The SEPA Migration End Date Regulation – “SMED”

1. The SEPA Migration End Date Regulation – “SMED” European Payment Regulation Conference London 6th December 2011

2. SEPA and the SMED Regulation • Background & process of the regulation from here: • Draft regulation issued for consideration by the European Parliament in Dec 2010 • Semi-public compromise text issued in June 2011 after examination by ECON • Now in the “trialogue” phase • If passes it becomes Member state law automatically, more or less immediately (there is no process of transposition as there was with PSD) • The re-draft foresees a staggered implementation period for the different in-scope transaction types of which there are now at least 4 • There could be an extensive list of out-of-scope payment products and of financial products that are not viewed as ‘payment products’. • Concrete timeline as per compromise text of June 2011: • Migration date for credit transfers: February 2013 • Migration date for direct debits: February 2014 • Migration date for “niche” schemes: August 2015 (credit transfers) + August 2016 (direct debits) • Dependent upon the passage of the Regulation in November 2011

3. Scope definition • There are no country-by-country Master Lists of the different categories of payments and financial products • Nor is there an agreement on who will create them • The lists needed to outline the core scope for what has to be migrated against the dates on the previous slide: • legacy Credit Transfer and Direct Debit payment products that are seen by each community as directly corresponding to the SEPA Schemes • Credit Transfer and Direct Debit "Niche products“ • The lists should also include the country-specific features of Credit Transfers (or Direct Debits) for tax payments, salary payments etc, where it would be viewed as completely legitimate to define an AOS around the SEPA Schemes, in the same way that Finland has (Tax Payment Date), so that payment service users do not lose functionality

4. Scope definition • The lists must also list the other payment and financial products that correspond to the categories that are defined in the SMED, and – for completeness – those that fall outside its scope: • Financial products that have a credit transfer or a direct debit embedded in them and where the migration path is that the embedded payment product must be migrated by the core dates but the rest of the product does not • Transactions which are initiated by means of a payment card at the point of sale, and directly result in a direct debit from a payment account identified by BBAN or IBAN where migration can be as late as 2016 • Out-of-scope payment products such as Card, Remittance, Mobile and High-Value (as well as cheque, cash and other paper payment products) • Financial products which are not "payment products" and which do not have to be migrated at all

5. Highlights of the June 2011 version • Now only applies to non-urgent payments, being euro credit transfers and direct debits where both endpoints are in the EU • Provision for wider controls over direct debits where users can specify limits to their bank on amounts, periodicity and payees i.e. there can be a Debtor-driven mandate as well as a Creditor-driven one • Consumers to be allowed to continue to use BBAN for a transitional period • No explicit monopoly for the EPC’s SEPA schemes but it is still hard to see how another scheme could reach the qualification threshold; the authorities did not want to create a de jure monopoly, but have created a de facto one and have even raised the bar

6. Highlights of June 2011 version (cont’d) • Banks must make it possible for customers to use physical XML for customer-to-bank communication as from the migration dates • Consumers and microenterprises are exempted from the provision whereby bulk files must be in physical XML • Corporates (including most SMEs) and public bodies may get a transition period at the election of each Member State before putting their bulk files into XML • No customer will ever be forced to use physical XML for individual payments • No multilateral interchange fees on direct debit collections at all, subject to a transition period • Multilateral interchange fees on direct debit fails (R-transactions) will be permitted but under stringent conditions

7. Timing – based on maximum transition periods

8. What does it all mean? • The distinction between High- and Low-value is maintained, but there won’t be Central Bank Reporting on either • SME’s, corporates and public bodies must use ISO20022 XML for files, but they may adopt as late as 2016 • The migration path country-by-country and scheme-by-scheme is opaque, except for Finland • But all users (except consumers) must use IBAN for all activity in schemes that have migrated, as from 2013 • If the scheme hasn’t migrated, they can stick with BBAN • Some schemes may not migrate at all

9. We get the DMF and the CMF • European Parliament rapporteur criticised the selection exclusively of the Creditor Mandate Flow in SEPA Direct Debit • SMED will contain extra checks that the Debtor Bank must perform or allow their customer to specify – just as if the scheme had been designed on the Debtor Mandate Flow • So the result is a “Mixed Model” • EPC commissioned research as follows (“in den Wind gesprochen”):

10. Trialogue debate • Between European Parliament, European Council and European Commission • The European Parliament’s Rapporteur (from Finland) presented a report dated 26th July 2011 which demonstrates the differences of position between the trialogue discussion partners • On all other issues they are aligned • That means there is no chance of the banks getting a better result on what has been presented so far except in the areas where the trialogue partners are not aligned

11. Trialogue main issues – Parliament’s view • Same migration date for Credit Transfer and Direct Debit, or split dates: Big Bang date probably would be later than the first of two split dates • MIF on national Direct Debit collections to be withdrawn in 2014 rather than 2018 – meaning on the Direct Debit core scheme migration date • Shortening the length of the transition period for all customers but consumers and microenterprises to adopt physical XML for bulk files

12. Trialogue main issues – Parliament’s • Increasing the length of the transition period for consumers to have to adopt IBAN • Free facilities to enable consumers to continue to use BBAN • Facilities to exist within the banking side so that customers only need to state IBAN and not BIC as well • Tug-of-war on the respective powers of the European Commission and the European Parliament to opine on payment scheme contents

13. Projected outcome • A very complicated migration phase since no customer will be able to stop using BBAN until no banking product requires it • Parallel running of legacy data standards and XML for bulk file users, since schemes migrate at different times to the availability of/obligation to use XML for running that scheme • Many payment and banking products remain out of scope • Industry facilities (IBAN/BBAN conversion, BIC derivation) need to be built together, do not exist now, and will be very costly

14. Strategic outcome • Will this encourage SMEs to trade more actively cross-border with one another, which is the main objective of SEPA (as per the Lisbon Agenda 2000)? • Or will multinationals be the main beneficiaries, in enabling cost-cutting through their Shared Service Centres?