Introduction and Background
The European Communities (Payment Services) Regulations 2009 (the Regulations) were recently signed into law. The Regulations which transpose the Payment Services Directive (PSD) will apply from 1 November 2009.
The PSD is a regulatory initiative from the European Commission which will regulate payment services and payment service providers throughout the EU and EEA.
At present, the internal market for non-cash payment services remains hugely fragmented. Cashless payments are governed by different rules in each Member State; it is often difficult for customers to pay for something from another EU country by direct debit or via any form of electronic payment. The diverging legal rules in 27 different Member States also represent a significant impediment to new payment service providers (including money remitters, supermarkets and IT or telecom providers) and effectively block them from competing and offering their services across national frontiers.
Objective of the PSD
The PSD aims to create legal security for all payment service providers throughout the EU. This generates more competition and enhances efficiency in the European payments market by removing barriers to entry and ensuring fair market access to new players, as well as maintaining a high level of consumer protection.
The PSD creates equal legal conditions for payments in the EU. The consequence is that every cross-border payment in the EU can be treated as a domestic payment. This brings benefits not only for the providers of payment services, but for the customer as well.
The PSD also provides the necessary legal framework to facilitate the development of the Single Euro Payments Area (SEPA), a major payments industry initiative which endeavours to improve the efficiency of cross-border payments and unify the currently fragmented national markets for euro payments into a single domestic one.
Scope and Structure of the Regulations
The Regulations broadly authorises three different types of payment services:
- money remitters;
- payment transactions carried out by mobile telecom operators, and
- full-range payment service providers (e.g. credit transfers, direct debits, card payments) including credit related to the payment.
The Regulations focuses on electronic payments, which are more cost-efficient than cash and which also stimulate consumer spending and economic growth. There are a number of activities, including cash and cheques, which are excluded from the Regulations. There are six categories of payment service provider which are covered by the Directive, including credit institutions (e.g. banks and building societies) and e-money institutions (e-money issuers will be governed by a separate but related regime provided by Directive 2006/46/EC).
The new rules will apply to payments made in any EU currency, where both the payer's payment service provider and the recipient's payment service provider are located in the EU.
The Regulations deals with three main issues. It establishes a new authorisation regime for payment institutions, it establishes a new set of transparency requirements and it sets out a new framework of rights and obligations in relation to the provision and use of payments services.
The new authorisation regime covers payment service providers which do not take deposits or issue e-money. Such providers are known as "payment institutions". Once authorised in Ireland, they will be able to passport their payment service business and operate in other Member States. This will facilitate the entry into the market of new payment service providers such as retailers, money remitters or mobile operators. A simple notification procedure must be complied with to avail of this passport procedure.
The Regulations also allows payment service firms operating beneath a certain threshold to operate under a waiver system. This requires the firms to be registered instead of obtaining authorisation. Firms operating under a waiver will be unable to passport their activities.
The new authorisation rules reflect those already in place for credit institutions and investment firms, only in a more lenient form. Payment institutions are required to fulfill a variety of qualitative and quantitative requirements. The Financial Regulator will be the competent authority in Ireland which will deal with the authorisation of payment institutions.
Qualitative requirements include, but are not limited to,
- a programme of operations, setting out in particular the type of payment services envisaged;
- appropriate internal control mechanisms within the governance arrangements, including sound administrative, risk management and accounting procedures;
- directors and managers that are of good repute and possess appropriate knowledge and experience, as well as shareholders that are suitable taking into account the need to ensure the sound and prudent management of a payment institution.
Quantitative requirements are in place to ensure financial stability, and include initial and ongoing capital requirements appropriate to the low level of risk of payment institutions.
The transparency requirements ensure that payment service providers give requisite information relating to payments to their customers. They will replace all equivalent national rules and are designed to provide all users with clear information that is proportionate to their needs to enable them to make well informed choices within the payment services market.
Examples of information that must be provided include the content and provision of terms and conditions, the content and provision of remittance information and minimum disclosure requirements. The requirements will vary according to the type of transaction (single payment transaction, framework contract or payment transaction).
Rights and Obligations in relation to Payment Services
The Regulations provide a simplified and fully harmonised set of rules with regard to rights and obligations linked to the provision and use of payment services. Payment service providers must respect standard rules governing certain key issues, including disputes between users and providers and conditions governing refunds. One of the more significant elements is the new execution times for payment transactions. The D+1 rule for the execution time of electronic credit transfers without any currency conversion means payment monies must be credited to a recipient's account at the latest by the end of the next business day (D being the date of instruction by the payer to effect the payment transaction). This rule will be introduced in 2013; until then the maximum execution time is D+3.
Existing providers should assess their current practices to ensure that they are compliant with the Regulations, whilst potential payment institutions such as retailers, money remitters or mobile operators are now presented with the opportunity to put themselves forward and to begin competing against the original payment service providers in this dynamic EU market. It is important to note that all payment service providers are required to comply with the conduct of business requirements and ongoing obligations from 1 November 2009 onwards.