Electronic Money Regulations 2011: Court of Appeal holds no statutory trust imposed on funds
The Court of Appeal ruled that the Electronic Money Regulations 2011 do not impose a statutory trust in respect of funds received from holders of electronic money (who nevertheless enjoy priority status in respect of their claims of creditors), providing essential clarifications on this subject. problematic for electronic money institutions and their customers.
A link to the judgment can be found here.
Ipagoo LLP (Ipagoo) has been authorized and regulated by the FCA in accordance with the EMR for the issuance of electronic money (e-money) and the provision of multi-country and multi-currency payment account services. It went into administration on August 1, 2019. In April 2021, Ipagoo’s co-administrators (administrators) asked the Court for guidelines on how the funds held by Ipagoo should be distributed and, importantly, whether the EMR imposed a legal trust on these funds.
The Electronic Money Regulations 2011
Electronic money institutions have an obligation under the RME to safeguard the funds they have received in exchange for which they have issued electronic money (defined as “relevant funds” within the RME). The Payment Services Regulations 2017 (PSR) also imposes an obligation to safeguard funds. EMR Regulations 21 and 22 provide that companies can protect relevant funds by:
- separate them from their own assets – by holding them in a separate account or by investing them in safe, liquid and low-risk assets held in an account under the control of an authorized depositary or
- Obtain insurance or a comparable guarantee to cover the potential loss of the funds concerned
Regulation 24 of the EMR provides that claims of e-money holders shall be paid from the pool of assets, comprising funds deposited with the e-institution in exchange for e-money, in priority over all other creditors . Further, until all such claims have been satisfied, no right of set-off or security shall be enforceable against the Asset Pool (except with respect to the fees and expenses of operating the account where the assets have been placed for backup purposes).
The RME further provides that the claims of e-money holders will not be subject to the priority of expenses of an insolvency proceeding, except with respect to the costs of distributing the pool of assets.
For the purposes of Regulation 24, “asset pool” is defined as any funds or relevant assets that have been protected by the electronic money institution in accordance with Regulation 21 or 22.
The FCA’s position was that the EMR imposed a legal trust on the funds concerned from the moment they were received by an electronic money institution and, furthermore, that this was necessary to protect holders of electronic money in the event of a insolvency of a business. The High Court had rejected this interpretation of the EMR and it was mainly on this basis that the FCA appealed the decision.
The directors also cross-appealed against the High Court’s ruling that the definition of ‘asset pool’ extended not only to funds which had in fact been protected by the company, but also encompassed funds which should have been protected in accordance with the DME, but were not.
In dismissing the appeals of the FCA and the Administrators, the Court of Appeal held that:
- EMR does not impose a statutory trust on funds deposited with e-money institutions by e-money holders
- Given the priority status of e-money holders’ claims on the asset pool under Regulation 24, a statutory trust is not required to provide the protection contemplated by the EMR and related PSR, since the claims of electronic money holders must be paid in priority over other claims of creditors
- The pool of assets from which claims of e-money holders should be satisfied extends to funds which should have been protected/segregated by a company in accordance with the EMR but were not – and therefore encompasses funds deposited by e-money holders, which have been commingled with the company’s own general funds in violation of the Regulations