E-Money Institutions: A Complete Regulatory Guide

E-money institutions are a distinct category of FCA-regulated firm — subject to the Electronic Money Regulations 2011 rather than the Payment Services Regulations — with specific obligations around authorisation, capital, safeguarding and the redemption rights of e-money holders.

The e-money regime sits alongside the payment services regime but is not identical to it. A firm that issues electronic money — a digital store of value exchanged for funds that can be used for payment transactions — is an e-money issuer and must be authorised or registered as an e-money institution (EMI) under the Electronic Money Regulations 2011 (EMRs). Banks and building societies can issue e-money by virtue of their existing authorisation; all other issuers must obtain separate FCA permission.

What Is Electronic Money?

The EMRs define electronic money as electronically stored monetary value represented by a claim on the issuer, issued on receipt of funds, for the purpose of making payment transactions and accepted as a means of payment by persons other than the issuer. Three elements are required: the value is stored electronically, it represents a claim on the issuer rather than a deposit at a bank, and it is used for payments accepted by third parties.

Prepaid cards, digital wallets, stored value accounts and certain loyalty points programmes may constitute e-money. The defining characteristic is that the holder has a claim against the issuer — not against a bank — and can use the stored value to make payments to third parties. Where a payment account simply facilitates the movement of bank deposits, the operator may be a payment institution rather than an EMI; the distinction determines which regulatory framework applies.

Authorised EMI vs Small EMI

As with payment institutions, the EMRs create two tiers of regulatory status. An authorised electronic money institution (AEMI) can issue e-money and provide payment services without restriction on volume. A small electronic money institution (small EMI) can issue e-money where the average outstanding e-money does not exceed €5 million — calculated as a six-month rolling average — and where it does not provide payment services to third parties beyond distributing and redeeming its own e-money.

The FCA registration process for small EMIs is lighter than the full authorisation process for AEMIs, but small EMIs must still demonstrate adequate safeguarding arrangements, appropriate governance, and AML compliance. Any small EMI that exceeds the €5 million threshold must upgrade to full AEMI status — the transition involves a full authorisation application and is subject to FCA approval.

Capital Requirements for E-Money Institutions

AEMIs must maintain initial capital of at least €350,000 at the point of authorisation — significantly higher than the €125,000 minimum for authorised payment institutions. The ongoing own funds requirement is calculated as 2% of the average outstanding e-money over the previous six months. This ongoing requirement is in addition to the initial capital and must be maintained at all times.

The FCA expects AEMIs to maintain a buffer above the regulatory minimum, calibrated to the firm’s own assessment of the capital needed to support its business through a period of stress. Where an AEMI also provides payment services alongside e-money issuance, it must calculate capital requirements under both the EMR and PSR frameworks and maintain the higher result.

Safeguarding for E-Money Institutions

EMIs are subject to safeguarding requirements equivalent to those that apply to payment institutions under the Payment Services Regulations. All funds received in exchange for e-money that has been issued — but not yet redeemed — must be safeguarded. The obligation applies from the moment the EMI receives funds and issues e-money in exchange; the funds are at risk until the e-money is redeemed and the corresponding funds released from safeguarding.

The practical mechanics of EMI safeguarding — designated accounts, eligible institutions, acknowledgement letters, reconciliation and audit — are addressed in the Safeguarding Client Funds guide. The key distinction for EMIs is that the safeguarding obligation attaches to the outstanding e-money float rather than funds held temporarily during payment processing. Where e-money is outstanding for extended periods — as is common in prepaid card programmes — the safeguarding operation involves managing a material ongoing balance.

Redemption Rights

E-money holders have a statutory right to redeem their e-money at any time for its par value in cash or by transfer to a bank account. This right cannot be waived by contract. The EMI may charge a fee for redemption only where the redemption request is made before the contract end date, or after more than one year from the contract end date; redemption at the contract end date must always be free of charge.

The redemption right is one of the fundamental features that distinguishes e-money from a deposit. A bank deposit is a liability of the bank held subject to the bank’s terms; an e-money balance is a liability of the EMI redeemable on demand. This structural difference is why the safeguarding regime exists: without it, the e-money holder’s redemption claim would rank pari passu with other unsecured creditors in an insolvency.

Payment Services Provided by EMIs

AEMIs can provide payment services alongside e-money issuance, subject to PSR conduct requirements. This is common in practice: a digital wallet provider issues e-money when customers load funds and provides payment services when those funds are used for transactions. The e-money issuance and the payment service are distinct regulated activities, each with its own regulatory obligations.

Where an AEMI provides payment services, it must comply with the PSR conduct rules — information requirements, transaction timeframes, SCA and liability for unauthorised transactions — in addition to the EMR capital and safeguarding requirements. The combined compliance framework is more demanding than either regime alone, which is why dedicated compliance resource is important from the outset.

EMI Authorisation: The FCA’s Approach

The FCA’s authorisation assessment for AEMIs follows a similar framework to its assessment for authorised payment institutions. The FCA considers the firm’s regulatory business plan, financial projections, governance structure, safeguarding arrangements, AML compliance framework and the fitness and propriety of its senior managers. EMI-specific considerations include the adequacy of the safeguarding methodology for the e-money model proposed, the robustness of the redemption mechanism, and the capital adequacy of the firm at launch.

The FCA has in recent years applied greater scrutiny to EMI applications from firms with novel or complex business models — particularly those where the boundary between e-money issuance and deposit-taking is unclear, or where the safeguarding arrangements involve complex custody or investment arrangements. Firms in this category should expect a more detailed application assessment and should ensure their compliance and finance leadership are well-resourced before submitting.

SMCR and Governance

The SMCR applies to FCA-authorised EMIs. Senior manager functions applicable to EMIs include SMF1 (CEO or equivalent), SMF16 (Compliance Oversight Function) and SMF17 (MLRO) — where the EMI is subject to the Money Laundering Regulations. The governance framework must include adequate board oversight of safeguarding, capital adequacy, AML compliance and operational resilience, with management information reported to the appropriate seniority.

Key References

• Electronic Money Regulations 2011
• FCA — Payment services and e-money firms
• Payment Services Regulations 2017