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How to properly safeguard clients’ funds

Pursuant to the legislation of the Republic of Lithuania, electronic money institutions (EMI) and payment institutions (PI) have a duty to safeguard the funds received from clients in one of the following two ways:

  • received funds have to be deposited in a separate account opened in a credit institution of the Republic of Lithuania (including a branch of a foreign credit institution operating in the Republic of Lithuania) or a credit institution of another Member State, the Bank of Lithuania or the central bank of another Member State, or invested in secure, liquid low-risk assets;
  • these funds have to be covered by an insurance policy, or a guarantee or a warranty statement must be obtained.

The most common way to safeguard the clients’ funds currently applied in practice is to separate and deposit them in a separate bank account.

The following two aspects should be taken into account in order to properly safeguard the clients’ funds:

First, when concluding an agreement with a bank concerning a bank account for depositing clients’ funds, there must be an express and unambiguous statement that this account shall be considered a deposit account used to deposit the funds of EMI or PI clients. Only in such cases, the funds deposited in this account will be properly secured in the event of EMI or PI insolvency. If this condition is not stipulated in an agreement between a bank and an EMI/PI, a bank account opened under such an agreement will not be considered as suitable for depositing clients’ funds.

As the Supreme Court of Lithuania has explained, “the bank and the client may agree that the account is a deposit account, regardless of the fact that this account expressis verbis is not named as a deposit account in the law, and this agreement shall have the force of law between its parties (Article 6.189(1) of the Civil Code)”. (Ruling in civil case No. 3K-3-337-690/2015 of the Supreme Court of Lithuania of 9 June 2015).

Second, the Law of the Republic of Lithuania on Insurance of Deposits and Liabilities to Investors provides that the deposits of financial institutions shall not be covered with the insurance. This means that in the event of bank bankruptcy an electronic money institution or a payment institution that deposits its clients’ funds in this bank will be included in the general list of bank creditors and will not receive any insurance compensations.

In the civil case No. e3K-3-124-611/2017 a court in cassation stated that “this principle [separation of funds] is not meant to secure the funds of users of payment services provided by a payment institution in the event of bankruptcy of a credit institution, in which a payment institution has a payment account and in which it keeps the funds of users of payment services, and does not determine an exception of the general rule enshrined in Article 6.913 of the Civil Code.”

The main ways to secure the funds of clients and an electronic money or payment institution in the event of bank bankruptcy are the following:

  • Diversification of funds in different credit institutions – opening accounts for depositing clients’ funds in several credit institutions and distributing funds in different accounts. This will help better manage the risk of loss of funds because if one credit institution goes bankrupt only part of all funds of the financial institution is likely to be lost.
  • Investments in secure, liquid low-risk assets, for example, debt securities. Securities kept in a financial brokerage firm or a credit institution will not be lost if these institutions go bankrupt, but instead, they will be transferred to another institution that may continue to keep these securities. Thus, in the event of bankruptcy of a credit institution assets in the form of securities are secured to a higher extent than money deposited in the account.
  • Depositing clients’ funds in the Bank of Lithuania being connected to the CENTROlink system.

This insight provides general information that cannot be considered as individual legal advice.

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