Considered in Grand Committee
My Lords, the UK’s payment sector has changed rapidly over the last decade, with an increasing use of card, mobile and electronic wallets to make payments. Firms today range from small remittance firms on the high street to fintech giants with millions of customers.
The growth of the payment sector has offered opportunities to UK businesses and consumers, with many using payment and electronic money institutions not only to make payments but as their transactional banking provider, to access their salaries and savings. Customers are now able to make faster, cheaper and more secure payments. However, as the sector has grown, this has increased the number of customers exposed to risk if these firms fail and enter insolvency.
There is evidence that the existing insolvency regime for payment and electronic money institutions is suboptimal for customers. Recent administration cases involving these types of firm have taken years to resolve, with customers left without access to their money for prolonged periods of time and receiving reduced money as a result of high distribution costs. This legislation therefore proposes to introduce a new special administration regime for payment and electronic money institutions and an extension of provisions under the Financial Services and Markets Act 2000 to these firms. The new regime is modelled on the 2011 special administration regime for investment banks.
HM Treasury conducted a public consultation during December and January and received useful responses from a number of trade bodies, relevant firms and other interested parties. Officials also met with industry groups before and after the consultation and spoke with the Banking Liaison Panel.
These changes will help to make managing insolvency of a firm quicker and clearer, ultimately leading to customers receiving their funds more quickly and giving continuity and confidence to consumers and businesses in the event of a payment and electronic money firm being put into insolvency. The legislation also corrects a minor defect in the recent legislation which transposed and onshored the Bank Recovery and Resolution Directive II.
The special administration regime for payment and electronic money services is a new insolvency process that provides consumer protection objectives and a toolkit for insolvency practitioners to aid them in efficiently managing an insolvent payment or electronic money institution. The key provisions of this regime include: bespoke objectives for an insolvency practitioner to ensure the return of customer funds as soon as reasonably practicable, to engage with the relevant authorities and to either rescue or wind up the institution in the best interests of creditors; continuity of supply provisions that will allow an insolvency practitioner to keep the firm’s key functions operational for customers; provisions to ease the transfer of business processes such that a new firm can take on the incumbent’s business and provide continuity for customers; and bar date provisions to allow the insolvency practitioner to set a deadline for consumers to claim and thus enable an earlier distribution of customer funds.
I note that additional work is required to apply the special administration regime to firms located in Northern Ireland and partnerships or limited liability partnerships located in Scotland. Around 1% of the 1,300 UK payments and electronic money firms are located in Northern Ireland, and there are no firms that are partnerships or LLPs based in Scotland. The Economic Secretary has written to his counterparts in the Northern Ireland Executive and Scottish Government, committing to rectify this as soon as is practicable in future legislation. In the interim period, consumers will still benefit from the changes to the Financial Services and Markets Act and from the protections offered to the 99% of eligible firms, as it does not matter where in the UK the customer is located.
The instrument also provides for Part XXIV of the Financial Services and Markets Act 2000 to be applied to payment and electronic money institution insolvencies. The extension of these provisions will provide the FCA with the same powers to participate and protect consumers in an insolvency process for these sectors as it does for other FCA-supervised firms. This includes the right for the FCA to speak at court hearings regarding the insolvency and a requirement for the administrator to work with the FCA during the insolvency process.
These regulations will provide a modern and effective insolvency process for a world-leading British financial services sub-sector, inspiring confidence from investors and customers alike. I therefore hope that the Committee supports them, and I beg to move.
I call the next speaker, Lord Davies of Brixton. Oh, we cannot hear him, so we will adjourn for five minutes.
My Lords, many thanks to the Minister for her introduction and the opportunity to consider the regulations. I welcome the opportunity to say something about a continuing subject of interest: the significant shift to electronic money that has led to these regulations. As outlined by the Minister, the background to these regulations is the rapid change over recent years with people increasingly using cards, mobiles and electronic wallets to make payments. This shift is now unstoppable and, in general terms, is to be welcomed. The ease of using online technology is a good thing so long as no one gets left behind—but perhaps that is a subject for another day.
We have the Chancellor’s ambition for a digital economy and, only three days ago, the Bank of England published an important discussion paper, New Forms of Digital Money. The paper notes:
“Over the past decade, there has been rapid innovation in how people make payments … The use of physical cash in payments continues to decline, and demand for convenience, especially with regard to e-commerce, has fuelled public appetite for digital payments. Fintech firms, and in some cases big technology firms, are developing alternatives to traditional forms of money.”
The Bank’s paper also notes, crucially in this context, that
“Presently, payments typically rely on the use of either cash or deposits held in commercial banks —referred to as ‘commercial bank money’. If new forms of digital money are to become widely used as a trusted form of retail payments, it is essential that the public can have the same confidence in them as they have in existing forms of money”.
I take it that the Government’s intention in introducing these changes is to help to protect customers in the event of a payment or electronic money institution being put into insolvency, and I welcome that. This in turn will strengthen confidence in the payment and e-money sectors, by improving customer and market outcomes.
I understand that these draft regulations, if made, will create a new special administrative regime for payment and electronic money institutions. The Explanatory Memorandum states that this new regime
“will give insolvency practitioners administering … insolvencies”
at these institutions
“an expanded toolkit. This will allow the insolvency practitioner to keep an insolvent institution operational with the aim of ensuring continuity for consumers and prioritising the return of their funds.”
The Explanatory Memorandum then says that the draft regulations
“will also extend the full suite of Financial Services and Markets Act 2000 … Part 24 provisions to all payment and electronic money institutions entering the standard insolvency process. This will provide”
“with specific powers to participate and protect consumers in the event of an insolvency of a payment or electronic money institution as it does for other FCA supervised firms.”
The implication is that these powers will go well beyond what is in these regulations, so perhaps the Minister could say something about what putting these regulations into a wider context might involve. What is it envisaged that the FCA will undertake that goes beyond these regulations?
I fully support the objectives of the regulations. The return of funds as soon as is reasonably practicable, the timely engagement of system operators and the emphasis on the best interests of the creditors are all obviously right. I admit that, to a considerable extent, I have to take it on trust that the 75 pages we have before us will achieve these objectives. However, it is also clear that they depend in practice on what is meant by “reasonable”, “timely” and “best interests”. Initially, I assumed that these terms will be interpreted by the administrator and are not unique to these circumstances. Can the Minister tell us anything about what discussion of guidance there might be about what these terms mean in the specific circumstances of these institutions? Is this something that will be left to the courts in the end?
Having these objectives set out in the Explanatory Memorandum and the regulations leads to another question: are there any circumstances involving an insolvency where these three objectives do not apply? I do not claim to be an expert in this area. Are there insolvencies where it is not intended that they should be resolved as soon as is reasonably practicable? Are there insolvencies where timely engagement is not appropriate?
More specifically, can the Minister tell us a bit more about the way in which Regulation 12(10) will be used? This relates to small institutions and the wording involves a double negative, which leaves me at a bit of a loss. Do we have information on what specific provisions will be applied to small institutions?
Finally—this is proof that I am paying attention—I can point out what I assume is a typo in the Explanatory Memorandum. Paragraph 3.1 refers to “s34”, which I take to mean the correct Section 234. Even without the typo, I must admit that I struggled with this paragraph. It certainly gives the impression that the Treasury is grasping at straws here, with what appears to be some recursive reasoning. This suggests that, at some stage, despite the statement that these regulations do not need to be consolidated, it would be a good idea to start again—particularly given the growing importance of this area of regulation.
My Lords, I am grateful to the Minister for her introduction of these regulations, which are substantial in length and complexity. The underlying principle, however, is relatively simple and one that we support. I am also grateful to my noble friend Lord Davies of Brixton for keeping us company this afternoon, albeit from a safe distance. The speakers’ list may be short but it is perfectly formed.
Insolvency is a tricky topic. Different rules apply to different forms of insolvency, and such processes are often complex and slow. This inevitably adds to the already strong emotions experienced by all parties when a business relationship breaks down. It is also clear from the reference in paragraph 7.14 of the Explanatory Memorandum that, in extremis, the stability of the UK’s financial system may be at risk. As the Explanatory Memorandum notes, payments in the UK are undergoing rapid transformation, with electronic payments ever more popular. There is a clear justification for this new special administrative regime and the new FCA powers that come with it.
The consultation carried out prior to the regulations being laid cited only a small number of insolvency cases among payment and electronic money institutions. Nevertheless, those cases have been drawn out over many years and, as a rule, customers have not received the money due.
I hope that the Minister will forgive me for raising a contentious issue so soon after the passage of the then Financial Services Bill. Does she agree that concerns around consumer detriment in the insolvency context add to the case for a general duty of care on financial services firms? Can she provide a quick update on work by the Treasury and FCA in that area?
A key part of the special administration regime and its expanded toolkit is how so-called asset pools should be treated. Among other things, the regulations deal with the reconciliation process and impose bar dates on claims for relevant funds. While that is all helpful, what does the Minister expect to happen when asset pools are, for want of a better phrase, too shallow for customers to get their money back? What path to recourse, if any, will customers have if they disagree with the court’s determination that the administrator has taken all reasonable measures to initiate contact with affected persons? What additional powers, if any, does the special administrator have compared with those enjoyed under the present regulations? Further, who pays the remuneration and cost of the special administrator? Does any money for such payments come out of the asset pool?
Yesterday, my right honourable friend Pat McFadden asked in the other place why, given the rapid increase in the use of payment and electronic money institutions, they are not covered by the Financial Services Compensation Scheme. He rightly observed that disparities in which institutions are covered by the FSCS mean significant gaps in consumer protection levels. What plans, if any, do the Government have to explore that?
Finally, the Government intend to introduce an additional set of new insolvency rules, in due course, to deal with procedural issues and so forth. Is the Minister able to offer any clarity on the anticipated timescales?
My Lords, I thank both noble Lords for this short but productive discussion on the statutory instrument. This is an important issue and I am glad to have had the opportunity to debate it. They raised a number of points that I will try to cover.
I hope that a potential duty of care or other new duty towards consumers is not too contentious. As the noble Lord, Lord Tunnicliffe, will know, the Financial Services Act required the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. In accordance with that, the FCA launched a consultation in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to deliver them. The consultation proposes a new consumer duty that seeks to set higher and clearer expectations for the standard of care provided by firms to consumers. The FCA is seeking stakeholder views on its proposals in the ongoing consultation, which is due to close on 31 July.
The noble Lord, Lord Tunnicliffe, also asked what would happen in an insolvency process where asset pools were too shallow for consumers to get their money back. Although the changes made through the statutory instrument will help to ensure that consumers get more of their money back more quickly, the regime will not be able to correct for any previous safeguarding failures that would cause consumers to receive less than all their money back. While the regime should help to make administration more efficient, it cannot itself prevent customer loss if the asset pool is too shallow for any distribution to be made.
The noble Lord, Lord Tunnicliffe, also asked what paths to recourse, if any, consumers would have if they disagreed with the court’s determination that the administrator had taken all reasonable measures to initiate contact with affected persons in the case of the use of the bar date provisions. I am not aware of any further recourse for a customer who feels that the administrator has not taken all reasonable measures to initiate contact with affected persons. However, there are safeguards provided within the regime, such as the objectives of the administrator and the Financial Conduct Authority’s scrutiny of the administrator in its role.
The noble Lord also asked who pays the remuneration and costs of the special administrator, and whether they come out of the asset pool. The rules that will be made subsequent to this SI will consider which costs are to be paid out of the institution’s assets and which are to be paid out of the asset pool. However, the regulations set out that where costs are incurred due to safeguarding failures, they will in the first instance come from an institution’s assets. If an institution’s assets are insufficient to meet these costs, the remaining money will come out of the asset pool.
Both noble Lords raised questions about the Financial Services Compensation Scheme. Payments and e-money firms are not currently covered by the FSCS, as they rightly identified. However, funds held by payment institutions and e-money institutions are required by legislation to be protected via safeguarding. These insolvency regulations will complement and enhance the consumer protections provided by the existing safeguarding regime. Indeed, on 18 May the FCA sent a Dear CEO letter to all e-money institutions setting out its concerns about those institutions comparing their services to traditional banks, or holding themselves out to be an alternative to banks in their financial promotions. It has asked e-money firms to write to their customers within six weeks to remind them that their money is protected through safeguarding and that FSCS protection does not apply in those cases.
I referred to the further rules that need to be made for the special administration regime, and the noble Lord, Lord Tunnicliffe, asked about the timing of further statutory instruments on that matter. We expect them to be laid in Parliament later this year, following which the changes to the regime are expected to come into full effect.
The noble Lord, Lord Davies, asked about the interpretation of the three objectives for this process. In May, the FCA published further guidance for insolvency practitioners. The special administration regime allows the FCA under certain circumstances to direct the administrator to prioritise a particular objective. Further, if an insolvency practitioner is unclear, it can apply to the court for direction if any meanings are not clear in administering the scheme.
The noble Lord, Lord Davies, was correct in identifying a typo in the Explanatory Memorandum. I apologise to him for that. I do not have the substance of his inquiry on that point before me, so I undertake to write to him and the noble Lord, Lord Tunnicliffe, if there are any remaining questions that I have not answered. With that, I commend the instrument to the Committee.
The Grand Committee stands adjourned until 3.05 pm. I remind Members to sanitise their desks and chairs before leaving the Room.