Introduction

The Payment Services Directive (PSD) seeks to harmonise the regulatory regime for payment services in the EU. The PSD was adopted by the European Commission on 13 November 2005. Member States have to implement the PSD by 1 November 2009.

European implementation

In proposing legislation on payment services, the European Commission identified certain differences between the Member States which were considered to be affecting EU competitiveness. These differences included:

  • EU electronic payment systems were fragmented along national lines with providers and users subject to different service standards, limiting opportunities for economies of scale
  • there were significant price differentials in payment services across the EU, reflecting varying efficiency and quality levels between national systems. Inefficiencies, including slow execution times for payments in certain countries, were deemed to be impacting negatively on business and creating uncertainty for customers
  • the level of competition between providers in some countries was deemed to be unsatisfactory, with a low level of market entry, and barriers to access for new providers

In 1997, Directive 97/5/EC on consumer protection rules for cross-border credit transfers (Credit Transfers Directive) was agreed. In 2001, the Commission brought in Regulation 2560 on cross-border payments in euros (Payments Regulations). This Regulation stipulated that cross-border payments in euro should be the same price as an equivalent domestic payment in euro within any Member State, and was intended to provide industry with an incentive to build the payments infrastructure necessary for the creation of the Single Euro Payments Area (SEPA). These existing pieces of legislation have, to some extent, made it easier and cheaper to make euro payments across the EU. They have also encouraged industry to start the process of building the payments infrastructure necessary for SEPA.

In 2003, the Commission published a consultation document identifying 21 potential barriers to the development of SEPA (Communication on a New Legal Framework for Payments in the Internal Market, December 2003). Following detailed consultation, the Commission decided to proceed with a proposal for a Directive to address the issues identified.

In 2005, the Commission adopted a legislative proposal for a PSD. Political agreement between the European Council of Ministers and the European Parliament was reached in April 2007, and the PSD was formally adopted on 13 November 2007. The PSD states that Member States must implement the PSD by 1 November 2009.

The PSD amends the:

  • Distance Selling Directive (97/7/EC)
  • Banking Consolidation Directive (2006/48/EC)
  • Distance Marketing Directive (2002/65/EC)

The PSD also repeals the Credit Transfers Directive and Commission Recommendation 97/489/EC on transactions by electronic payment instruments. The Payments Regulations remain in force.

The main aims of the PSD are to:

  • enhance competition between different types of payment service provider
  • harmonise market-access requirements for payment institutions (which in turn is designed to achieve a level playing field between banks and non-banks) and encourage innovation
  • have clear and simple information requirements for payment service providers and their customers (known as users or end-users) in order to increase transparency
  • standardise rights and obligations for users and providers of payment services, with an emphasis on a high-level of consumer protection

What are payment services?

The aim of the PSD is to harmonise the regulation of payment services across the EU. Article 4(3) of the PSD states that a payment service is any business that is listed in its Annex. The types of business that appear in the PSD’s Annex include:

  • services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account
  • services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account
  • execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider:
    • execution of direct debits, including one-off direct debits
    • execution of payment transactions through a payment card or similar device
    • execution of credit transfers, including standing orders
  • execution of payment transactions where the funds are covered by a credit line for payment service user:
    • execution of direct debits, including one-off direct debits
    • execution of payment transactions through a payment card or similar device
    • execution of credit transfers, including standing orders
  • issuing and/or acquiring of payment instruments
  • money remittance
  • execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting only as an intermediary between the payment service user and the supplier of the goods and services

What is a payment instrument?

Article 4 of the PSD contains the following definition for a payment instrument:

any personalised device(s) and/or set of procedures agreed between the payment service user and the payment service provider and used by the payment service user in order to initiate a payment order.

What is a payment service provider?

Article 4(9) of the PSD provides that a payment service provider is any one of the bodies listed in Article 1(1) of the PSD or a body which has a waiver under Article 26 of the PSD. The bodies listed in Article 1(1) of the PSD are:

  • credit institutions within the meaning of Article 4(1)(a) of Directive 2006/48/EC (Re-cast Banking Consolidation Directive)
  • electronic money institutions within the meaning of Article 1(3)(a) of Directive 2000/46/EC (E-Money Directive)
  • post office giro institutions which are entitled under national law to provide payment services
  • payment institutions within the meaning of the PSD (see below)
  • the European Central Bank and national central banks when not acting in their capacity as monetary authority or other public authorities
  • Member States or their regional or local authorities when not acting in their capacity as public authorities

Payment institution

The PSD introduces a new type of payment service provider known as the payment institution.

Article 4(1) of the PSD defines a payment institution as:

a legal person that has been granted authorisation in accordance with Article 10 to provide and execute payment services throughout the Community.

Where the PSD makes reference to payment institutions it generally means payment service providers other than credit institutions and electronic money institutions.

Three central concepts

The PSD introduces 3 central concepts and these are a new:

  • authorisation regime for payment institutions
  • set of transparency requirements
  • framework of rights and obligations in relation to the provision and use of payment services

Authorisation regime

The authorisation provisions can be found in Articles 5 and 10 to 14 of the PSD. Article 10(1) of the PSD provides that Member States shall require payment institutions that intend to provide payment services to obtain authorisation as a payment institution before providing payment services.

Article 20 of the PSD covers the designation of competent authorities. This provides that each Member State shall designate a competent authority that will be responsible for authorisation and prudential supervision of payment institutions.

Article 13 of the PSD provides that the Member State competent authorities will maintain a register of authorised payment institutions. Article 12 of the PSD provides that Member State competent authorities may withdraw the authorisation granted to a payment institution.

Articles 6 to 9 cover the prudential and capital requirements of payment institutions. The initial capital requirements for payment institutions are set out in Article 6 of the PSD and range from 20,000 euros to 125,000 euros depending on the payment institution’s activities.

Other prudential and capital provisions include:

  • own funds (Article 7)
  • calculation of own funds (Article 8)
  • safeguarding requirements (Article 9)

In relation to the calculation of own funds three methods of calculation are prescribed.

Passport

Payment institutions which obtain authorisation in one Member State will be able to passport their business and operate in other Member States without having to adhere to further licensing requirements in other Member States (this licence will apply to the provision of payment services only and not to other unrelated types of business activity in which a firm might choose to engage, and for which the firm would need to apply for any appropriate licences).

Waiver

Article 26 of the PSD provides that Member State competent authorities may waive certain requirements and enter a payment institution onto the register. However, Article 26(1) of the PSD does set out certain requirements on the applicant and these are:

  • in the preceding 12 months the applicant has operated below an average of total payment transactions per month of €3 million
  • no individual involved in the applicant’s management or operation has any previous money laundering or other financial crime convictions
  • the applicant has no desire to operate cross border and make use of the PSD passport right
  • the applicant has its head office or, in the case of an individual, place of residence, in a Member State in which it actually carries on business

A payment institution that has a waiver will still be subject to the PSD’s conduct of business requirements.

Article 17 of the PSD covers the position where a payment institution intends to operate through agents or branches or intends to outsource its activities. Where a payment institution wishes to provide payment services in another Member State by engaging an agent it needs to follow the procedures set out in Article 25 of the PSD.

Transparency requirements

Articles 30 to 50 of the PSD set out transparency requirements that will replace equivalent national rules. The purpose of the transparency provisions is to allow users to receive sufficient information on payment service providers so that they may shop around the EU. Article 32 of the PSD provides that the payment service provider will not charge the payment service user for providing the information. Article 33 of the PSD provides that it is down to the payment service provider to prove that it has complied with the information requirements in Articles 30 to 50 of the PSD.

The information requirements in Articles 30 to 50 of the PSD relate to the payment service contract and the authorisation and execution of a particular transaction. The information requirements cover:

  • the content and provision of terms and conditions
  • the content and provision of remittance information
  • minimum disclosure requirements 
  • fees and charges and rates for currency conversions and sub charges

Rights and obligations for users and providers of payment services

Articles 51 to 83 of the PSD cover the rights and obligations for users and providers of payment services. The key provisions include: 

  • Articles 51 to 63 of the PSD set out rules relating to the authorisation of payment transactions. These establish what constitutes authorisation and what happens in the event of unauthorised payments being made and also establishes provisions for refunds for certain types of payments. Article 51 provides a specific exemption for micro-enterprises and electronic money
  • Articles 64 to 78 of the PSD set out rules relating to payment orders and amounts transferred, harmonising the point in time at which a payment is considered to be accepted by a provider and requiring that providers ensure that the full amount of the payment transferred is received by the intended recipient. Articles 68 to 73 of the PSD set out provisions for execution time and value date
  • Articles 74 to 78 of the PSD cover liability
  • Article 79 of the PSD covers data protection
  • Articles 80 to 83 of the PSD cover penalties and complaints and redress procedures

Commission review

As part of the transposition process, the Commission plans to hold meetings with Member States in the second half of 2008 to ensure consistent interpretation of the PSD’s requirements. The Commission is expected to review the impact of the PSD within three years of 1 November 2009.

UK implementation – HM Treasury

In the UK , HM Treasury and the Financial Services Authority (FSA) will be responsible for implementing the PSD’s provisions.

In July 2006, HM Treasury published Payment Services Directive: a consultation document. This paper was useful in that it set out HM Treasury’s thoughts on how it would implement the PSD. It also set out a table which described the types of business that would be affected by the PSD . A copy of this table is set out in Annex 1 of this briefing. A summary of the responses received to the July 2006 consultation was published in December 2006. In December 2006, HM Treasury published a further paper, Payment Services Directive: A revised Regulatory Impact Assessment.

In December 2007, HM Treasury published Implementation of the Payment Services Directive: a consultation document. HM Treasury further consulted on its policy approach towards implementing the PSD, and a summary of responses was published in June 2008.

In July 2008, HM Treasury published Implementation of the Payment Services Directive: a consultation on the draft legislation. The draft legislation which will implement the majority of the PSD’s provisions, the Payment Services Regulations 2008 (the Regulations), was set out in this consultation document. Annex 2 of this briefing contains a summary of the Regulations. The consultation period closes on 3 October 2008.

In autumn 2008, HM Treasury plans to publish a summary of the responses to its July 2008 consultation, together with any revisions to the Regulations. The final version of the Regulations will be placed before Parliament prior to the end of 2008 to give all affected business as much time as possible to prepare for the new regime which will come into effect on 1 November 2009.

UK implementation – FSA

For the purposes of Article 13 of the PSD the competent authority in the UK will be the FSA. The FSA must maintain a public register of authorised payment institutions and their agents and branches. The obligation on the FSA only extends to agents operating in the UK and in the case of authorised payment institutions passporting their services into other Member States. The register must be updated on a regular basis and upon a payment of a fee, a certified copy of all or part of the register may be obtained upon request.

On 28 August 2008, the FSA published Consultation Paper 08/14: Implementation of the Payment Services Directive (CP08/14). This was a joint consultation with the Financial Ombudsman Service (FOS).

  • In CP08/14 the FSA set out a small number of changes to the FSA Handbook that would enable it to carry out its new responsibilities under the PSD. The FSA set out the following proposals:
  • changes to the Dispute Resolution: Complaints sourcebook (DISP) so that FSA complaints handling rules apply to payment service providers
  • changes to the jurisdiction of the FOS so that it can perform the out-of-court redress function which is set out in Article 83 of the PSD
  • changes to the Decision Procedure and Penalties Manual (DEPP) and the Enforcement Guide (EG) to explain the FSA’s approach to enforcement of the PSD’s implementing legislation
  • use of the FSA logo by payment institutions
  • certain consequential changes to the FSA Handbook

The deadline for comments on CP08/14 is 28 November 2008.

During the course of 2009, the FSA plans to publish a document outlining its approach to authorisation and supervision under the PSD.

UK implementation – other bodies

Other UK bodies will have a role to play implementing the PSD:

  • HM Revenue and Customs (HMRC) will retain responsibility for the anti-money laundering supervision of money service businesses (some of which will be payment service providers for the purposes of the PSD), and will additionally be responsible for the anti-money laundering supervision of any mobile phone operators or bill payment service providers
  • The Office of Fair Trading (OFT) will be responsible for the implementation of Article 28 of the PSD (access to payment systems), which has a competition objective, while the Competition Appeal Tribunal (CAT) will be the appellate body. The OFT is expected to publish its approach to the supervision of the PSD requirement for open access to payment systems (Article 28 of the PSD). This document will outline the principles by which the OFT will pursue a complaint against a payment system. The OFT will also publish a list of the payment systems that fall within the scope of this provision of the PSD
  • The Financial Ombudsmen Service (FOS) will provide the out-of-court redress mechanism envisaged in Article 83 of the PSD 

Please click here to view Annex 1 and 2.

What to do next?

Existing payment service providers ie banks and e-money issuers, in the UK should start considering whether their current practices are PSD-compliant. Other businesses may need to assess whether they fall within the definition of payment institution. If they do they should start considering the PSD’s prudential and capital requirements and how they will make their application for authorisation.