Published on 4th January 2023

Our recent research paper on Britcoin examined several of the failures in the Fintech digital payments industry that have gone unresolved.

The paper is entitled ‘CAPTURE – BigTech and Digital Payment Giants dominate the committees evaluating the replacement of physical cash with ‘Britcoin’ – a UK ‘Central Bank Digital Currency’’.

You can find a click-through to the full paper here:

Electronic Money Institutions or Payment Institutions take in customers’ monies in order to respectively issue electronic money and discharge a payment contract. Both must ‘safeguard’ customer monies that are within their control, but subject to a number of conditions.

The upshot of the conditions imposed by the Financial Conduct Authority (FCA) on Payment Institutions (PIs) is that the PI has to discharge the payment contract with such speed that it is only feasible if it does it with its own money: by the time the customer’s money clears and settles in the PI’s favour, the PI has discharged the payment contract and the money therefore belongs to the PI, not the customer. The total amount of money that belongs to a customer and needs to be put into ‘safeguarding’ by the UK’s PI sector is consequentially diminished.

This does not hold true of the UK’s Electronic Money Institutions sector or eMIs. Customers can hold eMoney without an obligatory end date imposed by a particular payment contract. The total funds sitting with an eMI and having to be ‘safeguarded’ can be substantial. Joshua Stephens of the City Law School refers to an FCA estimate of £18 billion.[1]

There is a lack of transparency over the amount, caused by divergent accounting policies adopted by eMIs for the recording of the value of eMoney issued to customers.

The almost-correct one in our view was followed by Settle Go Solutions (part of OpenPayd Group): it showed in its 2019 accounts an amount of ‘Client liabilities’ of €69.0 million, matched by ‘Client funds’ of €68.7 million within ‘Cash at Bank and in Hand’ of €70.7 million. The eMI held its issued eMoney as its liability, and pointed to an asset of not quite the same amount and comingled with its own funds.

Ozan Limited, also part of OpenPayd, fell a little short of this by showing at the same date €29,011 of client funds within its ‘Cash at bank’ of €882,807 but without showing any ‘Client liabilities’.

At the other end of the scale it is hard to believe how the treatment adopted by iPagoo in its 2018 accounts – the last ones before it went under – passed audit and was accepted by the FCA. The accounts showed ‘Cash at bank and in hand’ of only £432,918, did not mention any ‘Client funds’ within that figure, and carried no ‘Client liabilities’. The amount of its eMoney in issue was nowhere stated in its annual report. It was as if the eMoney issued by iPagoo did not exist and was neither a direct nor contingent liability of iPagoo, its supposed issuer.

The FCA should be insisting on the ubiquitous use of the policy of Settle Go Solutions with one addition: the issued amount of eMoney to be shown as a ‘Client liability’, with an asset identified as ‘Client funds in safeguarding’ and an asset identified as ‘Client funds outside safeguarding’. The two asset positions must total to the same amount as the ‘Client liabilities’. The eMI’s own ‘Cash at bank and in hand’ should be shown separately. The FCA requires that three accounts be run: (i) one in which safeguarded funds are held; (ii) one for conducting operations in client funds; (iii) one for the Fintech’s own money. The proposed accounting would mirror that exactly. eMIs must issue eMoney immediately they receive client funds so there is no fourth category: client funds held but not in the form of eMoney.

The legal status of ‘safeguarded’ funds also seems to be uncertain, and it is not guaranteed that the eMoney holders are the sole and only beneficiary of them and that they cannot be used to pay off other creditors of the eMI or to pay the fees of the trustee-in-bankruptcy, in the case that the eMI becomes insolvent.

The prime purpose of ‘safeguarding’ is to inoculate eMoney holders from the failure of the eMoney issuer, but a recent decision by the UK’s Court of Appeal in the matter of iPagoo’s insolvency shows that the FCA, and by extension the Payment Systems Regulator (PSR), do not know for sure what the legal status of safeguarded funds is.

The FCA joined the iPagoo case in order to obtain this clarity.[2] It wanted to establish whether a trust was automatically created for the benefit of clients when an eMI went into administration and, if it was not, why and how client funds were protected and to what extent.[3]

This is a quite basic point. The FCA/PSR should have had a firm position some years ago and before any client funds were accepted by Fintechs. Instead the FCA/PSR are playing catch-up, when billions of pounds are already lodged in so-called safeguarding with Fintechs. Here is another major detriment for UK consumers and businesses brought about by the Fintech industry and unresolved by financial regulators.

[1] accessed on 3 January 2023

[2] Case No: CA-2021-000740 Court of Appeal judgement of 9th March 2022

[3] There are broadly three options for safeguarding customer funds: (i) holding them at a ‘Credit Institution’, meaning a bank; (ii) investing them in high-quality, liquid assets like government bills; (iii) setting up an insurance policy that pays out when a firm goes bankrupt, and which must pay out for the benefit of customers and not to the bankruptcy estate of the firm