9 Financial services
| (30037)
14201/08
+ ADDs 1-2
COM(08) 627
| Draft Directive on the taking up, pursuit and prudential supervision of the business of electronic money institutions, amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC
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| Legal base | Articles 47(2) and 95 EC; co-decision; QMV
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| Department | HM Treasury |
| Basis of consideration | Minister's letter of 18 June 2009
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| Previous Committee Report | HC 16-xxxv (2007-08), chapter 3 (12 November 2008) and HC 19-xiv (2008-09), chapter 7 (22 April 2009)
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Clear
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Background
9.1 Directive 2000/46/EC, known as the Electronic Money Directive,
established a regulatory regime for e-money[35]
issuers across the Community and was a response to the emergence
of new pre-paid electronic payment products. It was intended to
create a legal framework for the e-money market to deliver its
full potential. Whilst ensuring an adequate level of prudential
supervision, it aimed to encourage new market entrants to the
e-money market, so as to promote competition between non-banks
and banks.
9.2 In July 2006 the Commission published a review
of the Electronic Money Directive which concluded that the European
e-money market had not developed as originally anticipated. Further
to that review, the Commission proposed, in October 2008, this
draft Directive to amend the legislation relating to e-money.
The draft Directive would clarify the definition of "electronic
money" to ensure legal certainty, with a technologically
neutral, simpler definition being proposed, and provide for a
new prudential regime, ensuring greater consistency between the
prudential requirements of e-money issuers under the revised Electronic
Money Directive and prudential requirements of payment institutions
under the Payment Services Directive, Directive 2007/64/EC. The
main elements of the new prudential rules include:
- an initial capital requirement
of €125,000, enabling market access for smaller players,
down from €1 million in the present Directive;
- a new formula to determine ongoing capital for
e-money issuers in addition to the three methods established by
the Payment Services Directive;
- removal of restrictions on mixed business;
- safeguarding requirements for e-money issuers
in line with safeguarding requirements for payment institutions
under the Payment Services Directive;
- redeemability requirements to ensure customers
have the right to redeem funds at all times;
- an updated waiver regime, under which small entities
would be able to obtain a derogation for some of the prudential
requirements, aligned with that of payment institutions under
the Payment Services Directive;
- updated anti-money laundering rules for e-money
issuers, including alignment with Payment Services Directive provisions;
and
- amendments to the Capital Requirements Directive
to change the status of e-money issuers.
9.3 When we considered this proposal, in November
2008, we said that any proposal to improve a regulatory regime
was important and, potentially, welcome and we noted the Government's
support, albeit nuanced, for the draft Directive. However we added
that before considering the matter further we wanted to hear about
the outcome of the Government's planned public consultation, any
technical changes it was proposing and the likely outcome on them.
When we considered the matter again in April 2009, on the basis
of further information from the Government, we noted that:
- we could only be told of the
emerging conclusions of the consultations, since they did not
end until a week before our consideration, and of the Government's
aspirations for a final compromise text of the draft Directive,
rather than to what extent they had been achieved; and
- the "negotiating" version of the Government's
impact assessment, published with its consultation document, seemed
to show, for the Government's preferred option "Accept
the Commission proposal but push for specific amendments",
that the negative monetised benefits would be offset by non-monetised
benefits.
On that basis we kept the document under scrutiny
and asked for confirmation that:
- the final outcome of the Government's
consultations matched the general support of stakeholders that
was emerging during the process;
- the final compromise text was likely to meet
the Government's key priority, as expressed in the impact assessment,
of a proportionate prudential regime; and
- the Government believed, with reason, that the
non-monetised benefits of the proposal will outweigh the negative
monetised benefits.[36]
The Minister's letter
9.4 The Financial Services Secretary to the Treasury
(Lord Myners) first confirms that the outcome of the Government's
consultations (by way of a formal written consultation process,
and informal meetings with stakeholders) aligned with the general
support already expressed by stakeholders, as described in his
letter to us of 2 April 2009.[37]
He continues that:
- twelve responses were received
from a cross-section of interested stakeholders, including e-money
issuing banks, the trade associations representing e-money institutions,
and end-user representative groups;
- respondents broadly supported the Government's
approach set out in the consultation paper;
- in general, respondents felt that the Commission's
proposal to replace the Electronic Money Directive was a step
in the right direction;
- however, they believed that certain aspects of
the Commission's proposal needed to be refined to ensure a more
proportionate and targeted regulatory regime for the issuance
of e-money and supported the Government's proposals set out in
its consultation;
- the majority supported the proposal to base the
definition of "outstanding e-money" on float (that this
total issued, and un-drawn, e-money at a point in time) instead
of payment volume, holding that a float-based definition would
better reflect the risk exposure of the e-money holder to the
authorised non-bank e-money issuer (e-money institution);
- the majority supported the proposal to refine
the proposed prudential regime by adopting a float-based method
of calculating own funds (ongoing capital requirements) and considering
the waiver regime for small e-money issuers in parallel with changes
made to the overall prudential regime (with a view to ensuring
that small businesses are not disadvantaged by the overall package
of provisions set out in the proposed text);
- while the majority of respondents supported the
Commission's objective to revise the Electronic Money Directive
requirements on e-money issuers to redeem e-money, they believed
that there should be a balance between the rights of users to
redeem outstanding e-money balances and the interests of e-money
issuers, in particular, in relation to the costs associated with
processing redemptions; and
- respondents felt that without this balance there
could be a risk that certain business models might become unviable,
causing certain e-money issuers to withdraw or for certain products
to be withdrawn, from the market. [38]
9.5 The Minister tells us that the final compromise
on the text of the draft Directive was reached at the ECOFIN Council
of 5 May 2009, on the basis of a first reading agreement with
the European Parliament. But he notes that the Government has
maintained a parliamentary scrutiny reserve on this compromise.
The Minister comments that the compromise meets the Government's
priorities of ensuring that the UK and Community e-money markets
are open, competitive, innovative and efficient and that the regulatory
regime for e-money issuance, including redeemability requirements,
is balanced and proportionate, whilst ensuring appropriate consumer
protection. He says that the agreed text includes:
- an amended definition of e-money
that offers clarity on which products would fall in and out of
the scope of the e-money regime;
- a definition of "average outstanding e-money",
which is based on float;
- a reduction of initial capital for e-money institutions
from €1 million to €350,000;
- provision allowing e-money institutions to use
a float-based method when calculating on-going capital (own funds)
under which they would have to hold at least 2% of the average
outstanding e-money;
- provision allowing competent authorities to vary
the calculated amount by 20%;
- calculating the waiver threshold (under which
small businesses that operate domestically may be waived from
the full requirements of the Electronic Money Directive) to be
calculated on the basis of the total business activities of the
e-money institution generating an average of less than €5
million of outstanding e-money;
- a new requirement to safeguard user funds in
order to protect e-money holders in the event that the e-money
institution becomes insolvent — these funds to be safeguarded
in sufficiently safe, secure and low risk assets, over which the
competent authority has scrutiny, or to be subject to a robust
insurance policy;
- a provision enabling e-money institutions to
conduct other payment services;
- a clarification of the rights of e-money holders
to redeem e-money and the circumstances in which e-money institutions
may charge redemption fees;
- provision for increased anti-money laundering
thresholds for re-loadable and non re-loadable e-money products;
and
- amendments to the treatment of e-money institutions
for the purposes of the Capital Requirements Directive.
9.6 On costs and benefits the Minister comments that
the Government does believe that the benefits of the proposal
outweigh the costs, telling us that:
- the impact assessment sets
out the costs to business under the Electronic Money Directive
and the projected wider benefits through reduced costs of compliance
with the proposed new regime;
- as updated the impact assessment indicates that
the estimated present value total costs to be in the region of
£83.40 million;
- adopting the proposed new approach could mean
that e-money issuers could benefit from a one-off reduction of
unit cost of £700,000 and a £200,00 annual reduction,
resulting from initial capital requirements falling from €1million
to €125,000 and basing ongoing capital calculations on 1.5%
of float; and
- it is estimated that the total benefits would
be between approximately £160 million and £470 million.
Conclusion
9.7 We are grateful to the Minister for this account
of developments on the draft Directive and note the Government's
positive assessment of the compromise text now ready for final
adoption. We have no further questions to raise and clear the
document.
35 Electronic money or e-money is defined by the Directive
as monetary value as represented by a claim on the issuer which
is stored on an electronic device, issued on receipt of funds
of an amount not less in value than the monetary value issued
and accepted as means of payment by undertakings other than the
issuer. Back
36
See headnote. Back
37
Ibid. Back
38
A summary of responses to the consultation can be seen at http://www.hm-treasury.gov.uk/fin_payment_index.htm.
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