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Requirements for safeguarding of customer funds in Fintech companies: is there any upcoming changes?

Requirements for safeguarding of customer funds in Fintech companies: is there any upcoming changes?

05/12/2019

Proper is the principal aspect of stable and reliable operation of the electronic money and payment institution.

Conditional Licensing – what is that?

The Bank of Lithuania will issue conditional licensing for an electronic money and payment institutions, which, at the time of licensing, have not provided the evidence about the factual implementation of client money protection measures. The Board of the Bank of Lithuania has already issued such electronic money institution license to ECOVIS ProventusLaw client UAB Guru Pay with a condition that the company will provide the Bank of Lithuania with evidence of proper implementation of customer funds protection measures prior to commencement of licensed financial services.

The laws on electronic money, electronic money institution and payment institution requires that money received from the client by EMIs/PIs be protected in following ways:

– By separating customers’ funds from other funds and keeping them in a separate account with the Lithuanian or other Member State of the European Union credit institution,

– By investing in secure, liquid or low-risk assets,

– By insuring the funds received from clients, having a guarantee or warranty letters issued by an insurance company or credit institution of the Republic of Lithuania or a Member State of the European Union.

The most common practice is to separate clients’ funds from own funds and keep them in separate account with a credit institution.

Financial institutions have already received and may face future fines from the Bank of Lithuania for violations on laws of client money protection.

Analysis of possible alternatives

In practice, EMIs/PIs are constantly challenged to meet the client money protection requirements. Having regard to the need to ensure adequate client money protection in the electronic money and payment institutions sector, the Bank of Lithuania explored possible alternatives and in December 3, 2019 announced the results of a public consultation “Increasing the Protection of Customer Funds Held by Payment and Electronic Money Institutions”:

1. The possibility of keeping EMI/PI customer funds with the Bank of Lithuania will not be further developed, as such a possibility has been already implemented for users of the CENTROlink payment system. As CENTROlink users account for over 95% of the EMI/PI market by the amount of customer funds (liabilities to customers), an additional solution for other EMIs/PIs would offer little added value.

2. The Bank of Lithuania plans to update the Requirements Concerning Internal Control, Risk Management and Protection of Received Funds and to more explicitly clarify which funds should not be kept in a separate client funds account with a credit institution, which investments are deemed secure, liquid low-risk assets, and how these funds should be segregated from other investments of own funds of the institution.

3. The inclusion of EMI/PI customer funds kept with credit institutions into the deposit insurance system and the
consolidation of the status of a trust deposit at the national level would only have a limited effect. Therefore, it
is proposed that the possibilities of the implementation of these national measures should not be pursued any
further.

4. The Bank of Lithuania will seek that the issue regarding increasing of the protection of EMI/PI customer funds was discussed at the EU level.

ECOVIS ProventusLaw suggestions

It is vital for the EMI/PI to have an internal client money protection procedure, that includes a description of the administration and reconciliation processes, to ensure that client funds are protected against payment institution creditors; the number of persons who have the access to the client money protection account and its functions; timely submission of reports to the Bank of Lithuania and etc.

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