GUEST BLOG: Don’t get caught out by Client Money Protection rules

One of the core issues that has been highlighted since the collapse of outsourced property management firm ARPM is whether client funds are held in an Electronic Money Institution (EMI) regulated by the FCA or a Bank regulated by the FCA.

EMIs were originally facilitated by HM Treasury and the FCA who wanted FinTech businesses to create products and to service sectors that the banks didn’t want to support.

The key difference between an EMI and a bank is the fact that an EMI holds the funds and mirrors 102% of all the funds in an account directly with the Bank of England. This means that if an EMI were to fail, the agent would get 100% of client funds returned.

RESPONSIBILITY

By comparison, a bank takes client funds and uses them to finance loans and mortgages, that is why interest is payable with a bank but not an EMI. However, if the bank were to fail, an agent could only claim back up to £85,000 using the Financial Services Compensation Scheme (FSCS), the rest would be their responsibility.

If the accounting software business were to fail, all client funds could be lost.”

If an agent is using a leading automated client account software which opens a bank account for them, that account is not covered by the FSCS scheme at all. This would mean that if the accounting software business were to fail, all client funds could be lost.

Over the last few months, it has become apparent some traditional CMP schemes have turned away from the benefits and security EMI’s bring as they are focused on a definition of a bank in legislation that was written by housing experts and not banking experts.

There could be many reasons for this change of heart by CMP providers such as commercial pressures and fear of change but unfortunately there has been a lack of willingness to listen and understand the security benefits EMI’s offer.

AUTOMATION

But products that work with an agent’s client bank account to ensure they receive all of the automation benefits and satisfy the traditional CMP schemes new stance are available.

An important word of warning though. Not all bank accounts offer FSCS protection, especially if they have been offered by an automated client accounting platform or a CASP (Client accounting service provider).
This means that if the agent’s CASP or the client accounting platform were to fail, all of the funds held could be lost. We recommend all agents that are unsure if their client bank account is covered by FSCS to get in contact with their provider or ourselves and get confirmation that they are protected.

Innovative change takes time and we are certain that, as security and protecting the clients’ funds was the whole essence of the CMP regulation, they will soon come to recognise that EMI’s are the safest place for these funds to sit.

Don’t get caught out.

Garrett Foxon is the Founder and Chief Executive of LettsPay