In our article from July 5, 2023 “The EU Commission’s proposals for PSD3 and PSR – an initial overview“, we provided an initial insight into the most important changes under PSD3 and PSR. The Commission’s proposals for PSD3 (“PSD3-E”) and PSR (“PSR-E”) also contain innovations with regard to the safeguarding of customer funds.
Table of Contents
The Commission’s proposals are not yet final, as the legislative process is still ongoing. On February 21, 2024, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published its report on the Commission’s PSD3 draft, in which it proposed several amendments, including with regard to customer money protection. The ECON report on the PSR followed on 22.2.2024. An overview of the proposed amendments in the ECON reports can be found in our article from 23.4.2024 “Changes to the ECON reports for PSD3 and PSR drafts”. The Council is currently discussing the drafts. It therefore remains to be seen whether and which changes will be reflected in the final versions of PSD3 and PSR.
Customer money protection – what, why and how?
Art. 9 PSD3-E (previously regulated in Art. 10 PSD2 and nationally in Section 17 ZAG) stipulates the so-called safeguarding requirements for payment institutions with regard to customer funds (in short: customer funds safeguarding). Client funds are funds received by payment institutions for the execution of payment transactions. Customer funds must be safeguarded by payment institutions – particularly in the event of insolvency. The background to this is that these funds are not covered by the statutory deposit protection within the meaning of the German Deposit Protection Act (EinSiG) (as is the case for CRR credit institutions, for example). The purpose of the obligation to protect customer deposits is therefore to protect creditors. For this reason, customer money protection is also one of the most important obligations that payment institutions have to fulfill. We have already described the general requirements for customer money protection in our article from 20.5.2021 “How safe is my money?” About customer money protection at payment and e-money institutions“.
Art. 9 para. 1 subpara. 1 a) PSD3-E initially regulates the so-called prohibition of commingling, according to which client funds may not be commingled with other funds at any time; i.e. client funds must be kept separate (so-called segregation requirement).
To fulfill the security requirements under Art. 9 PSD3-E, a payment institution generally has two security methods to choose from:
Hedging method 1 (“fiduciary solution”)
Client funds may be held by the payment institution
- deposited either in a fiduciary account with a credit institution or with a central bank (Art. 9 para. 1 subpara. 2 a) PSD3-E)
- or in safe assets (as determined by the competent authorities of the home Member State) (Art. 9 (1) (2) (b) PSD3-E).
Security method 2 (“guaranteed solution”)
Client funds may also be held by the payment institution
- by means of insurance (Art. 9 para. 1 subpara. 1 b) Alt. 1 PSD3-E)
- or with the help of a comparable guarantee (Art. 9 para. 1 subpara. 1 b) Alt. 2 PSD3-E).
In practice, the “fiduciary solution” hedging method in the form of an open fiduciary account is often chosen. Let’s take a closer look at this.
Problems in practice…
Payment institutions must meet the requirements for customer money protection, which are a prerequisite for obtaining a ZAG license, among other things. In order for payment institutions to meet the safeguarding requirements with the help of the above-mentioned “fiduciary solution”, they must first (be able to) open an open fiduciary account with a credit institution. In practice, payment institutions face considerable challenges when opening open escrow accounts (especially at the stage of applying for a ZAG license). In many cases, credit institutions refuse to open corresponding fiduciary accounts for payment institutions because they consider the associated risk of money laundering and terrorist financing to be too high. The obligation of payment institutions to safeguard customer funds is often in conflict with the obligations of credit institutions under money laundering law.
… solved by innovations in the PSD3/PSR?
The practical difficulties faced by payment institutions when opening accounts with credit institutions are explicitly mentioned in the proposals for PSD3 (see also recital 31 PSD3-E) and PSR (see also recitals 35 and 36 PSR-E). For example, Art. 9 PSD3-E and Art. 32 PSR-E include the following proposals:
- Credit institutions may only refuse to open an account for a payment institution in certain exceptional cases (see Art. 32 para. 1 PSR-E).
- In future, payment institutions will also have the option of depositing customer funds with a national central bank (if this is offered) (see Art. 9 para. 1 subpara. 2 a) Alt. 2 PSD3-E).
- In order to avoid so-called concentration risks, payment institutions must ensure that not all client funds are secured by the same security method. Client funds should also not be deposited with a single bank (see Art. 9 (2) PSD3-E).
Right to open an account with a credit institution
Credit institutions should generally provide payment institutions with an account. Only in exceptional cases may credit institutions refuse to open an account; this would require one of the cases listed in Art. 32 (1) PSR-E (e.g. serious suspicion of money laundering, breach of contract, submission of insufficient information/documents, etc.). The ECON report on the PSR provides for a change to these grounds in that a refusal should only be justified on objective, non-discriminatory and proportionate grounds. Art. 32 PSR draft is therefore intended to strengthen the right of payment institutions to open an account with a credit institution. From now on, the credit institution must justify the refusal in writing and in detail. The justification may not be of a general nature; rather, it must specifically address the risks (cf. Art. 32 para. 3 PSR-E). In the event of a refusal, the payment institution may lodge a complaint with the competent national authority (cf. Art. 32 para. 4 PSR-E).
Alternatively – collateralization at national central banks
In view of the difficulties payment institutions face when opening accounts with credit institutions, PSD3 now provides an additional option for safeguarding customer funds. Instead of credit institutions, it will now also be possible to deposit funds with the national central bank of the respective member state. However, the central banks are not obliged to offer this option. Rather, this is at the discretion of the respective central bank (see Art. 9 para. 1 subpara. 2 a) Alt. 2 PSD3-E). It therefore remains to be seen how this new option will be implemented in Germany and whether the Deutsche Bundesbank will offer this option.
Avoidance of concentration risks
Payment institutions should avoid the so-called concentration risk so that they can ensure the protection of customer funds as comprehensively as possible. This exists in particular if all client funds are deposited with a single credit institution. Art. 9 para. 2 PSD3-E stipulates that payment institutions should not use the same safeguarding method for all client funds. This would also have clarified the previous question of whether a payment institution may combine different safeguarding methods, i.e. whether one safeguarding method should always be used for all client funds or not. Rather, Art. 9 (2) PSD3-E now clarifies that different safeguarding methods should be used for all customer funds, i.e. customer funds could, for example, be safeguarded in part by depositing them in escrow accounts and in part by taking out insurance or a comparable guarantee. In the light of creditor protection and to avoid concentration risks, payment institutions should in future not (or no longer) deposit all customer deposits with one and the same credit institution, but should distribute the customer deposit guarantee among various credit institutions.
Conclusion
The innovations in relation to safeguarding customer funds are to be welcomed in principle, particularly in light of the considerable difficulties that payment institutions face in practice (especially at the stage of applying for a ZAG license). Payment institutions can only effectively fulfill their obligation to safeguard customer funds within the framework of the “fiduciary solution” if they are guaranteed access to fiduciary accounts. At the same time, however, this poses new challenges for credit institutions in meeting their obligations under money laundering law. In order to defuse this tension, Art. 32 (5) PSR draft provides for the EBA to develop technical regulatory standards in which the reasons for refusing access to escrow accounts are specified.
