Key innovations for e-money agents
Key innovations for e-money institutions
The new e-money regulatory law affects not only e-money issuers but also, for the first time, intermediaries of e-money issuers involved in the distribution or redemption of e-money. A kiosk or supermarket operator which sells or charges pre-paid cards for an e-money issuer will be classified as an 'e-money agent'. Under the new law, these intermediaries will be subject to a regulatory regime of their own.
Hitherto, the issue and management of e-money were reserved to financial institutions within the meaning of the Banking Act in accordance with the EU E-money Directive (2000/46/EC). The relatively strict regulatory provisions of the directive have resulted in only 20 pure e-money institutions being established in the entire European Economic Area (EEA). The new EU E-money Directive (2009/110/EC) is intended to improve this situation.
On March 8 2011 the act implementing the new directive was promulgated in the Federal Gazette. Since the new directive is intermeshed with the EU Payment Services Directive, which was implemented in Germany through the Payment Services Supervisory Act, the new e-money regulatory law was introduced by means of an extension of the Payment Services Supervisory Act. In turn, e-money institutions were removed from the scope of the Banking Act. The new provisions came into force on April 30 2011.
Key innovations for e-money agents
E-money agents constitute a new category of e-money intermediary which are subjected to a specific regulatory regime under the new e-money regulatory law. 'E-money agents' are defined, according to the Payment Services Supervisory Act, as all enterprises which act on behalf of e-money institutions in the distribution or redemption of e-money. However, e-money institutions are forbidden, subject to penalty, to issue e-money through third parties acting on their behalf.
The wording of the Payment Services Supervisory Act whereby e-money agents must act on behalf of an "e-money institution", is likely to prove inadequate. There is no obvious reason why the provisions of the Payment Services Supervisory Act applicable to e-money agents should not also be applied to e-money intermediaries of deposit-taking institutions within the meaning of the Banking Act, which continue to be authorised to conduct e-money business on the basis of their full banking licences. In fact, the explanatory memorandum to the Payment Services Supervisory Act in this respect refers not to "e-money institutions", but to "e-money issuers" (which term also covers deposit-taking institutions).
The legislature has already taken remedial action with regard to the Money-Laundering Act. According to a draft act on the optimisation of money-laundering prevention, published on May 11 2011, e-money intermediaries of deposit-taking institutions will be subjected to the obligations provided in the Money Laundering Act.
The fact that the distribution of e-money as such already triggers e-money agent status under the Payment Services Supervisory Act, thereby subjecting the affected person to certain regulatory provisions means a clear intensification compared to the previous law, since according to the relevant administrative practice of the Federal Financial Supervisory Authority, the mere distribution of e-money has hitherto been unregulated.
The question of the demarcation between permitted distribution and non-permitted issue of e-money through intermediaries appears, in particular, to be problematic. The correct approach should be to adopt a civil law view to the effect that e-money is issued only by entities which undertake to pay their customers, or third parties which accept e-money as a means of payment. Therefore, as long as an e-money agent concludes contracts about e-money products not in its own name, but in the name of an e-money institution, the handing over of e-money products to customers in the name of the e-money institution constitutes a permitted distribution, even if the e-money agent receives customers' money for the purpose of charging the e-money products.
In this light, however, the prohibition stipulated in the Payment Services Supervisory Act on the issue of e-money through e-money agents acting on behalf of the e-money institution (even taking account of the new e-money directive) does not appear comprehensible and is subject to extreme reservations because of the imposition of penalties. Presumably, the legislature thereby intended not to prohibit the issue of e-money by third parties "in the name", but rather "for the account" of e-money institutions. The unfortunate wording of the prohibition leads to difficult questions of interpretation, in which the principles of development of law in conformity with EU directives as well as the criminal law prohibition of application by analogy are to be taken into account. Against this background, it would be desirable for the authority to clarify the issue urgently.
An e-money institution which intends to involve e-money agents must inform the authority of the name and address of the e-money agents, describe the internal control mechanisms intended to be employed by the e-money agent to satisfy the requirements of the Money-Laundering Act (see below) and provide the name of the directors and other responsible persons of the e-money agents. On the other hand, there is no obligation to register e-money agents in the E-money Register, which is to be established pursuant to the Payment Services Supervisory Act.
While no proof of the reliability and qualifications of e-money agents need be provided to the authority, e-money institutions must always review the qualifications and reliability of their e-money agents and representatives in accordance with their obligations under the Payment Services Supervisory Act duly to organise their business. In addition, the authority can prohibit an e-money institution which has not properly conducted the selection or supervision of its e-money agents from involving e-money agents in its own business organisation.
Money-laundering legal obligations
According to the legislature, the involvement of e-money agents will create considerable scope for money laundering. E-money agents are therefore directly subjected to the obligations set out in the Money-Laundering Act. In addition, the Payment Services Supervisory Act sets out some specific provisions in this regard, although in parts these do not appear fully comprehensible. For example, if certain thresholds of value units stored on the e-money products are not exceeded, it is questionable why simplified money-laundering obligations of care apply to e-money institutions, but not to e-money agents. In view of the considerable administrative burden and costs associated with the application of the Money-Laundering Act, it must also be asked whether the legislature has, on balance, not overshot the mark here.
Cross-border involvement of e-money agents
The cross-border involvement of e-money agents of an e-money institution based in another state of the European Economic Area requires that a notification proceeding be conducted (so-called 'European passport'). Since the relevant provisions of the Payment Services Supervisory Act are based on the new e-money directive, this also applies, in principle (ie, subject to a different implementation of the directive or a different administrative practice in particular cases), to the reverse case: namely where an e-money institution based in another EEA state employs the services of an e-money agent working in Germany.
Under the old e-money regulatory law, it was problematic as to whether the cross-border employment of e-money intermediaries in Germany involved an obligation of the foreign e-money institution to establish a branch in Germany. The authority inclined towards this view if the intermediary performed significant parts of the e-money business in Germany. On the basis of EU law (with regard to both the old and the new e-money regulatory law), however, the requirement to open a branch should be assumed only if the intermediary is subject to the direction and control of the relevant institution, which is the case in particular if the intermediary is bound to the institution by an exclusive agreement. Here too, the opinion of the authority is awaited.
Intervention rights of Federal Financial Supervisory Authority and Central Bank
The Payment Services Supervisory Act sets out extensive rights of the authority and the Central Bank to intervene not only in the practice of e-money institutions but also in the practice of e-money agents of e-money institutions based in another state of the EEA. For the latter, the right to intervene is likely mainly to be invoked if the activity of the e-money agent no longer remains within the limits of the 'European passport' granted to the e-money institution.
Key innovations for e-money institutions
General statutory exemptions rather than discretionary exemptions in individual cases
While under the Banking Act e-money institutions have hitherto been able to receive individual exemptions from the authority in its conscientious discretion from the requirement to obtain a licence for certain less relevant e-money business, in future general statutory exemptions from the scope of the Payment Services Supervisory Act will be provided instead. These relate to:
- electronic value units which can be used for the purchase of goods or services within a demarcated system (eg, prepaid department store cards and fuel cards); and
- electronic value units used for payment through telecommunications, digital or IT appliances, if the network operator or IT system does not act exclusively as an 'interposed entity' between the user and the supplier of the goods or services (eg, the purchase of ring tones for mobile phones).
Due to the vague wording of the above exclusion, the demarcation between transactions with e-money which are free of licence and those which are subject to licence may be difficult in individual cases. It may be that certainty will be achieved through clarification from the authority.
New e-money licence also covers payment services
The licence to conduct e-money business under the Payment Services Supervisory Act also covers the provision of payment services within the meaning of the Payment Services Supervisory Act (eg, money transfer business or payment card business). In view of the practice of the authority in connection with the issue of licences to payment institutions (ie, companies which exclusively provide payment services within the meaning of the Payment Services Supervisory Act), it is anticipated that the authority will not issue general licences for the provision of any payment services whatsoever to e-money institutions, but that the licence will be restricted to payment services specifically applied for and made plausible within the scope of the e-money institution's proposed business model.
Reduced initial capital
The minimum amount for initial capital of e-money institutions has been reduced from €1 million to €350,000. In contrast, the ongoing capital requirements of 2% of the average e-money circulation correspond, in principle, to the hitherto applicable ongoing capital requirements. If the e-money institution also provides payment services not associated with the issue of e-money, the applicable provisions for the calculation of equity capital for payment institutions apply cumulatively.
Liquidity requirements relief versus security requirements
Since e-money institutions under the new law are no longer credit institutions, they are relieved from the scope of the liquidity regulation and are no longer subject to the minimum reserve requirements of the euro system.
However, in future, e-money institutions will be obliged, either in a trust model or by insurance through a third company, to secure customer moneys received.
Tightening of penal and administrative offence provisions
The issue of e-money without the required Payment Services Supervisory Act licence will be punishable by imprisonment of up to five years (the maximum has hitherto been three years). At the same time, the legislature also increased the maximum term of imprisonment for breaches of the Banking Act's licence requirements correspondingly. By strengthening these penalties, the legislature aims to sharpen the awareness of the public prosecutors for such licence offences. Companies in future should therefore look more closely at whether they may have exceeded the admissible limits of licence-free business. In addition, the extension of the Payment Services Supervisory Act will result in more intensive penalising of breaches against regulatory provisions by the establishment of further administrative offences provisions.
The new e-money regulatory law covers for the first time e-money intermediaries involved in the distribution or redemption of e-money. While under the previous law the pure distribution of e-money was not regarded as relevant to regulatory law, the distribution now involves the status of an e-money agent. This means, in particular, that the relevant intermediary – for example, the kiosk operator selling or charging pre-paid cards – is directly subject to the Money-Laundering Act.
For e-money institutions, the new e-money regulatory law involves significant relief (eg, the reduction of the initial capital or the repeal of the existing liquidity requirements). However, e-money institutions will in future have to secure customer moneys received in accordance with the strict provisions of the Payment Services Supervisory Act.
For further information on this topic please contact Torsten Fett or Florian Bentele at Noerr LLP by telephone (+49 69 97 14 77 0), fax (+49 69 97 14 77 100) or email ([email protected] or [email protected]).