UK Ipagoo appeal judgement examines the safeguarding obligations for EMIs

On the 9 of March earlier this year, the Court of Appeal (Civil Division) in the UK dismissed an appeal and confirmed that when an electronic money institution (“EMI”) is placed into administration, it was not necessary to impose a statutory trust in order to fulfil the purposes of the safeguarding provisions under EMD (Electronic Money Directive 2009/110) and PSDII (Payment Services Directive 2015/2366) considering that the spirit of both Directives was solely to preserve the sums paid by the EMI’s customers in the case of insolvency and against its other creditors.

This judgement, which relates to the status of funds received by an EMI from its customers in the event of its insolvency, is the Ipagoo LLP (In Administration), Re case, also known as Jason Daniel Baker and Geoffrey Paul Rowley against The Financial Conduct Authority (the “FCA”) [2022] EWCA Civ 302, 2022. Back in 2018, Ipagoo LLP obtained a licence by the Financial Conduct Authority, the UK financial services regulator, pursuant to the Electronic Money Regulations 2011 (“EMR”) to issue electronic money and to provide amongst others, payment account services.

A year later, this company ended up insolvent and went into administration, with Mr. Baker and Mr. Rowley (as joint administrators who had gone into insolvency without having taken either of the safeguarding steps described below), applying for the FCA’s intervention, and directions as to how funds held by Ipagoo were to be distributed and to confirm whether or not, such funds are held on trust pursuant to the EMRs.

In 2021, the High Court held that that there is no basis for implying a trust of the funds, and in essence, if the funds which had to be safeguarded (i.e. “relevant funds), were not in actual fact safeguarded, there must be an equal amount for such shortfall, which has to be available on the insolvency of the EMI and also added to the “asset pool” from Ipagoo’s estate, and to be distributed in accordance with the EMR.

The FCA appealed against this decision on the grounds that the Court did not interpret the EMR correctly when concluding that the safeguarding requirements under PSD2 and EMD (as implemented in the EMRs) could be given due effect without a statutory trust. The FCA contended that the Court was construing that the EMRs were overriding domestic insolvency and property laws, by holding that the assets which would otherwise be applied towards discharging the claims of secured creditors (or who had the benefit of insolvency set-off), be instead allotted for the benefit of e-money holders to the extent there is “deficit” in the EMI’s “asset pool”. According to the UK regulator, both Directives imply that the “relevant funds” would be subject to a statutory trust as soon as they are received by the institution. The joint administrators on the other hand cross-appealed, arguing that the EMRs give a statutory right to the EMI’s customers to be paid out of the “asset pool” and that if there are no safeguarded funds, such customers would in turn rank merely as unsecured creditors and that the high level of protection required by PSD2 is satisfied by the statutory regime.

EU and Maltese law distinguish between financial institutions (payment institutions or EMIs) and banks (credit institutions). The latter are the only institutions who can take deposits and pay interest and the bank-customer relationship is more akin to a debtor-creditor relationship. Financial Institutions are not allowed to take deposits from the public and the title to the money received by financial institutions remains of the institution’s customers, and which money must be safeguarded according to law. It appears that Ipagoo was non-compliant with such requirements under the EMRs.

The main point of the appeal was how the EMRs should interpreted and in this context, the Court of Appeal held that these must be interpreted in accordance with domestic law principles in the light of the meaning of the Directives in order to achieve conformity with the provisions and principles of the EMD and that the phrase an "appropriate level of consumer protection" in one of the recitals of the Directives did not necessarily imply that a statutory trust was essential to fulfil such objective.

Article 7 of the EMD relating to “Safeguarding Requirements” states

“1. Member states shall require an electronic money institution to safeguard funds that have been received in exchange for electronic money that has been issued, in accordance with article 9(1) and (2) of Directive 2007/64/EC. Funds received in the form of payment by payment instrument need not be safeguarded until they are credited to the electronic money institution's payment account or are otherwise made available to the electronic money institution in accordance with the execution time requirements laid down in the Directive 2007/64/EC, where applicable. In any event, such funds shall be safeguarded by no later than five business days, as defined in point 27 of article 4 of that Directive, after the issuance of electronic money.”

[…]

“4. For the purposes of paragraphs 1 and 3, member states or their competent authorities may determine, in accordance with national legislation, which method shall be used by electronic money institutions to safeguard funds.”

Article 7(4) makes it amply clear for the regulators to ascertain, in line with domestic legislation, which of the various methods of safeguarding an EMI should use. The safeguarding options under the EMD are namely: (a) depositing the funds with a credit institution (b) the purchase of liquid, lowrisk assets which had to be insulated in the event of insolvency (c) the issue of an insurance policy or guarantee for an amount equivalent to that which would have been segregated.

Article 10(1)(b) does not include any indication that the electronic money holder had a proprietary right to the insurance policy/guarantee or its proceeds or that they should be held on trust. The Court highlighted that it was vital to interpret art.10(1) of the preceding EMD as a whole and in the context of art.7 of the 2009 Directive. The existence of the alternatives in art.10(1)(b), together with the natural and ordinary meaning of Article 10(1)(a) made clear that it was not necessary to impose a statutory trust in order to fulfil the purposes of either provision.

It followed that to fulfil the requirements of the EMD and to interpret the EMRs in conformity with the Directives, "asset pool" in Regulation 24 of the EMD must be given a wider meaning than merely such funds as have been so safeguarded. On the FCA’s appeal and the administrators’ crossappeal, the Court of Appeal dismissed both the appeal and the cross-appeal and confirmed that there is no imposition of a statutory trust in relation to funds received from electronic money holders, and that the asset pool of insolvency EMI should also include funds which have not been safeguarded.