20200701 Wirecard : the FCA’s freezing of assets.

In or about 2007, the British government, using an extremely dubious device of alleging economic terrorism which the Chancellor of the Exchequer, Gordon Brown, or someone in his team made up as an excuse, froze the accounts of Landsbanki, a privately owned Icelandic bank that entered an insolvency process.

Brown went further and used that as a reason to seize the assets in the UK of another : Kaupthing Singer & Friedlander, the UK subsidiary of another Icelandic bank, Kaupthing.

The reason was simple: the money wasn’t protected under the UK’s deposit schemes and the Icelandic scheme would be overwhelmed if either of those banks failed leaving customers in the UK with no effective redress.

So, Brown’s nuclear option was a pre-emptive strike.
While his methods were legally dubious, his tactics were good: grab the money before anyone else can get to it.

That’s what the FCA was doing in relation to Wirecard, but in this case on far more solid legal ground.

In 2017, China, in the aftermath of a rash of PayTech frauds, realised that the FinTech sector was out of sync with the banking sector.

FinTech had light regulation and a free-wheeling attitude.

What happens, the People’s Bank of China asked, if a FinTech company collapses?

The solution implemented by the People’s Bank was simple: in the absence of the ring-fencing of the actual funds held for customers (that’s a technical difference that we don’t need to consider here), the payments company must hold, in a separate and secure account, a form of trust account, an amount equal to the amounts deposited by customers. In one fell swoop, albeit in a roundabout way, the problem was solved – and it makes sense: banks have a capital adequacy requirement, why not FinTech companies and why should that not be the amount that it owes customers so that it cannot use customers’ money for its own purposes?

Equally, a FinTech of this sort is not a regulated lender so it can’t lend it out.