UK Ipagoo Appeal Judgment Examines The Safeguarding Obligations For EMIs

• Jurisdiction: European Union
• Law Firm: Ganado Advocates
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Financial Services, Insolvency/Bankruptcy
• Author: Mr James Debono
• Published date: 02 January 2023

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 from 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 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...