If it looks like a bank and acts like a bank - it could be an EMI

In the course of creating our new Bank Account Product Ratings, we encountered a few surprises. Perhaps the biggest of these was the realisation that many current account providers aren’t actually banks. Increasingly, current accounts are being provided by Electronic Money Institutions (EMIs) and payment institutions.

EMIs don’t have a full banking licence and are regulated differently to banks. They’re not allowed to finance any activity with deposits, but their customers lack the protection of the FSCS.

This raises some questions around transparency, as consumers may – quite reasonably – assume their current account provider is a bank with full FSCS protection. EMI providers should make it clear to potential customers that they’re not banks. And that there’s no FSCS guarantee protecting their deposits.

EMI’s should also clarify what measures they do have in place for safeguarding deposits – without misrepresenting the guarantees. One provider informs customers that up to €100,000 will be protected by the European Deposit Protection Scheme (EDIS). However EDIS has not yet been passed into European law and shows no sign of coming into force any time soon. Potentially misleading consumers like this is bad practice.

To add to the confusion, some EMIs also have banking licenses in Europe. Lithuania has become a popular location for financial start-ups because of attractive deregulatory policies – including the first year free of regulation. Companies are able to obtain banking licences in countries with less comprehensive regulation and then offer these services in other EU countries.

Companies with EMI status in the UK and banking permissions in Europe should be wary of confusing consumers by talking up their banking credentials. Any products they offer in the UK are covered by Electronic Money Regulations, not banking ones. These companies may have aspirations to become a fully licensed UK bank, but until they do it could be potentially harmful to give consumers the wrong picture.

Recent discussions in the general insurance market have led to the FOS looking closely at misrepresentation. If the spotlight falls on EMIs, those making misleading claims to influence consumer behaviour could find themselves at odds with the FOS.