations 2021