The e-money market in Europe has grown sluggishly. Many have blamed the existing e-money directive (Directive 2000/46/EC) (the Existing EMD). On 27 July 2009 the Council of the EU adopted a new e-money directive replacing the Existing EMD. The new e-money directive (the EMD2) re-balances European regulation of e-money. In this article, Brett Hillis and Melissa Thornton of Denton Wilde Sapte look at the key changes.
Recital 5 to the Existing EMD states that it is desirable to provide a regulatory framework to assist “electronic money in delivering its full potential benefits and that avoids hampering technological innovation in particular”. The Existing EMD has not lived up to this ambition. Few e-money licences had been granted.
The fact the Existing EMD was a “minimum harmonisation” directive meant differing interpretation and implementation across Member States hindered its success. The Existing EMD also failed to set a “level playing field” between e-money institutions authorised under EMD (ELMIs) and those banks that issue e-money. The biggest problem has been the limitation preventing ELMIs from engaging in all but a limited range of closely related activities. This was introduced to prevent an ELMI failing because of its non-e-money activities. But it has prevented trusted brands from the non-financial world (e.g. mobile phone operators) entering the European e-money market. It has caused Europe to lag behind many developing countries in harnessing the huge potential of the mobile phone as a platform for banking. To compensate for the restriction on other activities ELMIs were given a simplified capital regime compared to banks. But it has appeared to many that this regime set requirements that were too high when set against the risks in e-money issuance.
The Payment Services Directive (2007/64/EC) (the PSD) adopted in 2007 showed some of these lessons had been learnt. The PSD sets prudential requirements for those institutions providing payment services that are not credit institutions or ELMIs. It also sets conduct of business rules that apply to ELMIs as well as banks and other payment institutions. As a result it seems natural to align EMD2 with the PSD where appropriate. Fortunately, EMD2 takes this approach. By making EMD2 a maximum harmonisation directive and aligning it with the PSD the Commission hopes to:
(a) create a level playing field between payment service providers;
(b) harmonise national rules and promote the take-up and use of e-money; and
(c) improve customer protection.
Member States must implement EMD2 into national law within 18 months of it coming into force. The Commission will review EMD2 at the same time as the PSD i.e. by 1 November 2012.
Scope and definition of e-money
EMD2 applies to electronic money issuers, which are credit institutions (as defined by Directive 2006/48 (the CRD)), ELMIs and post office giro institutions. However, title II of EMD2, which deals with the requirements for the taking up and pursuit of business and prudential supervision, only applies to ELMIs as credit institutions are already authorised under the CRD.
EMD2 amends the definition of e-money to ensure that Member States apply it consistently. The new definition states EMD2 applies to account-based e-money products (some Member States had thought not under the EMD). However, EMD2 no longer applies, in line with the PSD, to:
(a) “limited networks” i.e. where the service is based on an instrument that can be used to acquire goods or services only within the premises used by the issuer, or under commercial agreement, whether within a limited network of service providers or for a limited range of goods or services; and
(b) services based on telecommunications, digital or IT devices, where the goods or services bought are delivered to and used through an IT device, provided the operator is not only an intermediary.
This conforming of scope is to be welcomed.
The PSD passporting regime has replaced the CRD’s rules on passporting for ELMIs. It was felt that using the CRD passporting regime resulted in ELMIs having inferior passporting rights to banks and, in particular, that an ELMI wishing to set up a branch in a Member State other than its own may be subject to additional requirements.
To create a level playing field between ELMIs and payment institutions EMD2 imports PSD’s qualitative prudential requirements. This means ELMIs need to comply with the authorisation procedure for payment institutions under the PSD. Under the Existing EMD the initial capital for ELMIs is €1million. EMD2 reduces this to €350,000. Lowering this threshold should encourage market access for smaller ELMIs.
EMD2 contains four methods for ELMIs to calculate their own funds. Options A, B and C are the same as in the PSD. Regulators may allow ELMIs to use options A, B and C for activities not linked to issuing electronic money. However, ELMIs that issue electronic money must use option D. This requires ELMIs to have own capital of 2 per cent of the average outstanding electronic money (as defined by EMD2). The competent authority can vary the amount of capital an ELMI is required to hold by up to 20 per cent depending on factors such as the institution’s risk management processes and the internal control mechanisms.
Activities and safeguarding
Under EMD2 ELMIs will be able to undertake mixed business. This will help mobile phone operators and other potentially major brands to enter the e-money market. EMD2 also removes the existing limits on investments ELMIs can make. The Commission hopes the amendments will encourage institutions previously excluded from the e-money regime to register for licences, thus fostering competition and innovation.
To protect consumers from the risk of the ELMI becoming insolvent, EMD2 introduces measures to protect consumer funds in line with the PSD. EMD2 requires an ELMI to safeguard funds once credited to the ELMI’s payment account. Funds cannot be co-mingled with those from other activities and must be:
(a) deposited in a separate account in a credit institution or invested in secure low-risk assets; and
(b) protected from the creditors of the ELMI (e.g. by a trust account) or covered by an insurance policy or comparable guarantee from an insurance company or credit institution.
Where the ELMI can not calculate the precise amount of funds that need to be safeguarded it can safeguard a representative portion. This helps mobile network operators and electronic voucher issuers who were unable to split out their customers’ prepaid funds for mobile services and funds for e-money.
The EMD waiver regime is now in line with the PSD. Waivers are allowed in relation to Articles 3 (general prudential rules); 4 (initial capital), 5 (own funds) and 7 (safeguarding requirements). To be able to get a waiver from the competent authority of the Member State in which it is based, the ELMI must ensure that:
(a) its total business activities generate an average outstanding electronic money less than €5 million;
(b) the legal or natural persons operating or managing the business have not been convicted of money laundering, terrorist financing or other financial crimes; and
(c) its head office is in the Member State where it pursues its business.
But firms with a waiver will not be able to passport their services into another Member State.
The EMD clarifies that e-money issuers can charge a fee for redemptions only if the contract between the issuer and the electronic money holder allows for a fee and one of the following applies:
(a) the electronic money holder asks for a redemption before the termination of the contract;
(b) the contract provides for a termination date and the electronic money holder terminates the contract before that date; and
(c) redemption is requested more than one year after the date of termination of the contract.
There is no longer a limit on the fee that can be charged; however, the fee must be “proportionate and commensurate” with the costs incurred by the ELMI. These provisions only apply to consumers; other electronic money users’ ability to redeem is subject to contract. The changes better align EMD2 with the telecoms regulatory regime familiar to mobile network operators.
EMD2 amends the Third Money Laundering Directive (Directive 2005/60/EC) to align the threshold values below which an e-money issuer needs to comply with full due diligence requirements for anti-money laundering purposes with amounts specified in the PSD. As a result there need be no due diligence provided the following upper thresholds are not exceeded:
(a) €250 where the e-money device can be recharged; and
(b) €2,500 on the total amount transacted in a calendar year, except when €1,000 is redeemed in that calendar year.
Member States can increase the limit in (a) to €500 for national payment transactions, and are free to set lower limits.
Amendment to the CRD
EMD2 distinguishes between credit institutions, which can accept deposits, and ELMIs, which are not legally able to do so. Previously e-money issuers had the status of credit institutions under the CRD without being able to accept deposits. This affected ELMIs’ passport rights. Now there is a clear distinction between credit institutions which can accept deposits and ELMIs which cannot.
Under EMD2 ELMIs already conducting e-money activities under the Existing EMD in the Member State in which their head office is located can continue to do so without having to comply with the new authorisation procedure. However, ELMIs must submit all relevant information to the competent authorities within six months of the date of EMD2 coming into force. This is so the competent authorities can assess whether the ELMI in question complies with EMD2 and, if not, the measures it must take to ensure compliance. Member States may allow firms currently benefiting from a waiver to continue operating without the need to seek authorisation until 12 months after the EMD2 comes into force.
EMD2 should be warmly welcomed. ELMIs were too heavily regulated and it is heartening to see the regime governing them being liberalised but with proper account being taken of market and consumer confidence. It may be the last measure of financial liberalisation we see for some time.
This article originally appeared in E-Finance and Payments Law and Policy.