Changes to the German safeguarding regime of customer funds pursuant to Section 17 of the German Payment Services Supervisory (ZAG), which will be amended by the new law for urgent changes in the financial market and tax area.
With the law for urgent changes in the financial market (draft version) passed by the Bundestag on 30 January 2025, the legislator quickly did some homework. Among other things, it includes a long-requested amendment to Section 17 ZAG, which concerns the safeguarding of customer funds by payment and e-money institutes. The law requires approval by the German Bundesrat and needs to pass in there as well. If it is signed into law, the new Section 17 ZAG is to apply from 9 April 2025.
Section 17 ZAG will read as follows (changes highlighted)
(1) Institutions that provide payment services in accordance with Section 1 para. 1 sentence 2 nos. 1 to 6 or that operate an e-money business shall safeguard the funds that they have received from payment service users or through another payment service provider for the execution of payment transactions or the issuance of e-money in accordance with methods 1 or 2. The funds
- a) shall not be co-mingled at any time with the funds of any natural or legal person other than payment service users or e-money holders on whose behalf the funds are held,
- b) shall, where they are still held by the institution and not yet delivered to the payee or transferred to another payment service provider by the end of the business day following the day when they have been received, in an escrow, a separate account at a credit institution or an account at the Deutsche Bundesbank or at another central bank of a Member State of the European Union at their discretion or in secure, liquid low-risk assets after consultation with the supervisory authority; In this respect, the supervisory authority may, at its due discretion, exclude generally recognized assets in individual cases in accordance with Sec. 1 para. 31 if the categorical classification as secure, liquid assets with low risk does not appear objectively justified with regard to the objective recoverability of the collateral, in particular maturity and other relevant risk factors, or
- c) they shall be segregated from the institution’s other assets in such a manner that in the event of insolvency they will not form part of the institution’s insolvency estate and its creditors will not have access to them, even by way of individual enforcement, or
- be secured by an insurance or other comparable guarantee from an insurance company or credit institution that is authorized to conduct business within the jurisdiction in which the payment institution is licensed and that does not belong to the same group as the institution itself, in the amount corresponding to that which, in the absence of the insurance or other comparable guarantee, would have to be held separately and which is to be paid out in the event of the insolvency of the payment institution.
If the institution secures the funds received in accordance with method 1 by depositing them or investing them in secure, liquid low-risk assets, the deposited funds or the secure, liquid low-risk assets shall be deemed to belong to the clients in relation to the institution’s creditors. The Federal Financial Supervisory Authority may, at its due discretion, require the institution to use one of the two methods described in sentence 2.
What are the changes concerning escrow accounts?
Previously, Section 17 para. 1 no. 1 lit. b ZAG stipulated that customer funds still in the possession of the institution must be deposited in an open escrow account at a credit institution. According to the legislator, this is now to be “a segregated account at a credit institution or an account at the German Bundesbank or another central bank of a member state of the European Union at their discretion”. With the term “segregated account”, the legislator follows the terminology of Art. 10 para. 1 lit. a PSD2.
Escrow accounts are no longer required; a separate account is sufficient
Apart from deposits with the Bundesbank or another central bank, it is now sufficient to deposit customer funds in a segregated account instead of an escrow account. However, this does not necessarily mean that all escrow agreements must be terminated. An escrow account is also a segregated account. The escrow agreement will no longer be necessary in the future, but it should not be detrimental and may even be helpful with regard to German deposit protection (cf. below).
Insolvency remoteness is ordered and not just required
Previously, Section 17 para. 1 no. 1 lit. c ZAG required the institution to ensure that customer funds were protected in the event of insolvency. This caused particular problems with regard to payments made by the institute to the escrow account that had to be made to compensate for a shortage of incoming payments (e.g. due to chargebacks). In practice, this could only be solved by complex account structures and was always subject to the threat of not being insolvency proof. The legislator has now provided clarification by stating that the funds deposited in segregated accounts or in secure liquid assets are allocated clearly to the customers and not the institute. According to the explanatory memorandum to the law, this means that customers should have a right to separation of any funds deposited in this way in accordance with Sec. 47 of the German Insolvency Code (InsO) and that these should also be protected from third-party enforcement proceedings, because the third-party action against execution pursuant to Sec. 771 of the German Code of Civil Procedure (ZPO) provides them with a suitable right of intervention.
According to the explanatory memorandum to the Act, it should even be possible for the institution to add own funds to the segregated account to compensate for any shortfall. However, it remains important that the funds can be clearly allocated to the respective customer at any time on the basis of the institution’s accounting records. The legislator states in this regard:
“Due to the processing of transactions by the institutions, it may be unavoidable that, for a certain period of time, funds economically owed to the institution are also held in an account used for processing payment services or e-money transactions. This does not affect the protection of the funds received. In the event of a shortfall, e.g. due to a lower payment to the payment service provider by a payment system operator, the institution’s own assets can still be transferred to cover any shortfalls for the benefit of the payment service users or e-money holders. Otherwise, it is sufficient that the funds deposited in the segregated account or invested in secure, liquid, low-risk assets can be clearly assigned to the individual payment service users and/or e-money holders on the basis of the institution’s accounting.
This clarifying explanation is a great help in practice. It would have been even better to include this not only in the explanatory memorandum but also in the law itself, in order to create real legal certainty.
However, a few questions remain.
So far, the requirements for escrow accounts are included in BTO 1 ZAG-MaRisk. There will certainly be a corresponding adjustment to the requirements after the changes come into force, from which the specific practical implications will then be set out for the institutes.
Unfortunately, in the rush, the legislator has probably overlooked a few consequential amendments:
The new Sec. 57a ZAG speaks of an escrow account instead of a segregated account.
The law for urgent changes in the financial market also provides for a new Sec. 57a ZAG, which enables payment institutes and e-money institutes to participate directly in payment systems. The requirements for this are listed in Sec. 57a ZAG. It is then pointed out that “the number and functions of persons who have access to the escrow account” must be specified. However, the escrow account has just been abolished and transformed into a segregated account.
Deposit protection only with an escrow account
According to Sec. 7 para. 4a of the German Deposit Guarantee Act (EinSiG, the coverage for deposit protection in the case of an open escrow account depends on the customers and not on the account holder, i.e. the institution. This is an advantage for customers because they are usually entitled to deposit protection in contrast to deposits of payment and e-money institutions, which are excluded under Section 6 no. 4 EinSiG. Although there is no legal requirement for payment and e-money institutions to ensure that customer funds are subject to deposit protection, if an institution promises customers an escrow account at a German credit institution for purposes of safeguarding, for example in the payment service framework agreements, a change to a segregated account without an escrow agreement would be a disadvantage for customers. In this case, it would be helpful if the legislator were to make further adjustments or to clearly state that deposit protection for customer funds of payment and e-money institutions is not desired under supervisory law because otherwise the protection of customer funds would be the same as for those at a bank.
Section 17 of the German Credit Secondary Market Act (KrZwMG)
According to Sec. 17 KrZwMG, credit service institutions are also obliged to maintain a separate escrow account for the funds received from borrowers. The problems of insolvency protection arise in a similar way in the KrZwMG as in the ZAG, since Sec. 17 KrZwMG is also very much modeled on Sec. 17 ZAG. Unfortunately, however, Sec. 17 KrZwMG has not been changed, which means that the previous problems of Sec.17 ZAG with regard to insolvency law remain the same for credit service providers.
