Summary and implications
The Electronic Money Regulations (Regulations) came into force on the 30 April 2011 with the intention of creating a clearer regulatory framework for issuers of electronic money in the increasingly popular pre-paid industry. The Regulations apply to electronic money institutions and, subject to certain derogations from the source directive exercised by the government, to small electronic money institutions (those with average e-money outstanding not exceeding €5 million).
It should be noted that full credit institutions, credit uninos and municipal banks are exempt from requiring authorisation and registration under the Regulations but must have permission under Part IV of the Financial Services and Markets Act 2000 for issuing electronic money
The Regulations define electronic money as an “electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which:
- is issued on receipt of funds for the purpose of making payment transactions;
- is accepted by a person other than the electronic money regulations; and
- is not excluded by either of the two exclusions in regulation 3.”
The first exclusion in regulation 3 states that the type of prepaid balances that will be caught by the Regulations are principally “open loop” schemes, in that the prepaid balance can be used at any retailer that accepts that form of open payment network.
The Regulations do not cover “closed loop” schemes. This is where the balance can only be expended with the issuer itself, for example, a balance with an online wine retailer or a gift card for a music store and would also exclude, for example, your top-up card for the office canteen. In respect of “controlled loop” schemes – in that the balance on that card or account can only be expended at certain retailers as specified by the card issuer or the account bank, such as, gift cards for a franchise of coffee shops – would probably not be covered by the Regulations as long as the retailers where that balance could be expended were made very clear and the ability to spend outside that “controlled loop” was disabled.
The second exclusion in regulation 3 states that a prepaid balance used to make payment transactions executed by means of any telecommunication, digital or IT device where the goods or services are delivered to and used through such a device are excluded, for example, music, online newspaper or video content, electronic books and mobile phone applications bought and enjoyed through the relevant device they have been delivered to.
Other important changes that the Regulations bring in include:
- the initial and minimum ongoing capital requirement for electronic money institutions has been reduced. There are initial and minimum ongoing capital requirements for some small electronic money institutions;
- the scope of activities that electronic money institutions can undertake will be expanded so that they can undertake mixed business activities. This means, for example, that they will be able to carry out unrelated payment services and other unregulated business;
- all electronic money institutions must safeguard funds received from customers for e-money so that, if they become insolvent, the e-money issued will be protected from other creditors’ claims and can be repaid to customers;
- new redeemability requirements will ensure that customers can get their money back up to six years after the end of a contract. Electronic money institutions are also not allowed to refuse to redeem e-money if it is worth less than €10;
- the anti-money laundering rules for electronic money institutions will be updated; and
- a provision for firms to carry out simplified due diligence checks will be raised from €150 to €250. This will be raised further to €500 for transactions within the UK.