FCA Applies More Handbook Rules To E-money and Payment Services

With the prospect of a disorderly Brexit looming large, the FCA is consulting on proposals to extend its Principles for Business and customer communication rules to e-money and payment services, whether they are provided by banks, e-money/payment institutions or registered account information service providers. There are also new rules and guidance for currency exchange transfer services. The consultation closes on 1 November 2018, with a view to publishing the final rules by the end of January 2019, to apply from 1 April.  Some rules will not apply to incoming EEA firms, and it remains to be seen whether the European Commission or other EU member states will view the extension of these rules as infringing the 'maximum harmonisation' approach to the regulation of payment services and/or regulatory divergence by the UK post-Brexit. But with the end of financial services passporting, anyway, perhaps the FCA no longer cares - and most firms seem to have started setting up their EEA passport hubs in other EU member states in any event.

Generally, the supply of e-money services is governed by the Electronic Money Regulations 2011 ("EMRs"), which implement the second E-money Directive; and both e-money and payment services are governed by the Payment Services Regulations 2017 ("PSRs"), which implement the second Payment Services Directive.

While the FCA is the regulator appointed to supervise these regulations, most of its rules in the Handbook do not apply, as the E-Money and Payment Services Directives require 'maximum harmonisation' - consistent implementation in all member states to ensure a level playing field across the European Economic Area. However, the PSRs introduced some scope for the FCA to extend its rules to these services, essentially where they are not within the scope of the directives or inconsistent with the regulations or the principle of 'maximum harmonisation'.

While the PSRs prescribe certain information to be given to e-money and payment service customers, they do not create overriding obligations, or the possibility of regulatory redress, concerning the 'fair treatment' of customers, for example, or that firms' communications must be clear, fair and not misleading.  Some payment service providers have fallen foul of the UK's Advertising Standards codes, however.

Accordingly, the FCA considers there is scope to apply its Principles for Businesses and associated guidance which create general management obligations for payment services firms, including the requirement to 'treat customers fairly'; as well as the rules and guidance in BCOBS 2 set out the FCA's expectations of firms when communicating about, or promoting, their services to customers. The specific application of these rules to e-money and payment services is explained in Chapter 3 of the consultation paper.

In addition, the proposed new rules and guidance concerning currency exchange transfer services are designed to enable the FCA to sanction misleading communications to consumers, the exchange rates they can achieve, the cost of those services and comparing alternative providers’ fees. These proposals are explained in Chapter 4 of the FCA's paper.

It remains to be seen whether the European Commission will view the FCA's proposals as cutting across the principle of maximum harmonisation, and its specific efforts to improve the transparency and fairness around payment services, including currency exchange services.

But with the prospect of a disorderly Brexit looming large, and the end of financial services passporting, perhaps the FCA no longer cares...  Most firms seem to have started setting up their EEA passport hubs in other EU member states in any event.

Review of E-money Regulation: More Regulation For Retailers?

The European Commission has just reported on the status of EU e-money regulation, raising the prospect of more regulation for retailers who offer 'gift cards' and other loyalty schemes.

Electronic money, or "e-money" is basically electronically stored value that can be used to make payments to people other than the issuer, while "limited network" or 'closed-loop' stored value can only be used to pay the issuer (as with a loyalty points scheme, fuel card or gift card, for example).

E-money is not to be confused with "crypto-currencies" like Bitcoin, Ether etc. which are not considered "funds" for regulatory purposes because they are not 'fiat' currencies that are backed by governments as a matter of law ('legal tender').

The issuance of e-money was first regulated distinctly from banking by the EU in 2000, under the E-money Directive (EMD) which was replaced by a new directive (EMD2) from 2011. By then the activities of electronic money issuers/institutions (EMIs) had also become regulated under the Payment Services Directive (PSD) from 2009, which was replaced in mid-January 2018 by regulations implementing PSD2.

Inconsistencies

These directives are supposed to be applied the same way by all member states in the European Economic Area (28 EU member states plus Iceland, Liechtenstein and Norway). But the Commission has found that EMIs "engage in "forum shopping", choosing to register in the Member States that provide the most beneficial legal frameworks from their viewpoint." EMIs can then use a "passport" process to offer their services in the remaining EEA member states.

For example, the Annex to the report shows that the UK is home to 87 of the EU's 172 E-money institutions (EMIs), with Malta being the next most popular base (13) then Cyprus (10). This also means that the 87 EMIs based in the UK will need a new base in one of the remaining EEA member states from which to passport their EEA-facing services after Brexit.

The UK is also home to 19 of the EU's 74 small EMIs (who transact less than €3 million a month over a 12 month period), with the Netherlands home to 23 and Latvia 12. But small EMIs have no passport rights, anyway, so do not raise the same concerns.

Benefits of EMD2

The benefits of EMD2 were cited as more clarity and lower capital requirements than EMD1; on top of the fact that payment services regulated under PSD2 and e-money services can be provided under the EMD2 authorisation.

The Commission did not find any consumer harm associated with using e-money or redeeming it for cash (withdrawing the funds equivalent to their e-money balance to another payment account or via an ATM).

Compliance costs are said to range from 1% to 5% of overall costs (€25,000 to €500,000) offset to some degree by the reduction in capital requirements from €1 million under EMD1 to €350,000 for full EMIs under EMD2 (compared to €125,000 for full payment institutions under PSD2).

Issues

Negative factors associated with EMD2 were found to be mainly the inconsistencies in how each EEA member state views the role of an EMI's "agent" (which the EMI has to register) and "distributor" (of which an EMI just has to notify its regulator); and "limited network" or 'closed-loop' stored value, which is unregulated. The inconsistencies make it more difficult to predict the regulatory status and related requirements from case to case and state to state.

EMIs also complain that banks won't allow them to open bank accounts as easily as other types of firms, although the Commission hopes this will be improved by various access provisions in PSD2, and moves by central banks to allow EMIs (and PIs) access central bank accounts and settlement systems.

Next steps

The Commission will explore ways to improve consistency in interpreting the role of agents, distributors and "limited networks". In addition, it will consider making large 'limited network'  providers subject to some (unspecified) aspects of EMD2, even though they must already register with the local regulator when their network transaction volume exceeds €1 million over a 12 month period).