Court of Appeal judgment on emoney safeguarding

The judgment in relation to the treatment of certain funds held by Ipagoo, a failed EMI, has been handed down.  The joint administrators of the firm had applied for directions as to whether certain funds were held on trust under the EMRs. In July 2021, the High Court held that in principle there was no basis for implying a trust of funds, but that the “asset pool” defined in regulation 24 of the EMRs should be treated as if it included all funds which should have been safeguarded under the Regulations, even where they had not been.  So, on that basis, on the insolvency of an EMI, a sum equal to any shortfall must be added to the asset pool from the firm’s general estate, and be distributed in accordance with regulation 24.

FCA appealed this decision, taking the view that under the EMD and PSD2, the EMRs should be construed in a manner that results in “relevant funds” being subject to a statutory trust from the moment the EMI receives them and that the proceeds are traceable, whether or not they were segregated at any time. It said if this were not the case, the funds would be unprotected if the EMI did not take the safeguarding steps it is supposed to. It went on to say that the suggestion that the shortfall should be made up from the general estate goes against insolvency law, but anyway should not be necessary if a statutory trust arises.

The administrators were neutral, but were asked to represent the interest of the unsecured creditors of Ipagoo.  So they contended on a cross-appeal that the judge was right to find there was no statutory trust but wrong in saying the asset pool should include the funds that should have been safeguarded, thus giving e-money holders preferential right to payment.

The judge held that the EMRs did not impose a statutory trust and gave several justifications for this stance. She said that if the e-money holders were intended to retain a proprietary interest in the funds consistent with a statutory trust, they would be entitled to interest on deposits, which the EMRs do not provide for. So there was no statutory trust.

On the matter of the asset pool, the judge said it is clear that the asset pool is intended to stand apart from the normal insolvency regime and should only bear the costs associated with distributing it, and the e-money holders’ claims would not be subject to the priority of expenses of an insolvency proceeding.  She mentioned that the EMRs would be capable of overriding the Insolvency Act if necessary, because they stemmed from EU legislation.

Overall, both the appeal and the cross-appeal were dismissed, so the conclusion remained that:

  • the EMD does not require, and the EMRs do not impose, a statutory trust;
  • the EMD requires that all funds EMIs receive from e-money holders be safeguarded (and not just those that are safeguarded in accordance with PSD2); and
  • so, “asset pool” has to be taken to include a sum equal to all the funds that should have been but were not safeguarded.



Emma Radmore