Electronic Money or E-Money is a rapidly expanding market. By 2019, the number of E-Money Accounts in the EU had grown to 307 million from 125 million in 2009.
By definition, E-Money is money institutions hold electronically that their clients can access by a card or digitally through an electronic device. This simply means that the service usually does not provide physical access to a bank branch or checkbooks.
The first regulatory framework for this was put in place in 2000. It applied to firms operating schemes where a payment card was used with someone other than the issuer. Such firms had to either be
- authorized by the Financial Services Authority (FSA), or
- registered with the FSA as a “small e-money issuer.”
Later, the European Commission felt that the e-money market was developing slower than expected, and the above directive was holding it back.
The result? The second e-money directive of 2009. It was designed to encourage new entrants to the market by imposing lower capital requirements and a lighter regulatory regime for small e-money issuers. The latest version of the e-money regulations came into force in 2011, bringing further clarity to the regulatory framework.
Some of the other changes under the new regulations were:
- Reduction in the ongoing capital requirement for EMI (E-money Institution)
- The scope of activities of EMI was expanded to undertake mixed business activities. This meant they could carry out unrelated payment services and other unregulated businesses.
- All EMIs must safeguard funds received from customers. In case the EMI becomes insolvent, the e-money issued will be protected from the claims of other creditors and can be repaid to customers.
- New redeemability requirements will ensure that customers can get their money back up to six years after the end of a contract. EMIs also cannot refuse to redeem the e-money if it’s worth less than GBP 10.
- A provision for firms to carry out simplified due diligence checks was raised from GBP 150 to GBP 250. This was further raised to GBP 500 for transactions within the UK.
What is Safeguarding Under E-Money Regulations?
Safeguarding requirements are in place to protect client funds if the institution becomes insolvent. As per the FCA, all EMI firms must have appropriate and well-managed safeguarding arrangements in place.
Safeguard for e-money institutions is in place to safeguard relevant funds. Relevant funds include customer funds held in accounts or money debited for payment transactions. Safeguarding starts immediately once EMI receives the relevant funds and continues until it pays the funds out to the payee or its Payment Service Provider (PSP).
Important points that an EMI must follow:
- An EMI must keep relevant funds segregated from any other funds that it holds.
- EMI must designate an account to place relevant funds or assets for safeguarding.
- EMI must segregate funds from working capital and other funds. It should hold the e-money funds in accordance with the legislation or cover them with an insurance policy and guarantee.
What Does Safeguarding Mean for the Winvesta Multi-Currency Account?
There are three institutions involved in protecting client funds in the Winvesta MCA.
- Winvesta: Winvesta must keep client funds separated from its own funds and cannot use them for its operations, lending, or investing.
- Currency Cloud (TCCL, acquired by Visa): TCCL must safeguard client funds at a British high street bank. It cannot use them for its operations, lending, or investing.
- High street banks like Barclays: Barclays safeguards client funds and keeps them ring-fenced from its operations. This means Barclays cannot lend the client money or invest it.
In case Winvesta or Currency Cloud becomes insolvent, Winvesta clients’ funds will still remain protected at Barclays.
Through its e-money regulations, the EU and UK have found the balance to be customer protective while being financially progressive. Safeguarding is one of the most important principles of the e-money regulation that EMIs must adhere to. It protects clients from the risk new players can bring to the market, while supporting the growth of new financial firms that can provide better service and experience than the incumbent banks.