Jason Daniel Baker & Anor. v The Financial Conduct Authroity

The safeguarding regime for electronic money does not create a statutory trust over funds received by an electronic money institution. It protects electronic money holders against the institution’s other creditors upon insolvency, rather than conferring proprietary rights enforceable against the world.

The statutory asset pool includes both assets actually safeguarded and a sum equal to relevant funds which should have been safeguarded. Electronic money holders have priority over that enlarged pool. Their rights operate outside and before the ordinary insolvency waterfall. The costs of restoring the pool are costs of distributing it.

Ipagoo LLP, an authorised electronic money institution, became insolvent after receiving substantial customer funds. Its joint administrators sought directions concerning the distribution of those funds and whether they were held on trust under the Electronic Money Regulations 2011.

The deputy High Court judge held in [2021] EWHC 2163 (Ch) that no statutory trust arose. He nevertheless held that the statutory asset pool included a sum equal to relevant funds which should have been, but were not, safeguarded. The Financial Conduct Authority appealed against the trust ruling and aspects of the priority analysis. The administrators cross-appealed against enlargement of the asset pool.

The central issues were whether the domestic and EU safeguarding regimes required a statutory trust, whether the asset pool included unsafeguarded shortfalls, and how that pool interacted with ordinary insolvency priorities.

1. Appeal and cross-appeal dismissed. The Electronic Money Directive (2009/110/EC), read with article 10 of the Second Payment Services Directive (2015/2366/EU), did not require a statutory trust. The required protection was insulation against the claims of an electronic money institution’s other creditors upon insolvency. A trust would create wider proprietary rights and remedies which the Directives did not require.

2. The alternative safeguarding method of insurance or a guarantee was inconsistent with any requirement that customers retain beneficial ownership of funds received by the institution. Under that method, the institution could use the received funds for its business. Neither the policy nor its proceeds were necessarily held for customers as trust property. The redemption provisions, including contractual fees and time limits, also pointed away from continuing proprietary ownership.

3. The Electronic Money Regulations 2011 did not themselves create a statutory trust. Their definition of electronic money, redemption regime, provision for estimated representative amounts, statutory-duty remedy and alternative safeguarding methods were inconsistent with such a trust. Mere segregation was insufficient to create one.

4. All funds received from electronic money holders fell within the required safeguarding protection. To conform with the Directives, “asset pool” in regulation 24 included not only assets actually safeguarded but also a sum equal to relevant funds which should have been safeguarded under regulations 21 or 22. The adverse effect upon other creditors was the intended consequence of insulating electronic money holders’ claims.

5. The costs of distributing the asset pool under regulation 24(2) included the costs of making good the pool where safeguarding had not occurred. Electronic money holders’ priority rights were best analysed as a statutory secured interest over the pool. They operated before, and outside, the ordinary waterfall under section 175 of the Insolvency Act 1986.

6. In any event, section 2(2) and (4) of the European Communities Act 1972 conferred power to implement EU obligations through secondary legislation even where this modified an existing Act. Regulation 24 was therefore capable of overriding or impliedly disapplying inconsistent insolvency priorities.

1. Court of Appeal (Civil Division): In [2022] EWCA Civ 302, the court unanimously dismissed both the Financial Conduct Authority’s appeal and the administrators’ cross-appeal.

2. High Court, Insolvency and Companies List: In [2021] EWHC 2163 (Ch), a deputy High Court judge held that the Electronic Money Regulations 2011 did not impose a statutory trust. He held that the regulation 24 asset pool included a sum equal to relevant funds which should have been, but were not, safeguarded.