PARLIAMENTARY DEBATE
Draft Payment and Electronic Money Institution Insolvency Regulations 2021 - 9 June 2021 (Commons/General Committees)

I beg to move,

That the Committee has considered the draft Payment and Electronic Money Institution Insolvency Regulations 2021.

A copy of the regulations was laid before the House on 26 April.

It is a pleasure to serve again under your chairmanship, Mr Davies.

The payments sector in the United Kingdom has seen rapid change over recent years, with people increasingly using 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 payments sector has offered opportunities for 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 payments that are faster, cheaper and more secure. However, as that sector has grown, so has the number of customers exposed to risk if those firms were to fail and enter insolvency.

There is evidence that existing insolvency processes for payment and electronic money institutions are not working effectively for customers. It is challenging for an administrator to start returning relevant funds until they have complete information on all claims to those funds. Gathering that information, potentially without key outsourced staff or access to the firms IT systems, can make insolvency a long and expensive task, during which time customers do not have access to their funds. They also face an increased chance of receiving a reduced claim at the end of the process as a result of high administration fees.

Recent administration cases have taken years to resolve, with customers left without access to their money for prolonged periods and receiving reduced monies as a result of high distribution costs. The regulations therefore propose 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 those firms. The new regime is modelled on the 2011 special administration regime for investment banks.

The changes will help to make managing the insolvency of a firm a quicker and clearer process, ultimately leading to customers receiving their funds quicker and giving continuity and confidence to consumers and businesses in the event of a payments or electronic money firm being put into insolvency. The legislation also corrects a minor defect in recent legislation, which transposed and on-shored the bank recovery and resolution directive II.

The special administration regime for payment and electronic money firms 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 new regime includes bespoke objectives placed upon the administrator to ensure the return of customer funds as soon as reasonably practicable, to engage with relevant authorities and either to rescue or wind-up the institution in the best interests of creditors. It also contains useful provisions on matters such as continuity of supply, to ensure that key functions, such as the provision of IT services, are maintained and not lost at the point of insolvency, and provisions to ease transfers of business which would allow the administrator to move customers to a new provider. Importantly, it also provides bar date provisions, which, with appropriate consumer protections, set deadlines for customers to claim their money back. Once those deadlines have passed, administrators are able to begin making distribution of funds, rather than having to wait for everyone to claim in their own time.

I would like to note to the Committee that additional work is required in order 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. I have written to Ministers in the Northern Ireland Executive and Scottish Government and committed to rectify that as soon as is practicable in future legislation. In the interim, consumers will still benefit from the changes to the Financial Services and Markets Act 2000, 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 24 of the Financial Services and Markets Act to be applied to payment and electronic money institution insolvencies. The extension of those provisions will provide the Financial Conduct Authority with the same powers to participate and protect consumers in an insolvency process for those sectors as it does for other FCA-supervised firms. That 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, ensuring that the FCA can work on behalf of consumers to get them their money back.

The regulations will protect consumers and inspire confidence in a modern and world-leading British financial services sub-sector, and I commend them to the Committee.

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?

I thank the right hon. Gentleman for his characteristically forensic but clear questions, and I am happy to try to respond. He raised a number of reasonable points about the nature of the provision for reimbursing customers who find themselves dealing with an insolvent provider. He also picked up on the fact that the institutions in question do not form part of the FSCS levy and the compensation scheme from that. However, they are subject to the Payment Services Regulations 2017, PSRs, and the Electronic Money Regulations 2011, EMRs. They impose a different regime, which is a safeguarding requirement to protect customer funds received for the provision of a payment service or e-money. That means that the firms dealt with under today’s SI must put a certain amount of capital aside or have an insurance provision for safeguarding. They are not completely without some provision, but it is just different from the levy pool that comes out of the FSCS, levy payment and membership of that pool.

The right hon. Gentleman asked about the cut-off process, the bar, and how reasonable that would be. Of course, that is underpinned by a court process and one of the provisions in the regulations is for the FCA to be a participant in that, to verify the exhaustive nature of steps taken to identify customers who will be subject to some of the pay-outs.

The right hon. Gentleman also asked about foreign exchange and the transfer of assets abroad. Those matters would ordinarily come under the provisions of the FCA, but I will look into those issues further and write to him on those two specific points. My instinct is that there is no distinction in terms of different treatment for different customers.

I am confident that the legislation will produce better outcomes for UK businesses and consumers in the payments and e-money sectors. The right hon. Gentleman rightly acknowledged the fast-evolving nature of the industry, and it is vital that we in the UK ensure that our financial services sub-sectors have appropriate consumer protection measures. I look forward to the full implementation of the regime. I think that it will provide greater assurance to consumers and a clearer pathway to resolution when firms go under. I commend the SI to the Committee.

Question put and agreed to.