German government plans to clarify insolvency protection for payment service providers’ fiduciary accounts: ZAG reform in ZuFinG II
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What will change for online merchants and payment service providers? The planned ZAG reform in ZuFinG II promises significantly improved insolvency protection for customer funds in escrow accounts. Online merchants and other payment service users can breathe a sigh of relief, while payment service providers such as large online platforms will benefit from greater clarity and flexibility in implementing the requirements. But what exactly is changing and what are the practical implications of the reform? We shed light on the key points and provide an outlook on the future of customer money protection.
The planned revision of the Payment Services Supervision Act (ZAG) as part of the Second Future Financing Act (ZuFinG II), the draft bill for which was recently published by the BMF. Art. 41 No. 6 on p. 73 et seq. and the explanatory memorandum from p. 186 et seq.) provides significantly better and clearer insolvency protection for fiduciary accounts. Payment service users such as online merchants will benefit from extended protection measures for their funds, and payment service providers, especially large online platforms, will also find it easier to comply with the supervisory and insolvency law requirements of Section 17 (1) ZAG if the reform is implemented in this way.
So how does the change in the law provide better and clearer protection for customer funds in the event of insolvency? We shed light on the most important changes, their practical effects and the link to deposit protection.
Current challenges in securing customer funds
The current version of Section 17 para. 1 sentence 2 no. 1 lit. b Alt. 1 ZAG in conjunction with lit. c ZAG places special requirements on an open escrow account that is set up by a ZAG institution to manage payment service users’ funds on a fiduciary basis. Otherwise, e.g. if such a fiduciary account is not economically or organisationally feasible, the funds may, in accordance with Section 17 para. 1 sentence 2 no. 1 lit. b) Alt. 2 ZAG, the funds may instead be invested in secure liquid assets with low risk; it is also possible to secure funds by means of insurance or a guarantee in accordance with Section 17 para. 1 sentence 2 no. 2 ZAG.
In practice, client funds are currently usually secured via an open escrow account in accordance with section 17 (1) sentence 2 no. 1 lit. b Alt. 1 ZAG in conjunction with lit. c ZAG. The established case law of the Federal Court of Justice on insolvency-proof fiduciary accounts within the meaning of section 47 InsO (and pre-insolvency pursuant to section 771 ZPO) plays a decisive role with regard to the question of how the principle of immediacy and the principle of exclusivity/separation of assets (prohibition of asset commingling) applicable to such fiduciary accounts are to be applied. Even the merely minor and unintentional non-compliance with these principles could, under certain circumstances, lead to such an account possibly losing its fiduciary character, which would then also have been a supervisory violation of the ZAG.
In practice, some have also found that the supervisory authority’s interpretation of this tends to be somewhat restrictive and not always very practicable, although it has been possible to deal with this in practice. Nevertheless, it causes difficulties in practice, as the other previous security options in accordance with Section 17 ZAG (secure, liquid assets / insurance / guarantee) are not easy to implement, mean higher costs and there are also hardly any offers for such insurance / guarantees (or if there are, then not always in sufficient amounts and/or not on time, as some payment service providers have a seasonal business model with major differences in turnover).
Ultimately, however, the question always arose as to whether the previous processes, such as the open escrow accounts used as a market standard in practice, are legally compliant in the sense of the BGH case law on escrow accounts, i.e. whether the BGH case law still applies to these modern transaction modalities such as online trading at all. The draft bill addresses this question as a result.
Extended protection through ZAG amendment in ZuFinG II
The revision of Section 17 ZAG as part of the Second Future Financing Act aims to improve insolvency protection for fiduciary accounts. In addition to the tried-and-tested deposit of customer funds in fiduciary accounts at credit institutions, which is now to be clarified, the new regulation now also opens up the possibility of depositing funds with the Deutsche Bundesbank or other EU central banks. This extension increases the flexibility of institutions in safeguarding customer funds.
In practice, this means that payment institutions and could now have more and better options for keeping their customers’ funds safe. The option of depositing funds with central banks can be particularly attractive for larger institutions, as it allows them to avoid the risk of the account-holding credit institution becoming insolvent. However, it remains to be seen whether the central banks will want to formally offer such accounts in practice (and whether they will be willing/able to manage them technically). However, it is always to be welcomed if the legislator opens up further secure options for keeping customer funds safe under supervisory and insolvency law.
Key points of the planned changes
The planned revision of Section 17 (1) ZAG brings significant changes and clarifications:
“Section 17 (1) is amended as follows:
The following sentences are added:
“If the institution secures the funds received by depositing them in an open escrow account with a credit institution, payment service users or e-money holders shall have a right to the funds deposited on their behalf within the meaning of Section 47 of the German Insolvency Code and Section 771 of the German Code of Civil Procedure that justifies segregation and prevents disposal, provided that the funds can be determined at any time. As long as sums of money are still in the possession of the institution in accordance with sentence 2 (1) (b), they shall form a special estate until they are deposited in accordance with sentence 2 (1) (b), which shall serve to satisfy with priority the payment service users and payment service providers to whom these sums of money were to be transferred or transmitted. § Section 32 (3) Deposit law applies mutatis mutandis.”
The explanatory memorandum first states that the protection of trustors has so far been based on “generally applicable, non-codified rules”. The explanatory memorandum does not state this explicitly, but the fact that this has not been regulated by law to date is seen by some as a reason for the legal uncertainty in practice in this area. This is now to be changed by explicitly regulating the protection by law (and thus also by deviating from the previously relevant BGH case law on fiduciary accounts): Accordingly, the new provision of Section 17 ZAG establishes legal protection for funds held by payment service users and e-money holders in separate escrow accounts by inserting it. The planned new version of the provision, according to the explanatory memorandum,
“also clarifies that the funds received in the course of the provision of payment services (section 1 (1) sentence 2 numbers 1 to 6 of the ZAG) and the operation of the e-money business (section 1 (2) sentence 2 of the ZAG) remain beyond the reach of the institution’s general creditors: The payment service users and e-money holders should be able to oppose access under enforcement law by means of third-party proceedings pursuant to Section 771 of the German Code of Civil Procedure, and in insolvency proceedings relating to the institution’s assets they should have a right to segregation within the meaning of Section 47 of the German Insolvency Code. The [reform] thus draws the consequences under liability law from the fiduciary nature of the provision of payment services and the operation of the e-money business, which identifies the payment service user or e-money holder as the beneficial owner. Due to the processing of transactions by the institutions, it may be unavoidable that, for a certain period of time, funds are also held in an account used for the processing of payment services or the e-money business, to which the institution is the beneficial owner. This does not affect the protection of the funds received as long as the payment to the payment service users and/or e-money holders is prioritised and the payment to the service provider is only possible once all payment service users and/or e-money holders have been satisfied in full. In the event of a shortfall due to the withdrawal of funds for own purposes, the available funds would have to be divided pro rata between the payment service users and/or e-money holders. Otherwise, it is sufficient that the funds received in the segregated account can be clearly allocated to the individual payment service users and/or e-money holders on the basis of the institution’s bookkeeping as part of the asset segregation requirement inherent in the prohibition of commingling. The new regulation thus leads to a more precise implementation of the Second Payment Services Directive, the wording of which it is based on, as well as that of the other national transposition laws.”
This new version obviously takes up a number of suggestions and indications from practice that the current legal situation and supervisory practice could be better adapted to the European legal background and brings several significant improvements and clarifications compared to the current legal situation:
- extension of the custody options: The amendment now explicitly permits the safekeeping of client funds not only in fiduciary accounts at credit institutions, but also at the German Bundesbank or other EU central banks. This increases flexibility for the institutions and can lead to even greater security of the funds in certain cases.
- explicit right to separate satisfaction: The new version makes it unmistakably clear that payment service users have a right to separate satisfaction within the meaning of section 47 InsO and a right to bring third-party proceedings pursuant to section 771 ZPO. This was not formulated so clearly in the previous version, and certainly not explicitly in the legal text.
- introduction of a special fund: The new text introduces the concept of a special fund for funds that are still in the possession of the institution but are intended for deposit. This closes a potential protection gap and strengthens the position of customers in the critical phase between receipt of funds and deposit in the escrow account.
- clearer determinability requirement: The new version of the standard text itself emphasises the need for “determinability at any time” of the deposited funds. This creates more clarity with regard to the requirements for the accounting and management of customer funds by the institutions. This involves a certain amount of technical effort, but in practice it can certainly be achieved by many providers.
- reference to practice: thankfully, the explanatory memorandum addresses two practical issues that have caused headaches so far;
- Due to the processing of transactions by the institutions, it may be unavoidable that, for a certain period of time, funds are also held in an account used for the processing of payment services or the e-money business that are economically due to the institution. This does not affect the protection of the funds received as long as the payment to the payment service users and/or e-money holders is prioritised and the payment to the service provider is only possible once all payment service users and/or e-money holders have been satisfied in full.
- In the event of a shortfall due to the withdrawal of funds for own purposes, the available funds would have to be divided pro rata between the payment service users and/or e-money holders.
In fact, it can happen that parts of the funds received into an escrow account are actually economically, if not yet legally, due to the payment service provider. How quickly did these have to be transferred from the escrow account? Were they allowed to arrive there at all? It was unclear whether this affected the fiduciary nature of such an escrow account. In practice, it was unavoidable that something like this would occur, especially if payments were not received in individual cases but in larger collective amounts from other centres. Similarly, a formal shortfall could occasionally occur temporarily, even if this is regularly and quite certainly settled soon. Here too, the question of the fiduciary nature of the trust account was therefore possibly questionable in accordance with BGH case law. The explanatory memorandum together with the new wording of the standard suggests that this has been recognised by the legislator and regulated in such a way that it no longer shakes the fiduciary nature of the account.
Practical effects of the reform
The planned amendments take account of practical needs by enabling more flexible business processing and at the same time strengthening customer protection. The protection of customer funds is maintained as long as payment service users are given priority. This enables flexible business processing while at the same time safeguarding customer protection.
For the institutions, however, this also means that they will have to review their internal processes and systems and, if necessary, adapt them to fulfil the new legal requirements. This may require investments in IT systems and training for employees. At the same time, however, the reform also offers opportunities to strengthen customer confidence and possibly develop new business models.
Excursus: Fiduciary accounts and deposit protection
An important aspect that deserves attention in this context is the link between fiduciary accounts and statutory deposit protection. This concerns the question of what happens whenever it is not the trustor as the account holder who becomes insolvent, but the account-holding institution where the trust account is held. In principle, open fiduciary constellations are covered by the scope of protection of the deposit guarantee. This results in particular from the clarification pursuant to Section 7 (4a) EinSiG (Deposit Guarantee Act):
“If the account holder acts for the account of a third party, the third party shall be used as the basis for the cover amount in accordance with § 8, provided that the account is clearly labelled as an open fiduciary account in the account designation or should have been labelled as such and the existence of the fiduciary relationship is proven.”
This requires, in particular, that this escrow account is clearly labelled as such and that the amounts can be allocated to the trustors. This emphasises the importance of clean and transparent accounting on the part of ZAG institutions/payment service providers and e-money institutions.
However, it should be noted that pursuant to Section 6 No. 4 EinSiG, deposits of payment institutions are not subject to deposit protection. This apparent discrepancy is resolved by Section 5 (1) sentence 2 EinSiG in conjunction with Section 7 (4a), according to which the person of the trustor is decisive in the case of fiduciary accounts.
In practice, this means that customer funds held in fiduciary accounts are protected by the deposit guarantee scheme, even if the payment institution itself is exempt from this protection. This represents an additional layer of security for customers that goes beyond the provisions of the ZAG. In such cases, the deposit guarantee does not only take effect once for the holder of the trust account, but multiple times for all customers who have deposited or record individual contributions in the trust account as individual trustors.
Conclusion and outlook
The ZAG reform as part of ZuFinG II represents a significant step towards improving customer protection in payment transactions. It addresses the current challenges and aims to clarify the legal uncertainties. For payment institutions, this means an increased administrative burden on the one hand, but also the opportunity to strengthen the trust of their customers and improve their market position on the other.
The combination of improved insolvency protection and existing deposit protection creates a robust safety net for customer funds. The new provisions make the regulations clearer, more comprehensive and more practical overall. They directly address the uncertainties that have arisen in practice and create a more robust legal framework for the protection of customer funds at payment institutions and e-money institutions.
It remains to be seen how these new regulations will prove themselves in practice. Further adjustments may be necessary in the future in order to respond to new developments in payment transactions.
What do you think of these innovations based on your practical experience? Do you see further room for improvement in the area of customer money protection? Share your thoughts with us in the comments and discuss the impact of this important legal change with other experts.
