Summary of draft rules released and closing of consultation

What does the consultation concern?

In December 2020, HM Treasury released a summary of the draft rules (the “Rules”) to accompany the proposed new regulations for the SAR under consultation. PIs and EMIs are an increasingly important part of the fintech landscape, and while they are an important link in the chain in payment services, and there have been growing concerns about the impact of failures, there is under English law no tailored regime for dealing with an insolvency of one.  PIs and EMIs, like investment banks, are institutions which hold customer funds in the course of their business. The investment bank SAR (the “IB SAR”), introduced in 2011, provides a regime for safeguarding those customer funds and reducing the delay in their return to customers in the event of the institution’s insolvency. The Rules now proposed are largely based on the rules for the IB SAR (the “IB SAR Rules”), although there are some differences which we have highlighted below. The consultation has just completed.  The next stage will be to report on and implement the recommendations..  A key point is that the special administrator of PI/EMI  has an explicit objective to return customer funds as soon as reasonably practicable and, in addition to incorporating some of the key tools from the IB SAR to facilitate this, it is proposed that the special administrator of PI/EMI shall take reasonable steps to constitute the asset pool and determine entitlements to customer funds before returning customer funds. The Government also proposes to extend the full suite of Financial Services and Markets Act 2000 (“FSMA”) provisions to PIs and EMIs so that the Financial Conduct Authority (“FCA”) has the same rights to participate and protect consumers in an insolvency process for PIs and EMIs, as it does for other FCA supervised firms.

What's different about this regime compared to the IB SAR Rules, on which it will be based?

  1. Given PIs and EMIs do not undertake deposit-taking activities:
    • the provisions relating to a special administration (bank insolvency) order or a special administration (bank administration) order are not applicable and do not form part of what is proposed;
    • there will be no entitlement for the Financial Services Compensation Scheme to vote on the administrator’s statement of proposals; and
    • the Bank of England will not be involved except as an “Authority” with whom the administrators must engage if required in pursuit of “Objective 2” (i.e. to ensure timely engagement with payment system operators and the Authorities in accordance with the regulations).
  2. Similar to the IB SAR Rules, the special administrator may require a relevant person (e.g. officers, certain employees) to prepare and submit a statement of affairs of the relevant PI’s or EMI’s affairs, albeit with different particulars to be included. For the purposes of the PI and EMI SAR, such statement of affairs should include:
    • onames and addresses of users or holders of the institution;
    • details as to the amount of relevant funds held;
    • details of the safeguarding option(s) employed by the institution;
    • details of the accounting method(s) used by the institution;
    • details of other creditors; and
    • detail of any security interests held by a creditor.
  3. The administrator’s statement of proposals, in addition to the matters prescribed in the IB SAR Rules, will also be required to set out:
    • details of the safeguarding option employed by the institution; and
    • whether any reconciliation (i.e. a client money reconciliation and transfer to/from safeguarding accounts, to be carried out by the special administrator immediately after appointment) has yet been undertaken by the administrator.
  4. The waterfall for and allocation of expenses of the special administration will be similar to that in the IB SAR Rules, with some modifications, including:
    • Costs incurred by the administrators due to a breach of the relevant PI’s or EMI’s safeguarding regime are to be paid out of that institution’s own assets to the extent agreed by the creditors’ committee or approved by the court. Any shortfall is to be paid out of the asset pool.
    • The administrator is entitled to recover from the asset pool the costs of constituting, reconstituting and reconciling the asset pool.
    • Costs and expenses incurred in connection with returning post-insolvency receipts are to be allocated on an individual user / holder basis (instead of mutualised basis across all users / holders).
  5. Unlike the IB SAR Rules, a date (i.e. a bar date) beyond which neither a claimant nor the FCA may submit a claim can be has to be fixed with the permission of the court. This is intended to avoid uncertainty, delay and disruption to the distribution process by the special administrator.
  6. The Rules will set out “reasonable measures” for the administrators to take before a bar can take effect.