November 2016 PSD2 APPROACHES: CHANGES TO SCOPE Financial Services 10-7971557-1 1 PSD2 APPROACHES: CHANGES TO SCOPE Introduction and Background In this briefing, the second in our series on PSD2, we focus on changes to geographical scope and the exemptions. The change s to scope set out in PSD2 can be summarised as: ► more payments will come within the scope of the law. Payments and currencies not currently subject to PSD1 are caught by PSD2; ► the existing PSD1 exemptions have been narrowed; and ► new types of Payment Service Providers (PSPs) (Payment Initiation Service Providers and Account Information Service Providers) will be subject to regulation for the first time. Businesses that currently rely on the existing payment services exemptions will need to decide whether they can continue to o perate outside the payments framework. Some will need to apply for authorisation while others will need to change the basis on which they operate, and possibly, consider whether to partner with an authorised PSP. Businesses that have not been subject to regulation at all may now be in scope and they too will need to consider a pplying for authorisation. We will cover the introduction of the new types of PSPs in a separate future briefing. Since our last PSD2 briefing in May, the UK voted to leave the European Union. For the purposes of this briefing, we assume the UK will implement the Directive. We are happy to discuss our thoughts on the impact of the referendum in the context of payments regulation separately. Increased geographical scope Currently, only the provisions around value dating and availability of funds apply to one-leg transactions in Member State currencies. PSD2 has an extended jurisdictional reach which means that in addition to the Directive applying to 2-leg in transactions in any EU and Member State currency, there are also now specific obligations on PSPs for: ► 2-leg in non-EEA currency transactions; and ► 1-leg out transactions in any currency We set out some payment scenarios to illustrate the PSD2's geographical scope compared to PSD1. Scenario 1: London to Paris in Euro No change. As both legs are within the EU/EEA and made in Euros (or in the currency of a Member State) the protections under Titles III and IV of PSD1/PSD2 apply in full. LONDON Payer Customer Payer PSP (London) EEA/EU PARIS Payee PSP (Paris) Payee 10-7971557-1 2 Scenario 2: London to Paris in Japanese Yen All change! PSD1 only applies to payments in the Euro or that of a Member State. Under PSD2, titles III and IV apply to payments in a third country currency where both legs are within the EU/EEA. However, there is no requirement on the payer's payment service provider to specify the maximum execution time nor to ensure a D+1 payment value date in the payee's account. Scenario 3: London to New York in Pounds Sterling All change! PSD1 does not cover payments where one leg is outside the EU/EEA. PSD2 will apply but the level of protection is lower and only attaches to the leg within the EU/EEA. There is no requirement on the payer's payment service provider (PSP) to specify the maximum execution time or to ensure a D+1 payment value date. Nor do the protections apply in respect of a PSP's liability for non-execution, defective or late execution. What this means for PSPs Information and transparency on charges requirements will now apply to payments to and from outside the EEA, at least for the part of the transaction for which the PSP located within the EEA is responsible. Information requirements will apply to transactions in non-EEA currencies within the EU. There will also be an extension of rights & obligations to these types of payment transactions. It is clear that PSD2 will have substantial business organisation implications for the majority of PSPs. This will impact products, IT systems, architecture and customer terms and conditions. We intend to publish a future briefing specifically on the conduct of business changes that PSD2 will require PSPs to implement. Firms should start thinking about their existing products and services and what changes may need to be made. These should be considered against other legislative and industry developments in the payments area, such as the 2nd Wire Transfer Regulations and 4th Anti Money Laundering Directive. We can advise further on these requirements. PARIS Payer Customer 10-7971557-1 3 Exemptions to PSD2 Existing exemptions currently provided by PSD1 are preserved, but there are changes to their scope. Commercial agent The EU has narrowed the scope of the commercial agent exemption. The exemption will only be available where there is a formal agreement in place to negotiate or conclude the sale or purchase of goods or services on behalf of either the payer or payee (but not both), regardless of whether the intermediary is in possession of the funds.. Businesses which operate e-commerce platforms that act as an intermediary on behalf of both buyers and sellers should review whether they already need, or will in the future, authorisation as a payment institution. Just acting as an intermediary with no real ability to negotiate will not be sufficient to successfully rely on the exemption. Limited networks The application of the limited network exclusion has also been narrowed. An example of a limited network is a store card in a chain of book shops. Under PSD2, there will be reporting obligations for limited networks when payments reach a certain level to allow regulators to monitor their use and, potentially, to require networks to apply for authorisation. The exclusion will be specifically restricted to: ► circumstances where a payer acquires goods and services on the premises of the issuer or within a limited network of service providers under a direct commercial agreement with a “professional issuer”; ► the purchase of a very limited range of goods or services; or ► payment instruments to acquire specific goods or services regulated by a public body for social or tax purposes. Firms must notify regulators if the average of the preceding 12 months' payment transactions exceed Euro one million. The notification must include a description of the services offered and specify precisely which element of the exemption is relied upon (the third limb is not relevant for these purposes). Regulators are likely to monitor the applicability of the exemption by businesses and undertake assessments to determine whether the exemption should be available. Firms that are likely to come close to or exceed this threshold should give careful thought to these questions in advance and be ready to justify their use of the exemption. Given the uncertainty, some may decide to seek regulator approval regardless of the payment transactions volumes carried out. Telecom exemption The existing exemption for digital content (e.g. an app or electronic newspaper) purchased by a digital device such as a smart phone, will be narrowed, limiting its use to micro-payments for digital services. We think only network operators who provide content with electronic communication services to a subscriber that are charged to the same account will be able to rely on the new exemption. The exemption will also apply to charitable activities and ticket purchases and in all cases, only where a single transaction does not exceed €50 or the cumulative value does not exceed €300 per month. The narrowing of this exemption and its apparent future limitation to telecom operators may exclude its use by other services, such as providers of internet content streaming services. Those firms which currently rely on this exemption should analyse whether their business model is still compatible with the new telecom exemption. Automated teller machines Automated Teller Machine (ATM) operators continue to be excluded from regulation where they are operated independently from providers of payment accounts. The European Commission considers that this has allowed the growth in coverage of ATMs across Member States, particularly in less populated areas. However, ATM operators will need to comply with the PSD2's information/transparency provisions to ensure customers are clear about the service being provided, specifically about charges, such as those for withdrawals. Waiver regime The threshold for "small" payment institutions may change. Under the "waiver regime" Member States may waive certain regulatory requirements for institutions which have average monthly payment transactions not exceeding Euro 3 million per month. In future, if Member States choose to exercise this option, they may reduce this threshold. 10-7971557-1 4 The UK exercised this option when it implemented PSD1. For small payment institutions, authorisation is less onerous and there is no continuing minimum capital requirement. Small payment institutions should monitor the UK position on transposition of PSD2 carefully. In any event, they should take care not to exceed the threshold which has not been increased and is being eroded by inflation. Steps firms can take 1 Conduct an analysis of the application of PSD2 to different cross border scenarios and foreign currency payment transactions. This will not simply involve a tweaking to an existing process, but will effectively involve a PSD1 + PSD2 implementation to the scenarios now in scope (albeit that not all of the PSD will apply to these scenarios); 2 Firms need to consider the impact of these changes on terms and conditions and other customer communications; 3 If any exemptions are currently being relied on and no changes to the business model are being proposed, check whether these continue to apply; 4 Consider whether authorisation is necessary or desirable; and 5 Review systems and controls and procedures generally and consider third party agreements that may need to be amended. To discuss anything in this briefing, please contact Amanda Hulme or any of the team contacts below. 10-7971557-1 5 Contacts AMANDA HULE Partner 020 7880 5853 email@example.com ROSANNA BRYANT Partner 0113 209 2048 / 020 7160 3047 firstname.lastname@example.org NIKKI WORDEN Partner 020 7160 3023 email@example.com BRIAN MCDONNELL Partner 020 7160 3512 firstname.lastname@example.org WILLIAM JAMES Partner 020 7880 5771 email@example.com FIONA GHOSH Partner 020 7788 5120 firstname.lastname@example.org JAMES TURNER Managing Associate 020 7160 3208 email@example.com REBECCA WELLS Associate 020 7160 3170 firstname.lastname@example.org 10-7971557-1 6 addleshawgoddard.com Doha, Dubai, Hong Kong, Leeds, London, Manchester, Muscat, Singapore and Tokyo* *a formal alliance with Hashidate Law Office © 2016 Addleshaw Goddard LLP. All rights reserved. Extracts may be copied with prior permission and provided their source is acknowledged. This document is for general information only. 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