E-money regulatory update

E-money regulatory update Smartcard Networking Forum 11 April 2006

By way of introduction….. • Definition of electronic money • FSA’s Regulatory Objectives • Principles of Good Regulation • Our basis for regulating e-money • What is going on in Brussels……... • ………even as we speak

Definition of e-money Electronic money is monetary value as represented by a claim on the issuer which is: • Stored on an electronic device • Issued on receipt of funds • Accepted as a means of payment by persons other than the issuer

FSA’s Regulatory Objectives • Market Confidence • Public Awareness • Consumer Protection • Reduction of Financial Crime

Principles of Good Regulation • Efficient and economic use of our resources • Senior management responsibility • Regulatory burdens should be proportionate to desired benefits of regulation • Facilitating innovation • International character of financial services and maintaining competitive position of UK • Minimising adverse effect of regulation on competition • Facilitating competition between regulated firms

Our basis for regulating e-money • European e-money directive (2000/46/EC) • Incorporated into UK law in the FSMA Regulated Activities Amendment Order 2002 (SI 2002/682) • FSA electronic money sourcebook (http://fsahandbook.info/FSA/html/handbook/ELM)

What’s going on in Brussels……. • Review of the e-money directive (should have been completed by 27/04/2005) • Survey by independent consultants of e-money across the EU since regulation • A general (but inarticulate) desire to ease the regulatory burdens • A growing feeling that the e-money directive should be kept separate from the forthcoming Payment Services Directive

Review of e-money directive • This should have been completed by April 2005 • Was delayed pending resolution of the prepaid mobile issue • Public consultation exercise • Meanwhile consultants were engaged to review the working of the e-money directive across the EU • Commission’s recommendations are due this Summer

The evidence uncovered • Market has not developed as expected • Only 7 ELMI licences throughout EEA • Of which 4 are in the UK • E-money in circulation = €225 million • Of which €190 million may be in UK • Lack of solid business case the principal reason • But regulatory burdens may contribute

Directive’s target was wrong? • Directive inspired by plastic cards • But server based e-money has proved more resilient • Other business models must be considered • Contactless cards, transport cards, pre-paid debit, electronic vouchers & travellers cheques; mobile phone products

Success of the waiver • This has been most marked in the UK • 34 waivers granted (72 in EEA) • But some MS have not implemented a waiver regime • In any event the post waiver threshold to full Authorisation is a huge barrier to entry

Lack of a level playing field? This does not yet exist as between: • Full ELMIs • Waived firms • Banks • Business models not catered for by the directive (mobile phone PRS)

EMD’s objectives not yet met • Arguments about scope • Some evidence that technological advances have been inhibited • No level playing field • Directive requirements disproportionate to actual level of risk • Very little take-up of cross-EU passporting

Amendments to definition? • Confirm ‘electronic device’ includes servers • Delete words “of an amount not less in value than the monetary value issued” • Ban issue at a discount in a specific article • Clarify position of mobile network operators as e-money issuers

Capital intensive? • Full e-money issuers (ELMIs) must have minimum capital of €1 million and • Maintain capital at 2% of outstanding e-money liabilities • This is believed to be one of the biggest barriers to market entry • Commission believes there may be a case to lower threshold

Limitation of investments • Significantly limits ELMIs ability to earn a return on their “floats” • Competitive disadvantage with banks • Excludes bank and credit card receivables, thereby creating a funding gap • Commission believe this gap should be closed and list of permitted investments should be reviewed

Restriction on activities • ELMIs restricted to e-money issue and “closely related” services • This amounts to belt and braces given the cumulative prudential requirements • Significant constraint especially for firms where e-money issue is non-core • Commission therefore propose to de-restrict activities of ELMIs

Waivers • Application of waiver is optional • Some MS have not implemented • So some markets less attractive • Not passportable • Need for incentives for waivered firms to move to full authorisation • Therefore must be viewed in context of relaxing entry requirements for full ELMIs

Financial Crime and e-money • As defences against crime are strengthened in traditional firms……. • ……criminal activity may be displaced towards new firms • Smartcards are vulnerable to a risk of money laundering • So the law requires AML defences to be built • See Joint Money Laundering Steering Group guidance (www.jmlsg.org.uk)

Financial crime and e-money • EMD contained no AML measures • But 2 MLD does • 3MLD specifically addresses e-money • Must be national law by 15/12/2007 • Customer identification and due diligence procedures • Know Your Customer (how he operates his account) • Suspicious activity monitoring and reporting

Financial Crime and e-money • Low average value of e-money transactions • Therefore full ID and record keeping requirements could render such systems uneconomic • 3MLD (2005/60/EC) introduces simplified CDD for e-money • Similar derogation being considered for proposed Wire Transfers Regulation

Passporting • European banking law allows a financial institution authorised in one MS to “passport” to other MS without let or hindrance • Limited take up so far by ELMIs • At present it is easy to offer services on line but not to set up branches under a passport • Review will remove this anomaly

Timing • Commission’s proposals for review of e-money directive to be published later this Summer • Must then go to Council of Ministers and European Parliament • Deadline for implementing into domestic law unlikely to be before end 2008/early 2009 • But this is just guesswork on my part

Thank you for listening Dominic Peachey 25 The North Colonnade Canary Wharf LONDON E14 5HS Telephone: 020-7066 0488 Fax: 020-7066 0489 E-mail: dominic.peachey@fsa.gov.uk

E-money regulatory update