Understanding Method D for Electronic Money Institution Own Funds Calculations

## What is Method D for EMI Own Funds Calculation?

Method D is a specific methodology prescribed by the Electronic Money Regulations 2011 (EMRs) for Electronic Money Institutions (EMIs) in the United Kingdom to calculate their own funds requirements, directly linking these requirements to the volume of electronic money issued. Paragraph 23 of Schedule 2 to the EMRs sets Method D: own funds equal to 2% of the EMI's average outstanding electronic money. Method D applies to e-money issuance and the payment services related to it. Payment services unrelated to e-money use Method A, B or C instead, and the two amounts are added together. The purpose of own funds is to ensure that EMIs have a sufficient financial buffer to absorb potential losses and to protect consumer funds, thereby maintaining regulatory and financial stability within the sector.

The calculation under Method D requires careful consideration of what constitutes "electronic money outstanding" and how the average is derived. Regulation 2(1) of the EMRs defines average outstanding electronic money as the average total amount of financial liabilities related to e-money in issue at the end of each calendar day over the preceding six calendar months, calculated on the first calendar day of each month and applied for that month. The averaging mechanism aims to smooth out monthly fluctuations and provide a more stable basis for the own funds requirement. It is important for EMIs to establish robust internal systems to track their electronic money outstanding accurately on a daily basis to facilitate this calculation. Failing to do so can lead to inaccuracies and potential non-compliance with the EMRs.

How is the outstanding electronic money calculated for Method D?

The outstanding electronic money for Method D is calculated as the average amount of electronic money issued by the EMI and not yet redeemed, over a specific look-back period. Specifically, Schedule 2 paragraph 23 applies 2% to the average defined in regulation 2(1): the e-money liability at the end of each calendar day over the preceding six calendar months. This is a critical detail, as it means EMIs cannot simply take a monthly snapshot but must aggregate daily figures to arrive at a true six-month average. The "amount outstanding" refers to the value of e-money in circulation that customers hold in their accounts, which the EMI is obligated to redeem upon request.

It is crucial for EMIs to differentiate between funds held as electronic money and funds that might be held as payment services funds without being e-money. The legal measure is the e-money liability in issue, meaning e-money issued and not yet redeemed. Ensuring that only actual electronic money outstanding is included is vital, as erroneously including other liabilities could inflate the own funds requirement unnecessarily. Firms must have robust reconciliation processes in place to precisely identify these amounts daily. This often involves integrating data from transaction processing systems, ledger accounts, and customer account balances. Any funds that have been technically settled but not yet credited to an e-money account, or funds that have been redeemed but not yet fully transferred out of the system, require careful classification to avoid miscalculation. For more information on safeguarding obligations, see our article on Safeguarding Requirements for EMIs.

What are the minimum own funds requirements in the UK for EMIs using Method D?

The minimum own funds requirements for Electronic Money Institutions in the UK, irrespective of the chosen calculation method, including Method D, are clearly stipulated in the EMRs. Under regulation 19(1) an authorised EMI must hold own funds at all times equal to or above the higher of €350,000 and its own funds requirement under Schedule 2. The figure is set in euro, so firms monitor the sterling value of their capital against it. If 2% of average outstanding e-money is lower than €350,000, the €350,000 floor applies.

Initial capital of €350,000 is required on authorisation under Schedule 2 paragraph 2. Because 2% of €17.5 million is €350,000, Method D only drives the requirement once average outstanding e-money exceeds €17.5 million.

Where the EMI also provides unrelated payment services, the Method A, B or C amount is added on top. The FCA can direct an amount up to 20% higher or lower than the calculated figure after evaluating the firm (Schedule 2 paragraph 15). The full licence requirements are on our UK EMI licence page, and the payment services methods are covered on our authorised payment institution page. This ensures a consistent level of financial prudency across all authorised EMIs, regardless of their operational scale or specific business model. It is a fundamental pillar of the regulatory framework designed to safeguard consumers and maintain market integrity against unforeseen operational or financial stresses.

What documentation and reporting are required for Method D compliance?

Compliance with Method D requires robust documentation and regular reporting to the Financial Conduct Authority (FCA), demonstrating that the EMI is meeting its ongoing own funds obligations. Under SUP 16.15 an authorised EMI submits the annual FIN060 return, which includes its own funds position, within 30 business days of its accounting reference date. Since 7 May 2026 it also submits a monthly safeguarding return under SUP 16.14A, which reports the e-money outstanding that drives Method D. Regulation 37 of the EMRs requires the EMI to tell the FCA without undue delay of any significant change affecting its compliance with the own funds requirement.

Furthermore, firms must maintain comprehensive internal documentation that supports their reported figures. This includes: - Detailed records of daily electronic money outstanding balances for the preceding six months. - Calculation worksheets demonstrating how the 2% figure and the six-month average were derived. - Reconciliation statements between ledger balances and reported outstanding e-money. - Policies and procedures outlining the firm’s methodology for calculating and monitoring own funds. - Records of any internal or external audits pertaining to own funds calculations.

The FCA expects firms to be able to provide these documents upon request and to clearly articulate their methodology. Poor record-keeping or inability to substantiate reported figures can lead to regulatory scrutiny, supervisory actions, and potentially fines. It is advisable for EMIs to implement automated systems for tracking and reporting these figures to minimise human error and ensure timely compliance. Firms should also consider periodic internal or independent reviews of their own funds calculations to ensure accuracy and adherence to regulatory guidance. This proactive approach supports ongoing compliance and mitigates potential regulatory risks. For guidance on regulatory reporting, consider seeking compliance support from experts.

Are there any specific challenges or nuances when applying Method D?

Applying Method D for own funds calculation presents several specific challenges and nuances that EMIs must navigate to ensure accurate and compliant reporting. One significant challenge lies in precisely defining and tracking "electronic money outstanding." As noted earlier, this is not merely all customer funds, but specifically funds issued as electronic money and not yet redeemed. Distinguishing these from other payment service funds or operational floats requires meticulous financial engineering and robust accounting practices. Errors in classification can lead to either an underestimation, risking regulatory censure, or an overestimation, tying up excessive capital unnecessarily.

Another nuance is the averaging period and the dynamic nature of electronic money balances. The requirement to use a rolling six-month average of daily balances means EMIs must have sophisticated data capture and aggregation capabilities. A sudden surge or decline in e-money balances can impact the average over time, requiring firms to continuously monitor their own funds position against the calculated requirement and the fixed minimum of €350,000. Operational resilience in data management is therefore key. Furthermore, the EMRs do not explicitly define what constitutes "redeemed" e-money in every practical scenario. Firms must adopt clear, justifiable internal policies for when e-money is considered redeemed, particularly in scenarios involving delayed transfers or chargebacks. Interpretation differences can lead to compliance discrepancies. Navigating these complexities often benefits from expert advice on FCA authorisation applications and ongoing compliance.

What are the consequences of non-compliance with Method D own funds requirements?

Non-compliance with Method D own funds requirements carries significant consequences for Electronic Money Institutions, ranging from regulatory scrutiny to severe enforcement actions. The Financial Conduct Authority (FCA) takes breaches of prudential requirements very seriously, as they directly undermine an EMI’s ability to protect customer funds and ensure market stability. The immediate consequence of an own funds shortfall is likely to be increased supervisory engagement from the FCA, potentially leading to immediate requirements for the firm to inject additional capital. The FCA may also demand a specific remediation plan and impose restrictions on the firm’s operations, such as limiting new customer onboarding or business expansion.

More serious or persistent breaches can lead to formal enforcement actions, including: - Financial penalties: The FCA has the power to issue substantial fines to firms and individuals for regulatory breaches. - Public censures: The FCA may publicly announce findings of non-compliance, damaging the firm’s reputation and trust amongst consumers and partners. - Withdrawal of authorisation: In severe cases, particularly where a firm consistently fails to meet its own funds requirements or demonstrates a lack of willingness to comply, the FCA can revoke the EMI’s authorisation. This would effectively terminate the firm’s ability to conduct regulated activities. - Direction to cease activities: The FCA may issue directions requiring the firm to cease or restrict specific business activities. - Management fitness: An EMI authorised under the EMRs is not subject to the Senior Managers and Certification Regime, but its directors and managers must remain fit and proper. Persistent capital failures can lead the FCA to question whether they are.

Maintaining adequate own funds is not just a regulatory obligation; it is fundamental to an EMI’s operational licence and its long-term viability. Effective governance, robust internal controls, and proactive monitoring are therefore paramount in ensuring continuous compliance with Method D and avoiding these grave consequences. Firms should regularly review their own funds position and seek expert advice if they anticipate or identify any potential shortfalls.