Explanatory Memorandum to COM(2008)627 - Taking up, pursuit and prudential supervision of the business of electronic money institutions - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2008)627 - Taking up, pursuit and prudential supervision of the business of electronic money institutions. |
|---|---|
| source | COM(2008)627  |
| date | 09-10-2008 |
Customers and businesses in the European Union are making increasing use of electronic money, which is only now starting to be successful in replacing other means of payment in some Member States for certain types of payments. However, electronic money is still far from delivering the full potential benefits that were expected eight years ago at the time of adoption of Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions (hereafter referred to as the Electronic Money Directive) i.
The evaluation of the application of this Directive i has shown that some of its provisions seem to have hindered the take-up of the electronic money market, hampering technological innovation. Figures on the limited number of fully licensed electronic money institutions or on the low volume of electronic money issued demonstrate that electronic money has not yet really taken off in most of the Member States.
Now that a modern and coherent legal framework for payment services has been established at Community level with the adoption of Directive 2007/64/EC on payment services in the internal market (hereafter referred to as the Payment Services Directive) i, further action is urgently required to promote the emergence of a true single market for electronic money services in the European Union.
This Commission proposal focuses on modernising the provisions of the Electronic Money Directive, with special reference to the prudential regime of electronic money institutions, ensuring consistency with that of payment institutions under the Payment Services Directive. It aims to enable new, innovative and secure electronic money services to be designed, provide market access to new players and foster real and effective competition between all market participants. Innovation in the payments market will create tangible benefits for consumers, businesses and the wider European economy. Creative solutions will promote rapidity of payments, convenience of use and new functionalities for the e-society of the 21st century.
The current volume of electronic money is unsatisfactorily low, mainly because the number of newcomers to the payment market after the adoption of the Electronic Money Directive has not been as significant as expected. Therefore, in most of the Member States, e-money has not yet been considered a credible alternative to cash. The full potential of the electronic money market remains unexploited as it has not significantly contributed to stimulating consumer spending and economic growth. Outstanding electronic money represented only EUR 1 billion in comparison with 637 billion of cash in circulation as of August 2007. 20 electronic money institutions and 127 entities under a waiver were reported at end-2007.
The current Electronic Money Directive was adopted in response to the emergence of new categories of pre-paid payment instruments, in the context of the rapid changes in the business environment linked to the information technology revolution. The Electronic Money Directive sought to open the market for the issuance of electronic money through the creation of electronic money institutions regulated under a specific prudential regime. The objective was to create a clear legal framework designed to strengthen the single market for electronic payments and stimulate competition while at the same time ensuring an adequate level of prudential supervision. However, some inherent weaknesses have prevented it from delivering the expected results. These weaknesses have been identified in the evaluation of the Electronic Money Directive. They are linked mainly to the inadequacy of the legal and prudential framework for electronic money institutions under the current Directive.
The first problem strand relates to the unclear definition of electronic money and the scope of the Directive, which generates legal uncertainty and hinders the development of the market. The second relates to an inconsistent legal framework with a disproportionate prudential regime, inconsistent waivers and passporting procedures as well as the application of anti-money laundering rules to electronic money services. This overall legal inconsistency will increase once the Payment Services Directive provisions have been implemented (by November 2009), since some of the requirements for the prudential regime of payment institutions differ widely from those applicable today to electronic money institutions (e.g. electronic money institutions are currently subject to the principle of exclusivity of activities whereas payment institutions will not be).
Traditionally, payment services were offered by banks regulated by the EU banking directives. These were amended in 2006 and replaced by Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (recast of Directive 2000/12/EC) i and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast of Directive 93/6/EEC) i, hereafter referred to as the Capital Requirements Directive.
Electronic money can be issued by electronic money institutions (which, for the purpose of the Capital Requirements Directive, are considered as special purpose credit institutions), regulated under the Electronic Money Directive. Credit institutions, regulated under the Capital Requirements Directive, can also issue electronic money within the framework of the Electronic Money Directive. Providers wishing to issue electronic money therefore currently have two options:
- to apply for a licence as an electronic money institution under the Electronic Money Directive, or
- to apply for a licence as a full-blown credit institution.
The Payment Services Directive provides the legal foundation for the creation of an EU-wide single market for payments. It aims to establish a modern and comprehensive set of rules applicable to all payment services in the European Union. Member States will have to implement it at the latest by 1 November 2009. Under Title II of the Payment Services Directive, a new category of payment service providers, namely payment institutions, has been created. Payment institutions enjoy a specific prudential regime which is different from that of electronic money institutions and credit institutions. However, payment institutions are not allowed to issue electronic money. They are also prohibited from accepting deposits from payment service users and are permitted to use funds received from payment service users only for providing the payment services listed in the Annex to the Payment Services Directive. The activity of issuing electronic money is not listed in the Annex to the Payment Services Directive, but is implicit within one of the items of Annex I to Directive 2006/48/EC.
The approach is consistent with the policies and objectives to create a true internal market for financial services, and contributes to the creation of a Single Euro Payments Area (SEPA). It is consistent with the Lisbon agenda, as the review of the Electronic Money Directive will promote technological innovation and contribute to growth and jobs.
Consultation of interested parties
Consultation methods, main sectors targeted and general profile of respondents
On the basis of the Electronic Money Directive review clause (Article 11), the Commission launched an evaluation exercise beginning 2005. To conduct this evaluation, the Commission services launched a public consultation in July 2005. Based on the evaluation study and the public consultation, the Commission services published a staff working document on the review of the Electronic Money Directive in July 2006 i.
Member States and interested stakeholders have been regularly consulted on the objectives and content of the proposal. Two expert groups on retail payments, respectively the Payment System Government Expert Group and the Payment System Market Group, discussed the review of the Electronic Money Directive between December 2007 and June 2008. In addition, regular bilateral discussions with Member States, the European Central Bank, the payment industry (banks, electronic money institutions and mobile payment providers), consumer organisations, etc. have been organised.
The main findings of the evaluation report and the public consultation are summarised in the Commission staff working document on the review of the Electronic Money Directive issued in July 2006 i. Most of the respondents saw a need for revising the Directive, claiming that some provisions seemed to have hindered the development of the e-money market.
During the review process, stakeholders expressed concerns that the current Directive lacks legal certainty due to the unclear definition of electronic money and the unclear scope of the Directive.
In addition, the Review Report showed that high capital requirements, as well as certain restrictions (e.g. on the scope of activities of electronic money institutions) and requirements imposed by the Electronic Money Directive, have hindered the development of the electronic money market.
The main contributions to the public consultation can be found at: circa.europa.eu/Public/irc/markt
The Commission made wide use of external expertise during the preparation of this proposal. An evaluation study by external consultants, a public consultation and input from two expert groups provided valuable expertise. A specific meeting was organised with the electronic money industry and the European Central Bank.
A wide range of solutions have been considered to address the problems affecting electronic money services and meet the objectives that have been set. The two main problems, as mentioned in section three, are caused by issues related to:
1. The definition of e-money and scope of the Electronic Money Directive;
2. The inadequacy of the legal framework (prudential regime, waivers and anti-money laundering rules).
Based on an initial screening of the different policy options against the policy objectives, five key policy options were evaluated: 1) do nothing; 2) issue a simple guidance note; 3) apply the prudential regime of payment institutions to electronic money institutions; 4) apply a specific prudential regime for electronic money institutions; and 5) repeal the Electronic Money Directive.
Based on the evaluation of the policy options, it has been considered that alignment with the Payment Services Directive, as envisaged in both policy option 3 and policy option 4, would be the most appropriate way forward. Both options are expected to have a positive impact on the uptake of the electronic money market in terms of electronic money in circulation (a potential increase up to EUR 10 billion) and the number of institutions (up to 120 electronic money institutions).
The main advantages of policy option 4 are the availability of a specific prudential regime commensurate with the risks posed by electronic money institutions and maintenance of the existing reporting requirements for electronic money institutions to ensure market monitoring. The disadvantage would be a higher administrative burden, which remains however proportionate to its objective.
Policy option 3, applying the prudential requirements relating to payment institutions, would have the advantage that it would lower the administrative burden as no reporting would be required. The main disadvantage is that this would complicate market monitoring. In addition, the prudential regime in question is indirectly linked to the risks of electronic money institutions via payment volume as electronic money is used for executing payments.
Policy option 1 (do nothing) or policy option 2 (issue a guidance note) would maintain the complexity of the legal framework after the transposition of the Payment Services Directive in 2009 and would hinder further market development. Option 5 (repeal the Directive) would create legal uncertainty and hinder the development of new electronic money services.
The Commission's impact assessment is accessible at:
europa.eu.int/comm/secretariat_general/impact
Contents
- Legal elements of the proposal
- BUDGETARY IMPLICATION
- Objectives of the proposal
- General context
- Consistency with other policies and objectives of the Community
- Consultation of interested parties and impact assessment
- Summary of responses and how they have been taken into account
- Collection and use of expertise
- Impact assessment
- Summary of the proposed action
- Articles 1 and 2 : Clarification of the scope of the Directive and of the definition of electronic money
- Articles 3, 6, 7 and 9 : Revision of the prudential requirements
- Articles 8 and 9 : Activities and safeguarding requirements
- Article 5 : Redeemability
- Article 10 : Waiver
- Article 16 : Money laundering rules
- Article 17 : Amendments to Directive 2006/48/EC
- Legal basis
- Subsidiarity principle
- Proportionality principle
- Choice of instrument
- ADDITIONAL INFORMATION
- Simplification
- Repeal of existing legislation
The new proposal has a complete new structure. Given the desired alignment to the Payment Service Directive and the fact that all provisions have been amended, the existing Electronic Money Directive will be repealed and replaced by the new proposal.
The major changes that will be introduced by the proposal are the following:
Articles 1 and 2 : Clarification of the scope of the Directive and of the definition of electronic money
The current Directive raises legal uncertainty as to its applicability to certain business models and hinders the development of new and innovative services. As proposed in the Review Report, clarification of the definitions of electronic money and electronic money institution is necessary to address concerns as to which business models fall under the Directive and which services are regulated by Directive 2007/64/EC. A technically neutral and simpler definition of electronic money is proposed.
Currently, the prudential regime of electronic money institutions is closely linked to the prudential regime of credit institutions under Directive 2006/48/EC. Based on the qualitative risk assessment carried out in its impact assessment, the Commission considers that the current prudential requirements are excessive with regard to the risk of the activity. In order to facilitate possible future integration of the provisions of this Directive into Directive 2007/64/EC and given the close interrelationship between electronic money and electronic payments, it is important to ensure seamless consistency between the respective regimes for payment institutions and electronic money institutions. The proposal therefore includes the following adaptations:
Application of the qualitative prudential requirements under Title II of Directive 2007/64/EC to electronic money institutions (Article 3). This includes the authorisation procedure of Directive 2007/64/EC, following which e-money institutions have to submit an application to the competent authorities of the home Member State, including, inter alia , the programme of operations, a business plan and evidence of initial capital and governance arrangements. The competent authorities shall inform the institution within three months after receipt of the application whether the authorisation is granted or refused.
Lowering of the initial capital requirement from EUR 1 million to EUR 125 000 (Article 6). The initial capital is considered to be excessive and disproportionate with regard to the risk of the service. This high initial capital is seen as a major obstacle for smaller firms (mainly waived institutions) to apply for an authorisation to become an electronic money institution.
Replacing current ongoing capital requirements with new methods of calculation based on the nature and the risk profile of electronic money institutions (Article 7).
Today, under Article 1 i of the Directive, electronic money institutions are prohibited from doing any business other than the issuance of electronic money and closely related services. This restriction of activities is not in line with the non-exclusivity approach for payment institutions which, under Directive 2007/64/EC, may engage in non-payment services business (e.g. retailing or telecom activities). A more coherent approach is advisable. Electronic money institutions' activities should not necessarily be restricted to issuing electronic money and therefore safeguarding requirements such as those in Article 9 of Directive 2007/64/EC should apply in cases of hybrid electronic money institutions.
Clarification is needed on the application of redeemability requirements (the possibility for a consumer to get back his electronic money at all times by credit transfer or in cash), with special reference to their application to mobile telecom. Consumers should have the right to redeem funds at all times, free of charge if redemption takes place in total. Where redemption is partial, before termination of the contract, the issuer may charge the holder a fee which should be commensurate with the cost of the operation.
The Review Report outlined that a balance should be struck between facilitating market access, ensuring adequate safeguards and avoiding competitive distortions. There is also a need to provide incentives to institutions that operate under a waiver but envisage becoming fully licensed institutions. It is suggested that the electronic money waiver regime be aligned with the regime in Article 26 of Directive 2007/64/EC. Such a change must be seen in the context of the lighter entry requirements for electronic money institutions.
In view of the low average amounts involved in electronic money transactions, full application of identification and record-keeping requirements could be considered disproportionate, taking into account their high administrative costs for the payments industry, in a low-value online or mobile payments context. The current Directive contains no specific provisions covering anti-money laundering. However, Directive 2005/60/EC introduced a simplified customer due diligence regime which applies to electronic money, and a similar regime has been inserted in the Regulation on information on the payer accompanying transfers of funds. It is proposed that these low amounts be aligned with those in Articles 34 and 53 of Directive 2007/64/EC and, therefore, that the amounts of the thresholds in Article 11(5)(d) of Directive 2005/60/EC be increased. This measure would contribute to avoiding double identification in account-based situations. In addition, accompanying measures adopted by the industry would contribute to the mitigation of the risk. This would be in line with the self-regulatory approach in the area of payments (e.g. SEPA).
E-money institutions shall not accept deposits. The deposit-taking shall remain the monopoly of credit institutions. However, it is appropriate to consider e-money institutions as 'financial institutions' for the purpose of the Capital Requirements Directive 2006/48/EC. Changes are inserted in Article 4 i and in Annex I of the Capital Requirements Directive in order to reflect this and ensure that credit institutions may continue to issue e-money.
The legal basis for the proposal is Articles 47 i and 95 of the EC Treaty.
The subsidiarity principle is respected. According to this principle, action at Community level should be taken only when the objectives envisaged cannot be achieved sufficiently by Member States alone.
Directive 2000/46/EC has created a harmonised single market for the provision of electronic money in the European Union. However, some obstacles remain and need to be addressed at pan-European level. Electronic commerce is, by its very nature, a global issue and national solutions alone would hamper the development of electronic money. A Community-wide approach is appropriate because the applicable rules and principles have to be the same in all Member States in order to achieve legal certainty and a level playing field for all market participants.
The proposal respects the proportionality principle, since it aims to ensure full harmonisation only of the issues that are necessary to overcome the obstacles to the development of a single market for electronic money and that were identified during open stakeholder consultation.
All the proposed rules have been subject to a proportionality test and intensive consultation to ensure appropriate and proportionate regulation. This is particularly reflected in the prudential rules for electronic money institutions, the waiver and the redeemability clauses.
Regulatory action continues to be required to provide the necessary legal framework harmonising the prudential supervision of electronic money institutions to the extent necessary for ensuring, in particular, their sound and prudent operation and financial integrity. The Commission therefore proposes to keep the same instrument (a directive).
The Commission proposes a directive rather than a regulation as this former instrument is better suited to harmonising existing legislations. It is also consistent with the nature of the previous instrument chosen to harmonise rules in this field, and with other instruments adopted in related areas, such as the PSD.
The proposal has no implication for the Community budget.
Simulation, pilot phase and transitional period
There will be a transitional period for certain already established electronic money institutions with regard to compliance with the provisions in Title II of the Directive.
The proposal provides for simplification of legislation, simplification of administrative procedures for public authorities (EC or national), and simplification of administrative procedures for private parties.
Supervision of electronic money institutions will follow a harmonised and coherent approach, aligned with that of payment institutions, with the same rules for all Member States. This will help to simplify administrative procedures.
The full harmonisation approach of the proposal simplifies procedures for private parties.
The adoption of the proposal will lead to the repeal of existing legislation. The Directive will replace Directive 2000/46/EC.