Payment Institutions and E-Money Institutions struggling to find a safeguarding account in the UK may be unaware of a potential new opportunity as a result of Brexit. But those firms looking to take advantage need to consider legal and practical implications.
Changes in legislation coming into effect from ‘Brexit Day’ basically expand the definition of “authorised credit institution” in the E-Money Regulations and Payment Services Regulations. As well as banks authorised in the UK or EEA, it will include “an approved foreign credit institution” which is defined as:
- the central bank of an OECD state
- a credit institution that is supervised by the central bank or other banking regulator of an OECD state
- any credit institution that—
- is subject to regulation by the banking regulator of a State that is not an OECD state
- is required by the law of the country or territory in which it is established to provide audited accounts
- has minimum net assets of £5 million (or its equivalent in any other currency at the relevant time)
- has a surplus of revenue over expenditure for the last two financial years, and
- has an annual report which is not materially qualified
The OECD States that are not members of the EEA are: Australia; Canada; Chile; Colombia; Israel; Japan; South Korea; Mexico; New Zealand; Switzerland; Turkey; and USA.
This change in the legislation clearly massively increases the range of banks who can be approached to provide a safeguarding account. This may be particularly helpful for businesses operating in corridors to those countries concerned, but it may not be as easy to get a compliant safeguarding account with banks outside the EEA as might initially seem to be the case.
The Payment Services and E-Money Directives harmonise laws across the EEA, which means each national jurisdiction will have laws broadly similar to the UK, so banks should have an understanding of the requirements. The concept of a safeguarding account is unlikely to be as familiar to banks outside the EEA, so payment and e-money institutions looking to use this option are likely to have to first explain the UK legislation and the requirements of a safeguarding account.
The FCA’s requirements of the safeguarding acknowledgment letter is set out in the Financial Conduct Authority’s (FCA) Finalised Guidance on 9 July 2020, and in particular the reference to the firm being a trustee (following on from the judgment in the Supercapital case) may require some explanation and involvement from the bank’s legal department.
The agreement requires that the bank has no right or interest over the funds in the account and the specific reference to the UK legislation is also likely to require legal input, with rights of set-off being different in different jurisdictions.
Clauses 12 & 13 in the template letter and the question of which courts should have jurisdiction will be important, and the FCA are likely to want to have some confirmation that in the event of insolvency, the funds will be able to be distributed quickly.
Any firm looking to take advantage of this would therefore be advised to obtain local legal advice beforehand to make sure these points are addressed.
Beyond the legal questions there are practical questions that also need to be considered.
Time differences and “banking days”
If a safeguarding account is in a country which has a significant time difference with the UK (e.g. in the USA or Australia) and the payment or e-money institution is operating in the UK, then it raises the question of how the account can be managed to ensure that the correct amount of “relevant funds” are held. To add to this, there are likely to be differing public holidays which may mean that the account cannot be properly managed on days when the UK business is operating. The FCA will want to know how these issues are being addressed.
Anti-money laundering and financial crime considerations
Payment and e-money institutions are well aware that one of the areas of concern expressed by UK banks in offering safeguarding accounts is around AML and financial crime. This is likely to be the same for banks in other jurisdictions, with the added complexity of the firm being subject to UK rather than the bank’s national AML regulation.
This may result in additional requirements being set, or the bank being unwilling to take on such an unknown risk.
It should also be remembered that banks in other jurisdictions will not be bound by Regulation 105 obligations under the Payment Services Regulations. As you may recall this obliges banks to offer accounts on a POND (proportionate, objective and non-discriminatory) basis. It means that banks in other jurisdictions can turn applications down without giving any reason.
In summary, this does open new opportunities to obtain safeguarding accounts, and it may be that some foreign banks will see this as an opportunity to attract deposits from the sector, but any payment or e-money institutions considering this route should be aware of the legal and practical issues that need to be addressed.
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