Delegated FSCS protection - fintechs

nrsql

Just been reading about an issue in the states and wonder if the same could happen in the UK. Not sure how much of this is true but using multiple companies sounds like a common ploy to get round regulations.

Yotta (a FinTech) looked like a bank and claimed deposits were protected but it actually accepted deposits, sent it to a processing company, Synapse, which then accumulated into a single account and sent it to Evolution which held a banking licence and the protection.

Looks like Yotta and Evolution were viable but Synapse went under. As Yotta and Evolution were fine the protection didn't kick in and Synapse was closed down but was only a processing conduit and didn't present useful accounts. Means that depositors were just offered about 0.01% - I guess from liquidators. Yotta is now just an online gambling site.

Probably in the UK checking the FRN would highlight the issue or maybe regulations would stop such an institution from looking like a bank - though action taken is generally slow.

masonic

There are quite a few fintechs in the UK that don't have a banking licence and use third party payment providers and third party deposit takers (Raisin, Plum, Trading212, Tembo, Flagstone, etc). But the payment providers must at least have e-Money permission from the FCA, and some are banks in their own right (e.g. Clearbank).

In the event the payment provider goes under, then that could lead to a period where withdrawals and deposits can't be processed, but it wouldn't change the T&Cs of the account. One would hope it wouldn't take a very long time for the fintech to recruit an alternative TPP and be back up and running.

We obviously have a robust complaints process backed by the Financial Ombudsman Service in the UK, but one could imagine a situation where a fintech might fail owing to a mass of compensation claims if people got locked out from accessing their money for a period of time. Depending on the regulatory permissions the fintech had, FSCS might step in to cover FOS compensation or might not.

Maegi

https://forums.moneysavingexpert.com/discussion/comment/82048889#Comment_82048889

Your entire last paragraph makes no sense and appears complete conjecture.

Why (and how) could the FOS demand the FSCS steps in when the failed entity isn't even a member? If you want FSCS protection, deposit with an actual member of the scheme.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82049224#Comment_82049224

Perhaps you didn't read and understand the last sentence of my post.

Trading212, for example doesn't have a banking licence, but is FCA authorised with Client Money permission and is a member of the FSCS. If it were to fail under the weight of legally binding FOS compensation claims, those decisions relating to its control of client money (the relevant regulated activity) could be taken to the FSCS alongside any claims for shortfalled assets due to the administration process. The FSCS would meet the failed firms obligations for the relevant financial service up to the £85k limit, while compensation for lost interest due to maladministration of client money would likely be just a few hundred pounds at worst. There's little chance of it actually happening by a similar route as Yotta because T212 uses JP Morgan Chase as it's third party payment provider and this major bank is extremely unlikely to fail. Furthermore, T212 has a very profitable CFD-trading arm to its business, which cross-subsidises its other activities.

There is precedent for FOS claims being taken to FSCS in the failure of firms such as SVS Securities. Although it wasn't easy to get such a claim accepted, it came good in the end.

If the firm doesn't have relevant regulatory permissions and therefore isn't required to be part of the FSCS (e.g Raisin), then that route wouldn't exist.