Clifford Chance

An additional method of safeguarding funds for investment firms, payment institutions, electronic money institutions and payment processing service providers is expected to be introduced in The Netherlands.

Introduction

On 25 October 2020, the Dutch Ministry of Finance sent a bill to change the Dutch Financial Supervision Act (Wijzigingswet financiele markten 2022 - Kst. 35.950, the "Bill") to Parliament. The Bill introduces a new possibility for investment firms, payment institutions, electronic money institutions and payment processing service providers (afwikkelondernemingen) ("relevant institutions") to make use of a bank account which will be segregated by law from the relevant institution's own assets (a "segregated bank account"). The segregated bank account offers the relevant institutions an alternative to the use of a client money foundation (stichting derdengelden) to safeguard client funds (which is a regulatory requirement). Funds kept in a segregated bank account will be safeguarded from bankruptcy of the relevant institution.

No trust

Because Dutch law lacks the concept of a trust, a client money foundation is often used to safeguard clients' funds. Such a foundation is a legal entity that does not have any shareholders and is set up to be bankruptcy remote (in other words, the foundation may not perform any other activities except safeguarding funds that it receives from third parties in a segregated bank account). The concept of a client money foundation is not known outside The Netherlands and sometimes causes confusion with third parties that are confronted with this additional legal entity.

Apart from corporate administrative requirements (such as incorporating the foundation and registering directors with the Dutch Chamber of Commerce), a client money foundation is also subject to the supervision of the Dutch regulator. This means, amongst other things, that directors of the client money foundation will need to be screened by the Dutch regulator. Further, the relevant institution will need to include the foundation in its risk analysis, have in place policies and procedures in respect of the way the client money foundation operates (e.g., in respect of conflicts of interest) and the relevant institution will need to enter into a contract with the foundation in respect of the safeguarding of the funds. Meeting these requirements is often experienced as cumbersome.

The segregated bank account

The introduction of the segregated bank account offers a pragmatic alternative to incorporating a client money foundation. The segregated bank account simplifies the way in which funds may be safeguarded and takes away certain regulatory hurdles and corporate administrative requirements. To give a few examples: there is no need to

• establish a separate foundation
• appoint (independent) directors for the foundation
• ensure that the new directors are screened by the Dutch regulator
• register the directors with the Dutch Chamber of Commerce
• hold annual general meetings, etc.

However, the Bill does not prevent relevant institutions from using a client money foundation to safeguard client funds if this is their preference.

The segregated bank account will need to be opened with a credit institution (licensed by the European Central Bank or the Dutch Central Bank) having its registered seat in The Netherlands. Payment processing service providers (afwikkelondernemingen) will need to open a segregated bank account with the Dutch Central Bank. This is to ensure that Dutch (property and bankruptcy) law applies. The segregated bank account will be opened in the name of the relevant institution but for the benefit of the clients or third parties that have entrusted the relevant institution with their funds. The name of the segregated bank account will make clear that the account forms a segregated bank account ringfenced from the other assets of the relevant institution.

By law, the funds on the segregated bank account will be segregated from the funds and other assets of the relevant institution. Consequently, these funds may only be used for the payment of debts owing to (i) clients whose funds have been administrated on the segregated bank account for safeguarding purposes and (ii) the bank where the segregated bank account is held, in respect of the service fee for offering the segregated bank account only (the "Parties Concerned").

Insufficient funds

The fact that the funds on the segregated bank account may only be used for paying certain specified debts means that, in the event of bankruptcy of the relevant institution, the liquidator in bankruptcy (curator) will have to respect the claims of the Parties Concerned. These claims are therefore not affected by bankruptcy of the relevant institution. This may be different if the relevant institution acts in conflict with its legal and contractual obligations or if the funds have wrongfully not been credited to the segregated bank account, which would result in a shortfall of funds on the segregated account, in which case the relevant institution is required to remedy the shortfall without undue delay. However, until the shortfall of funds on the segregated account has been remedied, the relevant institution may only pay out funds to clients whose funds have been transferred to the segregated account on a pro rata basis. In the event that the relevant institution is declared bankrupt while there is a shortfall on the segregated account, the bank fees will need be paid first before the claim of the clients.

Other creditors of the bankrupt relevant institution will not be able to have recourse to the funds on the segregated bank account, with one exception. If the debts have been paid to the Parties Concerned and it is established that no new claims will arise, then other creditors may be paid from the segregated bank account out of what is left (if anything) of the funds. Should there not be enough funds in the segregated bank account to repay the Parties Concerned, they will also have recourse to the relevant institution's other assets that fall into the bankruptcy estate (faillisementsboedel).

Conclusion

As opposed to the client money foundation, the segregated bank account offers highly practical improvements for relevant institutions in respect of safeguarding of funds in The Netherlands. Our expectation is therefore that the use of the segregated bank account will be widely adopted once the Bill has entered into force. We expect the Bill to be passed by Dutch Parliament in the course of 2022 (around July).