Irish regulator ‘not satisfied’ with EML’s remediation efforts

Shares in EML Payments (ASX: EML) are once again on a nosedive after yet another update regarding regulatory intervention from the Central Bank of Ireland (CBI), which remains unimpressed with the company’s ongoing remediation efforts.

Since May 2021, EML’s Irish subsidiary PFS Card Services (Ireland) Limited (PCSIL) - a distributor of pre-paid Mastercard cards and Visa cards - has been undertaking remediation work at the behest of the CBI after the regulator raised issues with the governance, resourcing, reporting, risk methodologies, controls and risk frameworks, capital adequacy, safeguarding and transaction monitoring of the business.

This latest update from EML details how the CBI has stated it considers that PCSIL “has made limited remediation progress to date with significant and ongoing deficiencies remaining in PCSIL’s anti-money laundering and counter terrorism financing (AML/CTF) control framework”.

PCSIL accounts for more than a quarter of EML's global revenue, but the regulatory concerns do not relate to EML's Australian or North American business, and nor do they affect PFS' UK subsidiary or EML's other European businesses Sentenial Limited and Nuapay.

The Irish regulator also noted it was not satisfied with the subsidiary’s remediation plan and timetable for completion.

This remediation program was expected to be completed by the end of 2023, but EML says this timeframe is at risk and is subject to further engagement.

As a result, the CBI has issued a warning that it may place a ‘nil per cent’ cap on growth in total payment volumes for the period 31 March 2023 to 30 March 2024. Previously, the CBI had imposed a restriction of 10 per cent growth in total payment volumes.

According to EML, if the CBI does force all growth in total payment volumes to stop then revenue for the period 1 April to 30 June 2023 will be reduced by approximately $3.5 million, as well as a reduction in underlying earnings of approximately $2 million.

Therefore, EML has told shareholders to brace for a potential impairment on the carrying value of the company’s assets.

“Revenue growth is a key assumption which underpinned the impairment assessment and calculation of the impairment loss for the half year ended 31 December 2022,” EML said about its latest financial results released on Wednesday which included a non-cash impairment of $121.3 million.

“Any impairment adjustment would be a non-cash impact.”

The company’s board, which yesterday appointed the former Afterpay chief financial officer Dr Luke Bortoli as chairman, said it was ‘disappointed with this development’.

“The reconstituted board is taking the concerns of the CBI very seriously,” the EML board said.

“It is committed to remediation the issues that are of concern to the CBI and engaging constructively with the CBI in relation to the remediation.

“In that context, the board has established a new dedicated sub-committee (chaired by new non-executive director Peter Lang) charged with oversight of the remediation program.”

EML’s CBI update comes after it announced its financial results for the six months ended 31 December, including a two per cent rise in group revenue to $116.6 million.

Underlying gross profit rose by five per cent on the prior corresponding period, while net profit after tax was down 95 per cent to $700,000.

Overall, the company’s net loss was greatly impacted by the aforementioned non-cash impairment to come in at $129.9 million.

EML managing director and group chief executive Emma Shand - who replaced Tom Cregan in the top job in July last year - said the financial performance of the company was in line with expectations and reflected the challenges that the company has faced over the past two years.

“During the half, we have focused on getting the foundations right and have made solid progress on our remediation program, Elevate, which we have committed to completing by the end of December 2023, as previously announced,” Shand said.

“We are also streamlining the organisation and have finalised a new organisational structure aligned to our strategy as well as executing on operational efficiencies such as rationalising our technology and data estates.

“We have a strong balance sheet and a clear transformation path ahead of us and are well positioned to execute EML’s next chapter and deliver on our commitment to be an embedded finance leader of the future.”

The update from the CBI also comes after former partner Up Spain pulled out of its deal with EML without explanation in mid-February - one year after the deal was entered into.

In a short statement released to the market, Brisbane-based EML said Up Spain ‘no longer intends to proceed with the agreement’, and noted it would engage with the now-former partner regarding an ‘orderly dissolution of the relationship’.

The CBI matter is not the only regulatory debacle EML has found itself in; in October the firm temporarily ceased onboarding new customers, agents and distributors in relation to its UK subsidiary Prepaid Financial Services Limited (PFS UK) following concerns raised by the UK regulator the Financial Conduct Authority (FCA).

EML said at the time the financial impact of the ‘temporary measure’ was expected to reduce group revenue by less than $5 million in FY23.

According to the card payments services firm, the concerns highlighted by FCA were of a similar nature to those raised by the CBI.

EML is also facing a class action from Shine Lawyers on behalf of shareholders alleging the company made misleading representations regarding its corporate governance and regulatory compliance, launched in the wake of CBI’s concerns.

Shares in EML are down 11.21 per cent to $0.52 per share at 2.21pm AEDT.