The collapse of outsourced property management firm ARPM has highlighted the issue of whether client funds are held in an electronic money institution (EMI) regulated by the FCA or a bank regulated by the FCA, according to Garrett Foxon, CEO of Lettspay.

EMIs were originally facilitated by the Treasury and the FCA, who wanted FinTech businesses to create products and to service sectors that the banks didn’t want to support.

The key difference between an EMI and a bank is the fact that an EMI holds the funds and mirrors 102% of all the funds in an account directly with the Bank of England. This means that if an EMI were to fail, the agent would get 100% of client funds returned. By comparison, a bank takes client funds and uses them to finance loans and mortgages, which is why interest is payable with a bank but not an EMI, Foxon explains.

However, he points out that if the bank were to fail, an agent could only claim back up to £85,000 using the FSCS scheme, and the rest would be their responsibility. “If an agent is using a leading automated client account software which opens a bank account for them, that account is not covered by the FSCS scheme at all,” Foxon adds. “This would mean that if the accounting software business were to fail, all client funds could be lost.

“Over the last few months, it has become apparent some traditional CMP schemes have turned away from the benefits and security EMI’s bring as they are focused on a definition of a bank in legislation that was written by housing experts and not banking experts,” Foxon says.

“There could be many reasons for this change of heart by CMP providers: commercial pressures; fear of change; but unfortunately, to date, there has been a lack of willingness to listen and understand the security benefits EMIs have on the protection of client funds.”

With the aim of satisfying these and all CMP schemes, LettsPay has introduced a new product which works with an agent’s client bank account.

“This ensures that agents will get all of the automation benefits of LettsPay and satisfy the traditional CMP schemes new stance,” Foxon explains.

“With the new product, all of the agent’s client funds will be stored at a bank to satisfy the traditional CMP schemes. The client will still retain all of the great automation and easy user journey so there is no reduction in the quality of the LettsPay product.”

However, Foxon warns that not all bank accounts offer FSCS protection, especially if they have been offered by an automated client accounting platform or a CASP (Client accounting service provider).

“This means that if the agent’s CASP or the client accounting platform were to fail, all of the funds held could be lost,” he says. “We recommend all agents that are unsure if their client bank account is covered by FSCS to get in contact with their provider or ourselves and get confirmation that they are protected.”