A case currently before the German courts concerning Lufthansa's Miles & More loyalty points scheme raises the question of whether loyalty points schemes are now considered to be a form of electronic money. The outcome of the Lufthansa case may well set a precedent for regulatory treatment of loyalty points schemes in Germany and across the EEA.
Summary of the claim against Lufthansa
It is reported that the claim has been brought against Lufthansa by one of its loyalty programme members who is suing them for €21,000 on the basis that his loyalty points amount to electronic money. He claims he should therefore be able to withdraw his loyalty points as cash. Among other things, re-characterisation of loyalty points as electronic money could mean that Lufthansa is operating without the necessary regulatory authorisations.
Lufthansa's argument in defence is that issuing points is not issuing electronic money because the points do not have any cash value. However, this argument is potentially undermined by the ability of customers to transfer points from other programmes that do sell their points for cash. If the member's claim succeeds and a court determines that his loyalty points do constitute electronic money, Lufthansa may well have to become regulated as a bank or e-money issuer and comply with the rules that apply to such entities.
Points programmes with points purchase facilities look more like e-money
Each loyalty points scheme must be assessed on its specific features. Loyalty programmes that allow a member to purchase points may be more likely to fall within the scope of electronic money regulation. This is because it is more difficult to argue that loyalty points have not been issued on receipt of funds for the purpose of making payment transactions (one of the limbs of the definition of electronic money) if the points have been purchased.
Post Payment Services Directive 2 (PSD2), the limited network exclusion (LNE) no longer takes issuers completely outside regulation
Although the LNE can still save e-money issuers from the need to obtain regulatory approvals, the LNE's perimeter is unclear and will not save a points programme provider from the regulation altogether. This is because PSD2 introduced a reporting requirement for entities seeking to rely on the LNE to notify the FCA if the total value of transactions made with the monetary value issued in any period of 12 months exceeds €1 million. Although there is little guidance on this area, it is worth noting that we recently advised an e-money issuer concerning its limited network exclusion notification to the FCA and managed to get the FCA to accept that it ought to be treated as being completely outside regulation.
This might well be a German-specific issue
It is possible that the Lufthansa case is also related to a specific issue with the German law transposition of PSD2. However, with PSD2 being a maximum harmonisation directive, the outcome of the case may raise questions about whether other similar loyalty schemes, gift vouchers and points schemes may fall within the scope of the electronic money regime.
What happens next?
We await the outcome of the Lufthansa case and any subsequent comments or guidance from the FCA. In the meantime, if you are currently operating a loyalty points scheme which you would like to discuss with us, please don't hesitate to contact us.