On 8 February 2024, the FCA published a statement confirming that the Upper Tribunal (UT) had decided not to suspend restrictions that the Financial Conduct Authority (FCA) has placed on e-money firm Nvayo Limited (Nvayo). These restrictions, which appear on the FCA’s register, include restrictions on the business the firm can do. They were imposed by the FCA as a result of serious concerns it had about the firm, including its compliance with anti-money laundering (AML) rules.

The decision is a clear reminder for payment and e-money firms that they must have adequate systems and controls in place to combat the risk that they may be used for financial crime purposes and risk FCA intervention if they are not able to satisfy the regulator on this front. The UT judgment also highlights the importance of the fitness and propriety of beneficial owners and the need to manage carefully banking relationships, recognising that banks themselves need to manage their own regulatory position. The UT was unswayed by arguments in relation to the detrimental impact and frustration the restrictions have on Nvayo’s customers, or the impacts on staff and preserving the firm’s business, instead focussing on the need to protect the wider public against the risk of financial crime.

Background to the suspension application

Nvayo provides e-money and pre-paid cards and holds about 30,000 accounts. Its customers can transfer their e-money to others or spend it with certain retailers. Nvayo is authorised by the FCA under the Electronic Money Regulations 2011 (EMRs) which require a firm to safeguard clients’ funds (Regulation 20) and is also subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs). The EMRs allow the FCA to impose such requirements as it considers appropriate when authorising a firm and following authorisation (see Regulations 7 and 11). The grounds on which such requirements can be imposed include the protection of consumers. 

In May 2023, the US Department of Justice (USDoJ) arrested Nvayo’s ultimate beneficial owner (UBO), Christopher Scanlon, on charges of conspiracy to control and own an unlicensed money transmitting business in violation of US federal law. The FCA subsequently issued to Nvayo three Supervisory Notices (the Notices). Two Notices were issued in August 2023, the First Supervisory Notice and the Second Supervisory Notice (SSN), which were issued in response to Mr Scanlon’s arrest and failings alleged by the FCA in relation to the way Nvayo had dealt with this and the related investigation. Later, in November 2023, the FCA issued a Further Second Supervisory Notice (FSSN). This followed an AML review by the FCA which the FCA considered revealed significant deficiencies in Nvayo’s AML regulatory compliance. This review included a client file review in which the FCA found every file reviewed to be inadequate.

The Notices imposed requirements on Nvayo’s business which prevent Nvayo from carrying out new business; restrict Nvayo’s dealings in its own assets; and prohibit redemptions by an existing customer unless the appropriate AML due diligence in relation to the customer has been remediated to the satisfaction of an independent third party appointed under s166 Financial Services Markets Act 2000 (a Skilled Person).

Nvayo referred the SSN and the FSSN to the UT and applied for the suspension of the effect of the requirements pending the substantive hearing of Nvayo’s reference (under Rule 5(5) of The Tribunal Procedure (Upper Tribunal) Rules 2008).

UT findings

The UT’s power to suspend requirements pending the determination of a reference may be exercised where the UT is satisfied that such suspension would not prejudice: (a) the interests of any persons intended to be protected (whether consumers, investors or otherwise); (b) the smooth operation or integrity of any market intended to be protected; or (c) the stability of the UK financial system.

Where the UT is satisfied that granting a suspension would not prejudice the interests of consumers, the UT is not obliged to grant a suspension but must carry out a balancing exercise in the light of all relevant factors and decide whether in all the circumstances it is in the interests of justice to grant the application.

The UT refused Nvayo’s suspension application on the basis that the UT was not satisfied that there would be no prejudice to the interests of the relevant persons intended to be protected. The pre-condition for the exercise of the UT’s power to suspend under Rule 5(5) was not therefore met. In explaining the reasoning behind this decision, the UT made the following comments in relation to the requirements imposed on Nvayo:

(i) Requirement restricting Nvayo undertaking new business

Although Mr Scanlon was removed from the management of Nvayo in May 2023, the UT considered that this did not address Mr Scanlon’s continuing status as UBO. Owners are expected to be fit and proper and the fact that an owner is not involved in the management of the business does not divest them of their status as owner. Nvayo’s arguments that a sale of Mr Scanlon’s interest was imminent did not provide the UT with sufficient comfort.

The UT took into account that the US charges against Mr Scanlon remain to be determined, but commented that the criminal allegations are of a serious nature; they arise in the context of the same type of business as carried out by Nvayo; and they make specific reference to Nvayo. In the UT’s view, potential Nvayo customers, and the public more generally, would rightly be concerned if a firm could still take on new clients without any restriction whilst being owned by a person who remained subject to such serious criminal allegations, relevant to the business type of the firm.

Nvayo had four safeguarding accounts to comply with the requirements of the EMRs. After informing the relevant banks of Mr Scanlon’s arrest, three of these accounts were closed and the final one placed under review. In December 2023, the last of the banks notified Nvayo that it would close its account on 90 days’ notice (on 28 March 2024). In making its decision, the UT took into account the fact that Nvayo had received this notification of withdrawal of service and commented that prejudice would arise to any new customers who put their money into an account that would have to be closed and returned in short order. Nvayo argued during the hearing that it was confident the relevant bank could be persuaded not to close the account, but the UT did not consider that there was any firm foundation for that confidence.

In view of the combined concerns regarding the UBO and the bank account, the UT was not satisfied that the persons intended to be protected (who include future customers of the firm) would not be prejudiced if the requirement were to be suspended and new business were to resume.

(ii) Requirement restricting existing business

The effect of the requirements imposed on the firm’s existing business is that customers can only obtain repayment of the money in their account with the supervision of a Skilled Person.  Nvayo pointed to the detrimental impact this restriction had on its customers in terms of their being able to access their accounts and the knock-on effect on Nvayo’s relationship with its customers. However, in the context of AML risk, the UT considered that the persons intended to be protected by the restriction included the wider public and that the concerns raised by the FCA’s file review justified the restriction.

Whilst the file review only comprised ten client files, which represents a small proportion of the total amount of clients, the clients were selected as the top clients by transactional volume and/ or value data and the issues identified, which included lack of identity verification and risk assessment and omitting to obtain information on source of funds and source of wealth, are fundamental.  Although Nvayo used compliance tools, the UT found that these did not address all of the relevant compliance obligations, which required Nvayo’s interventions and oversight too.

Overall, the UT was not satisfied that there would be no prejudice to the persons intended to be protected by the relevant requirement (the public at large) if this requirement were to be suspended.

(iii) Assets requirement on Nvayo’s own assets

The FCA explained that an assets requirement will normally be imposed where there is a risk of the firm being wound down, the purpose being to facilitate any such wind down while allowing ordinary business expenses to be paid. The persons sought to be protected by such a requirement are existing account holders who will want to be assured that Nvayo has the resources to effect the return of their funds in the event of a wind down.

Nvayo argued this requirement is unnecessary because there has been no assets dissipation, nor is there any risk of asset dissipation. The UT took into account the fact that there is no reasonable certainty that the final Nvayo bank account will remain open and that closure will prevent Nvayo from carrying on in business (because it will be unable to comply with the relevant safeguarding obligations). The UT therefore concluded that there was an impending risk of wind-down.

Comment

The UT’s decision demonstrates that prevention is better than cure when it comes to the imposition of requirements by the FCA. Once subject to restrictions, the burden is on firms to satisfy the FCA that requirements are no longer necessary and the time-consuming process of challenging the FCA may not offer a practical solution whilst restrictions remain in force. Firms also need to think more broadly than their own customer base and consider the potential impact of any FCA concerns on the wider public and how they can demonstrate to the regulator that the interests of relevant persons are protected. Devoting resources to being able to evidence appropriate compliance arrangements and to proactively managing any regulatory review may assist in mitigating the risk of requirements being imposed and/or in getting any requirements removed as quickly as possible.    

Should you have any queries in relation to any of the points raised in this decision, please do not hesitate to contact any of the authors.