Regulatory Capital Requirements for EMIs: Calculating, Maintaining, and Reporting Minimum Capital

Regulatory capital is one of the most technically precise obligations facing FCA-authorised EMIs. Unlike many compliance obligations, capital requirements are not subject to significant interpretation — the calculation is prescribed, the minimum is absolute, and breach is a serious regulatory event. Yet capital breaches at payment firms are not uncommon, typically resulting from rapid growth that outpaces capital planning, or from a failure to correctly apply the regulatory calculation methodology. Understanding how EMI capital requirements work is essential for any finance or compliance professional at a payment firm.

The Legal Framework

Capital requirements for UK EMIs are set out in Schedule 2 to the Electronic Money Regulations 2011 (EMRs 2011). For payment institutions, equivalent requirements appear in Schedule 3 to the Payment Services Regulations 2017 (PSRs 2017). The calculation methods are broadly equivalent between the two frameworks. Own funds — the measure of capital — must at all times equal or exceed the ongoing own funds requirement, which is the higher of: (a) the initial capital requirement; (b) Method A (fixed overheads); or (c) Methods B or C (volume-based).

The Three Calculation Methods

Initial Capital (Minimum Floor)

For an Authorised EMI, the initial capital requirement is €350,000 (approximately £295,000 at current rates). This is a floor — the ongoing requirement can never fall below this amount regardless of the volume-based calculation. For a Small EMI, the floor is €350,000 only if issuing e-money; for a payment institution, the floor varies from €20,000 to €125,000 depending on services.

Method A: Fixed Overheads Requirement

Method A requires the firm to hold own funds equal to at least 10% of fixed overheads from the preceding year (or the current year's projection for a new firm). Fixed overheads are calculated from the firm's P&L: total annual expenditure minus variable costs (staff costs that are variable, cost of goods sold). For a firm with £3 million in fixed annual overheads, the Method A requirement is £300,000. This method tends to dominate in the early, lower-volume stage of a firm's development.

Method B and Method C: Volume-Based

These methods calculate required capital as a percentage of the firm's monthly payment volumes, averaged over the preceding twelve months. Method B applies a sliding scale: 4% of volumes up to €5 million, plus 2.5% of volumes from €5-10 million, plus 1% of volumes from €10-100 million, plus 0.5% of volumes above €100 million. Method C applies a similar sliding scale but to different volume segments for firms with mixed regulated activities. For a growing payment firm processing £50 million monthly, the Method B calculation would be approximately £375,000 — and rising as volumes grow.

The FCA requires firms to use the method that produces the highest requirement — not the lowest. Some firms make the error of calculating only the method that produces the most favourable result, which can result in holding capital that is technically non-compliant.

Definition of Own Funds

Own funds for EMI purposes are defined by reference to the Capital Requirements Regulation (CRR) as onshored into UK law. Core Tier 1 capital — ordinary share capital and retained earnings — is the primary eligible component. Intangible assets must be deducted from own funds, which is significant for technology companies whose balance sheets contain material software development costs or intellectual property. Deferred tax assets above certain thresholds and investments in other financial institutions must also be deducted.

A common pitfall for early-stage payment firms is the treatment of founder loans and intercompany balances. Loans from shareholders or parent companies are generally not eligible as own funds unless they meet the specific criteria for Tier 2 instruments under the CRR — they must be genuinely subordinated, have no right to be repaid on demand, and meet maturity requirements. The FCA has previously required firms to reclassify shareholder loans that were being counted as regulatory capital but did not meet these criteria, resulting in a capital shortfall requiring immediate equity injection.

Capital Reporting

EMIs must submit quarterly capital adequacy reports to the FCA via the RegData system. The FCA1 (Capital Adequacy) return requires firms to report own funds components, the ongoing own funds requirement under each applicable calculation method, and the resulting surplus or deficit. The FCA2 (Volume and Value of Payment Transactions) return provides the input data for Method B/C calculations. Both returns must be submitted within 30 days of the quarter end.

The FCA monitors these returns and will issue a supervisory query if an EMI's capital headroom above the regulatory minimum falls below a threshold considered adequate for the firm's risk profile. Firms approaching the minimum should proactively communicate with their FCA supervisory contact and have a clear capital management plan — the regulator is far more receptive to firms that identify and address capital concerns proactively than to firms whose capital breach is discovered through reporting.

Capital Planning

Because the volume-based calculation rises automatically as transaction volumes grow, rapidly scaling EMIs can find their regulatory capital requirement outpacing their equity base if capital planning is not actively managed. A firm targeting 10x volume growth in 18 months must model the trajectory of its capital requirement and ensure shareholder commitments or retained earnings will maintain the buffer. Capital planning should be a standing agenda item at board level, not a finance department calculation that surfaces only at quarter end.