The Electronic Money Regulations 2011 And The Insolvency Act 1986: Statutory Trusts, The Asset Pool, And The Waterfall Provision

• Published date: 07 April 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: 1 Chancery Lane
• Author: Mr Simon Newman

In the recent case of Baker v Financial Conduct Authority (Re Ipagoo LLP) [2022] EWCA Civ 302 the Court of Appeal has given useful guidance on the interaction of the Electronic Money Regulations 2011 (EMRs), which implemented the EU Electronic Money Directive (EMD), with the Insolvency Act 1986 (the 1986 Act), in respect of the status and basis of the Asset Pool, and the waterfall of payments where there is a distribution from an insolvent estate.

Whilst much focus of the case was on the argument whether the EMRs created a statutory trust over funds received by an electronic money institution (EMI), the court also considered the competing interests of the Asset Pool under the EMRs and an insolvent estate under the Insolvency Act.

The Electronic Money Regulations and Statutory Trust argument

The EU Electronic Money Directive was introduced to safeguard customer funds that are received by an EMI in exchange for electronic money that has been issued. Article 10 of the Directive, implemented by regulations 20 - 22 of the EMRs, required EMIs to take one of two steps to safeguard customer funds. Either they must: (a) segregate them, or (b) obtain insurance or a guarantee in respect of them.

On appeal the FCA argued that the requirement under the EMRs created a statutory trust in respect of any such funds for the benefit of the EMI's customers. If that was right, such funds would be safeguarded in the event of an EMI's insolvency.

This argument, however, was rejected by the Court of Appeal. In rejecting the argument four considerations supporting this conclusion were identified. Firstly, the funds which are required to be segregated under option (a) are a "fluctuating pool". Secondly, option (b) does not require any funds to be segregated at all, and it does not imply that customers have any continuing beneficial interest in the funds. Thirdly, there would be other consequences, in particular, "a trust would apply in circumstances other than insolvency and would have wider ramifications. Furthermore, it would create rights and remedies against third parties other than the creditors of the EMI." Fourthly, there were identifiable features of the drafting of the EMRs which militated against the trust interpretation.

This judgment brings useful finality to this issue given the first instance decision conflicted with a well-reasoned judgment of ICC Judge Burton in Re Allied Wallet Ltd [2022] EWHC 402 (Ch). Unusually, ICC Judge Burton had prepared her judgment prior...