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Friday, 18 October 2013

Will EU Red Tape Kill Store Cards And Loyalty Schemes?

Following my earlier SCL article on PSD2, I've had a few more thoughts on the European Commission's proposals aimed at ‘limited network’ services, such as retail store cards, gift cards, fuel cards and loyalty programmes. Remember, the Commission wants the changes agreed by Spring 2014, and Member states will have two years to implement them. It will be another five years before the Commission revies the effect of the changes, so this is the last chance to rectify the mistakes in PSD1 and avoid more in PSD2...

You will recall (no doubt) that the PSD exempts payment transactions based on payment instruments accepted only within the issuer's premises or certain 'limited networks'. Such instruments are also exempt from the definition of 'electronic money' in EMD2 by reference to the PSD exemption. While this exemption survives under PSD2, operators will be obliged to notify the regulator if the average of their transactions in the preceding 12 months exceeds €1m per month. The regulator may then disagree that the exemption applies. This catches 'closed loop' stored value and other instruments such as retail store cards, gift cards, fuel cards and loyalty programmes. Yet, as discussed previously here and here when the UK Treasury considered self-regulation to ring-fence funds in this area, there is no evidence of any harm to consumers in such scenarios, compared to the collapse of retail pre-payment schemes such as those offered by Farepak or tour operators which appear not be caught.

Here are my additional thoughts:
  1. Other than simply the volume/value, there seems to be implied an additional basis on which a regulator might decide that a service which otherwise fell within limited network exemption below the threshold average of €1m per month would no longer qualify when it reached that threshold. What basis would that be?

  2. If the regulator were to disagree that the limited network exemption under PSD2 applies, is the service provider automatically guilty of an offence without any possibility of an orderly transition to full authorisation or finding an authorised payment institution or PSD agent to operate the service?

  3. Similarly, if the regulator were to disagree that the limited network exemption under PSD2 applies to a ‘closed loop’ stored value service, does that amount to a decision that the exemption from the definition of “electronic money” under EMD2 would also cease to apply to that service? If so, a service provider who was lawfully operating within the exemption below the volume threshold would suddenly find itself in breach of both PSD2 and EMD2, again without any possibility of an orderly transition to full authorisation or finding an authorised e-money institution to operate the service.

  4. Outcomes such as those in scenarios 2 and 3 above seem to conflict with the privilege against self-incrimination and may be otherwise unacceptable from a public policy standpoint (e.g. the avoidance of retrospective regulation). Practically speaking, this mechanism could also drive every service provider with a programme operating anywhere near the volume threshold to approach the regulator for an indication of whether it’s programme would, if it reached the threshold, be deemed in breach. However, even doing that would open up a similar risk that the regulator may disagree that the exemption applies, with the ugly consequences that may follow. Accordingly, we may find that the operators of all limited network payment schemes apply for authorisation, or use an authorised firm to operate their schemes merely as a precaution against the possible commission of an offence. Or they cancel their programmes altogether. 
Surely such 'regulatory creep' is not the intention...?