Could regulators have avoided disrupting European fintechs in the wake of the Wirecard scandal last month?
That's the question now on fintech leaders' lips, a fortnight after UK regulators temporarily suspended Wirecard Card Solutions (WCS) following insolvency filings by its German parent company.
The shock move prompted up to 70 fintech clients who rely on WCS — including Curve, Pockit and Soldo — to suspend operations, simultaneously freezing hundreds of thousands of customer accounts for several days.
Now, Nigel Verdon — founder of banking platform Railsbank — is joining calls for the regulator to improve its guidance around e-money institutions like WCS, arguing a revisal is much overdue and could prevent future disruption.
"The WCS saga could have been avoided if the right regulatory regime had been put in place," Verdon told Sifted. "The Wirecard scandal brought to light [that] fundamental changes should be made in the industry to ensure healthy market growth and stability."
At the heart of the debate are long-standing concerns around how e-money institutions "safeguard" user funds and how they demonstrate their adherence to the regulator — the Financial Conduct Authority (FCA).
Verdon argues that gaps in the FCA's guidance leaves room for doubt about the protection of consumer funds, and ultimately forced the FCA’s hand in suspending WCS last month. In doing so, he echoes claims by former regulator Alison Donnelly that the existing guidance around safeguarding creates "confusion" and ambiguity about how closely institutions are sticking to the rules.
Similar comments were made last week by a fintech founder affected by the WCS suspension, telling Sifted: “[The FCA] should have been investigating their approach to [fund] safeguarding a long time ago and been getting comfortable around it. Instead, they were lazy and then freaked out after the German company filed for insolvency.”
They added: “The FCA could have handled this a lot better."
Nonetheless, another founder in the space disagreed with Verdon's diagnosis. They told Sifted that the FCA's decision to suspend WCS was more likely prompted by the fact its parent company, Wirecard, was accused of fraud, rather than legal loopholes or ambiguity.
Long time coming?
The Wirecard fiasco is not the first time that UK e-money rules have been brought into question. The debate came to a head again last year when another fintech, Ipagoo, collapsed and led to thousands of customer accounts being frozen without warning.
That raised another issue; namely that, unlike banks, e-money companies don't currently need a wind-down plan, meaning if they cease operations, there aren't clear procedures around returning funds to clients or minimising the disruption.
The FCA seems to have acknowledged these concerns, announcing in May that it was looking into e-money regulations and open to recommendations from the industry.
Nonetheless, Verdon — whose company Railsbank also operates under e-money rules — said it's still unclear what exactly the new guidance will entail, or when a final version will be issued and implemented.
He also argued that in addition to the FCA's current draft proposals, the regulator should move e-money safeguarding regulations under UK trust law, rather than sitting under the Financial Services and Markets Act. This, he said, would remove "ambiguity...and legal uncertainty" around whether company liquidation law could override safeguarding protections and allow administrators to seize user funds.
Verdon also called for a united response from other fintechs; several of which have privately criticised the regulator following the WCS fallout.
A spokesperson for the FCA told Sifted:
"Reducing the risk of harm to customers (and particularly the loss of their money) in the payments sector has been a priority area for the FCA for some time...More generally, the FCA will continue to proactively supervise firms in this sector [including WCS] and will act swiftly to protect customer money where firms fail to meet safeguarding and other key regulatory requirements."
Note: This piece has been updated to reflect the FCA's comment. Following the publication of this article, the FCA also issued a letter which concludes the consultation launched in May and outlines their final guidance for payments firms. This guidance is temporary and a full consultation is due later in the year.