The Court of Appeal has held that the Electronic Money Regulations 2011 do not impose a statutory trust in respect of funds received from e-money holders (who nonetheless enjoy priority status in respect of their creditor claims), providing some much-needed clarity on this issue for e-money institutions and their clients.
A link to the judgment can be found here.
Background
Ipagoo LLP (Ipagoo) was authorised and regulated by the FCA pursuant to the EMR for the issue of electronic money (e-money) and the provision of multi-country and cross-currency payment account services. It entered administration on 1 August 2019. In April 2021, the joint administrators of Ipagoo (Administrators) applied to the Court for directions in relation to how funds held by Ipagoo should be distributed, and crucially, whether the EMR imposed a statutory trust upon those funds.
The Electronic Money Regulations 2011
Electronic money institutions have an obligation, pursuant to the EMR, to safeguard funds received by them in exchange for which they have issued e-money (defined as “relevant funds” within the EMR). The Payment Services Regulations 2017 (PSR) similarly impose a requirement to safeguard funds. Regulations 21 and 22 of the EMR provide that firms may safeguard relevant funds by either:
- Segregating them from their own assets – by holding them in a separate account or by investing them in secure, liquid, low-risk assets held in an account under the control of an authorised custodian or
- Obtaining insurance or a comparable guarantee to cover the potential loss of the relevant funds
Regulation 24 of the EMR provides that the claims of e-money holders are to be paid from the asset pool, comprising the funds deposited with the e-institution in exchange for e-money, in priority to all other creditors. Further, until all such claims have been met, no right of set off or security right may be exercised in respect of the asset pool (unless relating to the fees and expenses of operating the account where the assets have been placed for safeguarding purposes).
The EMR further provide that the claims of e-money holders shall not be subject to the priority of expenses of an insolvency proceeding, except in relation to the costs of distributing the asset pool.
For the purposes of Regulation 24, “asset pool” is defined as any relevant funds or assets which have been safeguarded by the e-money institution in accordance with Regulations 21 or 22.
Appeal
The FCA’s position was that the EMR imposed a statutory trust upon the relevant funds from the moment they were received by an e-money institution and, further, that this was necessary in order to protect e-money holders in the event of a firm’s insolvency. The High Court had rejected this interpretation of the EMR and it was primarily on this basis that the FCA appealed the decision.
The Administrators also cross-appealed the High Court’s decision that the definition of “asset pool” extended not only to funds which had in fact been safeguarded by the firm, but also encompassed those funds which should have been safeguarded in accordance with the EMR but were not.
Decision
In dismissing the FCA and the Administrators’ appeals, the Court of Appeal held that:
- The EMR do not impose a statutory trust upon funds deposited with e-money institutions by e-money holders
- Given the priority-status of e-money holders’ claims to the asset pool by virtue of Regulation 24, a statutory trust is not necessary to provide the protection envisaged by the EMR and the related PSR, since the claims of e-money holders must be paid in priority to other creditor claims
- The asset pool from which the claims of e-money holders should be met extends to funds which should have been safeguarded/segregated by a firm in accordance with the EMR but were not – and therefore encompasses funds deposited by e-money holders, which were mixed with the firm’s own general funds in breach of the Regulations
Tim Carter
Louise Corcoran