The Payment Services Directive (PSD) allows non-banks to offer payment services. But how does it affect banks, and can banks and non-banks alike profit from the freedoms it offers? Dominic Gilmore looks at how the PSD regime will work under UK law.

Why the PSD?

The PSD is part of the European Commission’s mission to achieve a single market in retail payment services. The principal aims of the PSD are to:

  • improve competition in the European payments market by removing barriers to entry; and 
  • set common conduct of business rules applicable to all payment service providers and end-users in the EU.

It does this by setting a prudential authorisation or registration regime for any institution that offers payment services that is not a credit or electronic money institution. Harmonised conduct of business rules will apply to anyone who conducts payment services, including banks.

Is it in force?

Member States have until 1 November 2009 to implement the PSD into national law. HM Treasury is the responsible UK regulator. It has already consulted on its approach and, in July 2008, consulted on draft Payment Services Regulations (the Regulations).

Who will regulate payment services?

FSA will be the “competent authority” for most PSD purposes. Its role is to register or authorise payment institutions and police their compliance with conduct of business rules.

However, other bodies will also play a role. HMRC will keep responsibility for the anti-money laundering (AML) supervision of money services businesses (some of which will be payment service providers). It will also be responsible for AML supervision of any mobile phone operators or bill payment service providers which are PSD payment institutions and therefore newly within the scope of the Third Money Laundering Directive.

The OFT, meanwhile, is responsible for ensuring there is competitive access to the payment systems.

The Regulations contain almost all the implementing rules. However, FSA is consulting on changes to its rules on outof- court redress and complaints procedures.

Is anything still unclear?

The PSD is a “maximum harmonisation Directive” which means the UK cannot impose greater requirements than the PSD. There are, however, a few areas in which individual Member States have some discretion, or where the first consultation threw up some differences in interpretation:

  • the scope of a “payment institution”: Mobile phone operators, bill payment providers, non-credit institution credit card issuers and money transfer companies fall within the PSD to the extent they offer “payment services”. Treasury has clarified that most mobile phone operators in the UK will fall outside the PSD. It would catch only those who act purely as an intermediary. Also, bill payment providers will not provide money remittance services or any other payment services within the meaning of the PSD if they act as agent of the payee for receiving payer money, where payment by the payer to the firm constitutes payment to the payee without any further execution by the service provider; 
  • the meaning of “payment account” (an account held by a payment service user for executing payment transactions): This definition catches more than the current accounts and e-money accounts originally proposed. EU-level discussions have clarified the scope should include flexible, easy access savings accounts, where customers are not penalised for withdrawing their funds regularly either via a debit card or transferring to another account. On the other hand, fixed term deposit and similarly restrictive savings accounts should fall outside the scope; and 
  • safeguarding: The PSD requires ring-fencing of funds received from payment services users where the relevant funds exceed €600. Treasury now understands it can set a lower limit and suggests £50 as the minimum amount. It thinks this figure is enough to protect the innovative environment for low-value payment instruments while ensuring that most high value payment transactions are safeguarded.

What happens next?

reasury wants to finalise the Regulations by the end of 2008. FSA will then need to make minor changes to its rules and create application forms for new payment institutions so it can complete all registrations by November 2009. Although this is over a year away, any institution that offers, or may offer, payment services should consider its position now.