Regulator Scrutiny Hits EML Payments

Australia | May 20 2021

The Central Bank of Ireland has the Prepaid Financial Services business belonging to EML Payments is in its sights. Is the resultant slump in the share price justified?

-Not the first regulator to raise concerns about PFS
-Remedies likely to include extra oversight costs
-Confidence building now required


By Eva Brocklehurst

The cat is again among the pigeons in the financial services market, with the Central Bank of Ireland now the one raising concerns around risk and governance. EML Payments ((EML)) has revealed correspondence from the central bank relating to its Prepaid Financial Services division, acquired in April 2020.

This has severely impacted its share price, which has slumped around -45%. The upshot is that uncertainty is likely to weigh over the short term, Macquarie points out. EML Payments will respond to the correspondence by May 27 but the broker suggests it may be some time before the CBI makes a final decision.

The CBI is investigating misconduct under anti-money laundering and counter-terrorism financing rules. Canaccord Genuity believes this is likely to be part of a broader clamping down by the European Banking Authority on those financial institutions that have weak controls.

EML did not disclose the potential financial/legal impact but did indicate directives could restrict its European licence/programs. The broker believes the programs occurred in operations that were regulated under the Financial Conduct Authority in the UK prior to EML transferring its regulated subsidiary to Ireland after Brexit.

This is not the first regulator to raise concerns about PFS, Wilsons notes, as both the French and UK equivalents have previously levied penalties for incorrect settings (France) and infringements of competition law (UK). Based on past settlements the broker expects a modest impacts on operations and reputation and believes the slump in the shares factors in the risks.

Macquarie, too, expects the company will be able to continue operating, although there will be an increase to the cost base. Based on the 27% share of revenue derived from programs operating under Irish authorisation, the broker believes around $25m of FY22 operating earnings (EBITDA) could be at risk if the licence is revoked.

Macquarie emphasises it anticipates no suspension. Since 2019, the broker points out, the CBI has reached settlements on 14 enforcement actions and none have resulted in suspension of licences.

If the worst-case scenario were to eventuate, Canaccord Genuity agrees this would represent the first time a payment licence has been revoked by the CBI. Regardless, it will cause an overhang in the stock as the issue is likely to persist for some months.


Potential remediation actions Wilsons considers include increasing expenditure on systems and risk and a suspension of the licence until adequate remedies are deployed, as well as increased regulatory oversight.

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