The fallout from the collapse of German payments giant Wirecard has engulfed the UK payment services sector after the financial watchdog ordered the company’s local subsidiary to stop doing business.
The Financial Conduct Authority’s (FCA) decision early on Friday (June 26) meant customers of high profile fintechs such as Curve, ANNA and Holvi found their cards issued by Wirecard Solutions Ltd (WCS) had become useless.
“We have been working closely with Wirecard UK and other authorities over the past few days to take action that protects consumers,” the FCA said in a statement.
“On June 26, we took additional measures to require the firm to cease all regulated activities in order to further protect customer money.”
The decision followed an order issued to Wirecard a day earlier, demanding it seeks permission before disposing of customer funds or transferring any assets to its German parent company, Wirecard AG, which announced on Thursday it is filing for insolvency.
WCS has not applied for insolvency, but Wirecard said it was considering whether its subsidiaries would need to do so. The company declined to comment on the FCA action.
Deepening the pain for Wirecard’s customers, Visa announced on Friday afternoon that it has “suspended payment authorisations” for all WCS cards. Mastercard also said that transactions on such cards “will be restricted”.
Payment service providers in the UK and the EU used the Newcastle-headquartered WCS, which holds an e-money licence, to issue prepaid cards and provide online banking services.
ANNA, a mobile bank for business customers, tweeted on Friday: “We are urgently recommending you withdraw your money from your ANNA account as soon as possible.”
It told customers “your money is safe, but you may not be able to access it” and urged them to empty their accounts through a bank transfer if their cards stopped working.
Holvi, a Finnish banking app, said in a notice to customers that its cards are “temporarily suspended” but said that customers’ funds are being safeguarded in banks across Europe.
The cards and money transfer functions of payment app Curve were also suspended. The fintech said it “currently relies on [WCS] for all its financial transactions” but was “already well on the way” to migrating away from Wirecard and that the outage should only last for a limited period.
Pockit, an account and payment app with some 500,000 customers, faced a barrage of concerns from anguished customers on social media. It reassured customers that their money is safe and that WCS safeguarded the funds with Barclays.
Thish De Zoysa, the founder of gift card provider Their Perfect Gift, criticised the FCA for stepping in without warning.
“The FCA has just knee-jerked and not thought through the ramifications for Wirecard’s customers. They allowed the German impact to probably cloud their judgement,” he told VIXIO PaymentsCompliance.
De Zoysa, a customer of WCS since March 2016, said: “The guys [at WCS] have been good guys, not ever had an issue with them.” The company has active cards issued “in the tens of thousands” but does not yet know whether it will have to re-issue them through another provider, he added.
Which?, the consumer group, said: “While the FCA has moved to protect people’s finances, this decision could have a severe short-term impact on those who have limited or no other options available as an alternative.”
“Affected firms should be urgently contacting customers proactively to provide clarity about what additional help they can offer those unable to access their funds, and give a timeframe for how long any disruption is expected to last.”
Under the FCA’s safeguarding rules, WCS is required to either segregate clients funds in an account at an EEA credit institution or in low-risk investments, or have equivalent insurance.
The collapse of such a large e-money institution, and the potential fallout for others, could cause the industry to revisit a long-simmering debate about incorporation of the e-money sector into the Financial Services Compensation Scheme, which covers deposits in banks and other major financial institutions.
“I think any case like this sort of reignites that discussion,” said Colin Sloan of consultancy FSCom. “There’s a reliance on the payment or e-money institution having got the process right.”
If the funds are not covered by the compensation scheme, any distribution is also slower and customers get less back because administrators of a collapsed firm deduct the costs, which can be significant if the case is complex.
There have been few recent cases where an e-money or payment institution that has been suspended by the FCA has resumed business, although payment app Glint Pay was rescued from insolvency last year.
Epayments Systems Ltd, which was placed under similar requirements in early February this year due to breaches of anti-money laundering rules, remains suspended and its customers have not been allowed to access their accounts since.
The FCA has made safeguarding of funds a major supervision priority and repeatedly warned firms to have wind-up plans in place so firms that fail do so in an “orderly” way.
The German financial regulator BaFin, which has been criticised by short-sellers who claim it ignored warnings about the true state of Wirecard’s finances, has also been rebuked by the European Commission, which has asked the EU’s markets regulator to investigate its handling of the case.
The European Securities and Markets Authority has been asked by the commission to conduct a “fact-finding analysis” that “should seek to establish a comprehensive description and assessment of the events, including the adequacy of the supervisory response to these events, leading to the collapse of Wirecard AG”, according to a letter reported by news agencies.