Holding funds under a statutory trust

Home
Knowledge
FCA proposed changes to the safeguarding regime for payments and e-money firms in the United Kingdom
Holding funds under a statutory trust

Holding funds under a statutory trust

{68B6C188-5664-4575-9B62-CB1599D15DC1}

December 19, 2024

In this fourth, and final, article in our series about the FCA's consultation on changes to the safeguarding regime for payments and e-money firms, we look at the FCA's proposals to impose a statutory trust over relevant funds. We will also consider the FCA's proposals regarding: secure, liquid assets in which relevant funds are invested; the rights and proceeds under insurance policies and guarantees; and cheques and other payable instruments received for the execution of a payment transaction or purchase of electronic money.¹

Statutory trusts

This proposal follows the judgment in Ipagoo LLP [2022] EWCA Civ 302 (Ipagoo) which found that there is no statutory trust over an EMI's safeguarded asset pool. Rather, the effect of the Electronic Money Regulations 2011 (EMRs) is to create a special type of priority interest for customers in the event of insolvency. This means that there is solely a creditor/debtor relationship between a firm and its customers rather than a fiduciary relationship (as in a trust). The practical implications of the judgment remain unclear, particularly if a firm fails with a shortfall in safeguarded funds and where there are secured creditors.²

The FCA considers that the imposition of a statutory trust will provide better protections for consumers, who will be the principal beneficiaries and, as a result, will be afforded the benefit of fiduciary duties by the trustee payment or e-money firm.³ The use of a statutory trust will also provide greater certainty when a firm fails.⁴ This is because anything in the trust will fall outside the firm's general estate, so will not be available to other creditors, and any shortfall can be made good through the well-established principles of tracing⁵ The FCA considers that imposing a statutory trust is the only way to ensure adequate consumer protection under its current powers.⁶

Existing rules	Proposal
Under Ipagoo, there is only a creditor/debtor relationship between a firm and its clients, rather than a fiduciary relationship (as in a trust). The practical implications of this judgment remain unclear, particularly if a firm fails with a shortfall in safeguarded funds and where there are secured creditors.	Interim state: The current safeguarding requirements in the PSRs and EMRs will apply and no statutory trust will be imposed in the interim state. End state: When the existing safeguarding requirements in the PSRs and EMRs are revoked, the principles in the Ipagoo judgment will no longer apply.⁷The FCA proposals concern: a statutory trust will be imposed over relevant funds; the secure, liquid assets in which those funds are invested; the rights and proceeds under insurance policies and guarantees; and cheques and other payable instruments received for the execution of a payment transaction or purchase of electronic money. This means that, as trustee, payment or e-money firms will be obliged to comply with fiduciary duties owed to customers including, for example: acting in the best interests of the beneficiaries (which may be particularly important when a firm is in financial difficulty);⁸ not placing themselves in a position where their fiduciary duties and their own interests conflict, or where there is a real possibility they may conflict; Firms will hold assets in the statutory trust on the following terms, as prescribed by the FCA: for the purposes of, and on the terms of, the relevant funds rules (which set out the safeguarding regime) and the relevant funds failure rules (which will apply if the firm, or a third party they use for safeguarding purposes, becomes insolvent); for the purposes of distribution in line with the Payment and Electronic Money Institution Insolvency Regulations 2021; for clients for whom those assets are held, according to their respective interests; on the failure of the safeguarding firm, for the payment of costs properly attributable to the distribution of the relevant funds; and after all valid claims and costs have been met, for the firm itself.¹¹

Existing rules

Proposal

Under Ipagoo, there is only a creditor/debtor relationship between a firm and its clients, rather than a fiduciary relationship (as in a trust). The practical implications of this judgment remain unclear, particularly if a firm fails with a shortfall in safeguarded funds and where there are secured creditors.

Interim state:

The current safeguarding requirements in the PSRs and EMRs will apply and no statutory trust will be imposed in the interim state.

End state:

When the existing safeguarding requirements in the PSRs and EMRs are revoked, the principles in the Ipagoo judgment will no longer apply.⁷The FCA proposals concern: a statutory trust will be imposed over relevant funds; the secure, liquid assets in which those funds are invested; the rights and proceeds under insurance policies and guarantees; and cheques and other payable instruments received for the execution of a payment transaction or purchase of electronic money. This means that, as trustee, payment or e-money firms will be obliged to comply with fiduciary duties owed to customers including, for example:

acting in the best interests of the beneficiaries (which may be particularly important when a firm is in financial difficulty);⁸
not placing themselves in a position where their fiduciary duties and their own interests conflict, or where there is a real possibility they may conflict;

Firms will hold assets in the statutory trust on the following terms, as prescribed by the FCA:

for the purposes of, and on the terms of, the relevant funds rules (which set out the safeguarding regime) and the relevant funds failure rules (which will apply if the firm, or a third party they use for safeguarding purposes, becomes insolvent);
for the purposes of distribution in line with the Payment and Electronic Money Institution Insolvency Regulations 2021;
for clients for whom those assets are held, according to their respective interests;
on the failure of the safeguarding firm, for the payment of costs properly attributable to the distribution of the relevant funds; and
after all valid claims and costs have been met, for the firm itself.¹¹

Asset pool

Some e-money firms also provide payment services that are not connected to issuing e-money. The FCA has proposed that these firms will be able to create a single asset pool, comprising all relevant funds, so that consumers of these firms would be beneficiaries in the same statutory trust (regardless of whether they held e-money or simply used the payment services). These firms would be able to safeguard funds in a single relevant funds bank account, subject to the new diversification requirement, which should make safeguarding cheaper and simpler for these firms. Distribution of the funds, upon insolvency, would also be simplified because both e-money and payment service consumers would share the asset pool of the safeguarded funds proportionately.

Existing rules	Proposal
E-money firms which also provide payment services that are not connected to issuing e-money must hold funds relating to issuing e-money separately from those received for unrelated payment services.¹²	Interim state: The current safeguarding requirements in the PSRs and EMRs will apply. End state: Firms will be able to safeguard funds in a single relevant funds bank account, subject to the new diversification requirements. Consumers will be beneficiaries in the same statutory trust, regardless of whether they held e-money or simply used the payment services.

Unclaimed funds

The FCA notes that the current requirement on firms to safeguard relevant funds for at least six years can cause firms to incur significant costs when dealing with small amounts of relevant funds that have been unclaimed for a long time. Its proposed terms of the statutory trust would give firms an optional mechanism to deal with unclaimed funds.

Existing rules	Proposal
EMIs are currently required to safeguard unclaimed relevant funds for at least six years.	Interim state: The current safeguarding requirements in the PSRs and EMRs regarding unclaimed funds will apply. End state: Unclaimed funds must still be retained for at least six years. However, the proposed terms of the statutory trust would give firms an optional mechanism to deal with unclaimed funds. Firms will be able to gift funds to charity if certain conditions are met, including that reasonable steps to trace the consumer have been taken. A firm that makes use of this additional flexibility would still be subject to any legal right of the consumer to return of the funds.

Existing rules

Proposal

EMIs are currently required to safeguard unclaimed relevant funds for at least six years.

Interim state:

The current safeguarding requirements in the PSRs and EMRs regarding unclaimed funds will apply.

End state:

Unclaimed funds must still be retained for at least six years. However, the proposed terms of the statutory trust would give firms an optional mechanism to deal with unclaimed funds. Firms will be able to gift funds to charity if certain conditions are met, including that reasonable steps to trace the consumer have been taken. A firm that makes use of this additional flexibility would still be subject to any legal right of the consumer to return of the funds.

Clarifying when safeguarding starts and ends

The FCA considers that a lack of clarity on when the safeguarding obligation starts and ends can result in firms holding the incorrect amounts of funds in their safeguarding account. Further, it has also noted that the insolvency process may become more efficient if rules provided more certainty about when the obligation starts and ends.¹³

Existing rules	Proposal
The safeguarding obligation starts as soon as a payments firm receives relevant funds (or an e-money firm issues e-money). The FCA's guidance provides that firms will "receive" relevant funds as soon as they have an entitlement to them¹⁴ and that the general principle is that the safeguarding obligation remains in place until the funds are no longer held by the institution.¹⁵	End state: The FCA proposes to codify its existing guidance in its rules. It also proposes that the rules and guidance will also clarify at what point the safeguarding obligations start and end in certain circumstances, including where: funds are received via physical receipt (i.e. bank notes and coins), or via cheques and other payable orders; when a firm uses a cheque or other payable order to pay funds out of the trust on behalf of a consumer; where a chain of payment service providers is involved; and where transactions are executed via a payment system.¹⁶

Existing rules

Proposal

The safeguarding obligation starts as soon as a payments firm receives relevant funds (or an e-money firm issues e-money). The FCA's guidance provides that firms will "receive" relevant funds as soon as they have an entitlement to them¹⁴ and that the general principle is that the safeguarding obligation remains in place until the funds are no longer held by the institution.¹⁵

End state:

The FCA proposes to codify its existing guidance in its rules. It also proposes that the rules and guidance will also clarify at what point the safeguarding obligations start and end in certain circumstances, including where:

funds are received via physical receipt (i.e. bank notes and coins), or via cheques and other payable orders;
when a firm uses a cheque or other payable order to pay funds out of the trust on behalf of a consumer;
where a chain of payment service providers is involved; and
where transactions are executed via a payment system.¹⁶

What does this mean for you?

Although imposing a statutory trust is a legally significant change to the current regime, the FCA does not consider that firms will be required to make significant changes to the way they protect funds. Firms will be required, however, to get acknowledgement letters from third parties to reflect that the relevant funds are now held on trust.¹⁷

Firms will also need to review the structure of their safeguarding accounts and amend as necessary to create a single asset pool. This may involve engaging with safeguarding account providers to facilitate these changes.

Firms may also consider whether to use flexibility to deal with unclaimed funds and, if so, create the policies and procedures for ensuring compliance with the new regime.

A gap analysis of their processes and procedures will need to be undertaken by firms to ensure that the safeguarding of funds starts and ends in line with the proposed rules and that this is reflected in the firms' reconciliations. Firms may need to amend their processes and procedures to ensure compliance where required.

Paragraph 7.5 CP24/20 ↩
Paragraph 7.1 CP24/20 ↩
Paragraph 7.7 CP24/20 ↩
Paragraph 7.8 CP24/20 ↩
Paragraph 7.8 CP24/20 ↩
Paragraph 7.3 CP24/20 ↩
Paragraph 7.3 CP24/20 ↩
Paragraph 7.7 CP24/20 ↩
Aberdeen Railway v. Blaikie Bros (1854) 1 Macq 461; Boardman v. Phipps [1967] 2 A.C. 46; Bristol & West Building Society v. Mothew ↩
Keech v. Sandford [1726] EWHC Ch J76 ↩
Paragraph 7.6 CP24/20 ↩
Paragraph 7.10 CP24/20 ↩
Paragraphs 7.12 to 7.13 CP24/20 ↩
Paragraph 10.28 Approach to Payment Services and Electronic Money ↩
Paragraph 10.31 Approach to Payment Services and Electronic Money ↩
Paragraphs 7.15 to 7.17 CP24/20 ↩
Paragraph 7.9 CP24/20 ↩