Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee
Proposal for a Regulation amending Regulation (EC) No 924/2009 as regards certain charges on cross-border payments in the Union and currency conversion charges
Article 114 TFEU; ordinary legislative procedure, QMV
(39616), 7844/18 + ADDs 1–2, COM(18) 163
13.1Within the European Economic Area, electronic payments in euros are governed by the standardised rules and technical specifications of the Single European Payments Area (SEPA). This has brought down the cost of payments in euro, and as a result payment services providers (PSPs) in any EEA country—including those outside of the Eurozone like the UK—have to price domestic and cross-border transfers in euros the same. Overall, SEPA has lead to a significant reduction in the cost of transferring money within the single currency area for businesses and consumers: while sending €100 between Eurozone countries cost nearly €20 in 2011, it is virtually free of charge now.
13.2However, the benefits of the restrictions on charges for cross-border money transfers or payments have been limited in 8 EU Member States, including the UK, that do not use the euro. Although there were over 1.8 billion individual payments in euro made from these countries to another EU Member State in 2016, such transactions—credit transfers in particular—are considerably more expensive than intra-Eurozone transfers. This is despite the fact that PSPs in all Member States, irrespective of its domestic currency, have access to the same payments infrastructure used within the Eurozone to keep costs low. Cross-border intra-EU payments in other currencies, like pound sterling, also remain more expensive than euro-denominated transfers between Euro area countries (but occur much less frequently).
13.3To bring the costs of euro payments down for consumers and businesses in Member States that do not use the single currency locally, the European Commission in April 2018 proposed a change to the legal framework underpinning SEPA. This would require the nine non-Eurozone Member States to ensure that payment service providers in their territory equalise fees for sending or receiving a payment in euros with those for domestic transfers in their national currency. That means, for example, that the UK—while covered by the Regulation—will have to ensure that British banks treat an incoming or outgoing payment in euros as if it were in sterling (which, all other things being equal, would significantly reduce or altogether eliminate the fee charged for such transfers, card payments or cash withdrawals). The proposal would not affect cross-border credit transfers denominated in sterling or other non-euro currencies such as US dollars or Swiss francs (for reasons set out in “Background” below).
13.4In addition to the new measures to bring down the costs of cross-border payments in euros to and from non-Eurozone Member States, the Commission also wants to introduce new transparency requirements where consumers are offered different options for currency conversion when making a card payment or cash withdrawal in a Member State that uses a different currency than their home country. These would be given force of law via a future Delegated Act of the Commission, which in turn would be based on new detailed technical standards to be developed by the European Banking Authority (EBA) in the coming years.
13.5The Economic Secretary to the Treasury (John Glen) submitted an Explanatory Memorandum in April 2018 setting out the Government’s position on the proposal. In it, he notes the UK is “broadly supportive” of the new Regulation because it would “make financial services more affordable”. With respect to the new transparency requirements for currency conversions, the Minister says these would benefit consumers as well as the “UK’s strong position in international money transfers for FinTechs, many of whom already price transparently and are also frequently more competitively priced than other financial services providers”. As regards the implications of the UK’s withdrawal from the EU, and the Government’s policy of leaving the Single Market and therefore the effects of the EU’s directly-applicable SEPA framework, he adds only that “the applicability of the proposed Regulation will depend on the future relationship” with the EU.
13.6Given the relatively straightforward nature of the proposal (as the infrastructure for processing euro-denominated payments is already used by all EU banks), formal adoption by the European Parliament and the Council is expected by the end of 2018, so that the new rules on equalisation of fees for euro payments would apply across the EU from 1 January 2019. The transparency requirements for currency conversion would then become binding by early 2022, in anticipation of the development of the necessary technical standards by the EBA.
13.7The extension of the limitations on fees for cross-border payments to euro-denominated transfers involving a counterparty in a non-Eurozone EU country appears to be uncontroversial. We note that the Regulation is due to become applicable in early 2019. It is therefore expected to apply to the UK for the duration of the post-Brexit transitional arrangement, pending formal ratification of the UK’s Withdrawal Agreement under Article 50 TEU.
13.8As such, the Regulation would allow those who make or receive euro payments in the UK to or from an EU Member State—at least for the duration of any transitional period—to benefit from any reduction in the fees charged by payment services providers for such transfers. The Minister has provided no indication of the overall impact of the Regulation for the UK while it remains applicable here, including the likely savings to payment services users. The Commission itself estimates the annual EU-wide benefit to consumers and businesses would amount to €900 million (£793 million) at the expense of payment services providers.
13.9The Minister says that the effects the new Regulation will have on inbound and outbound payments in euro handled by UK-based payment services providers after the UK leaves the Single Market (whether at the expiry of the Article 50 period on 29 March 2019, or at the end of any subsequent transitional period) are unclear and depend on the new UK-EU partnership. He does not explain the (default) implications of the UK’s exit from the EU and the Single Market for its membership of the Single European Payments Area and the EU regulatory framework for cross-border provision of payment services more generally.
13.10A large number of British banks make use of the UK’s membership of SEPA, via its participation in the Single Market, to offer euro-denominated direct debits and credit transfers under the SEPA legal framework and payments infrastructure. UK banks also make use of the pan-EU payments clearing systems Target2 and EURO1, but will by default lose their ability to do so as and when the UK becomes a “third country” outside of the European Economic Area.
13.11SEPA is, in principle, open to non-EEA countries. Switzerland is the only member that is neither in the Single Market nor a user of the euro as its domestic currency. However, it is our understanding that—as the UK’s current participation in SEPA results legally from its membership of the EU—continued and uninterrupted UK membership as a non-EEA country would have to be approved by the European Payments Council and the European Commission. This in turn would depend on the UK’s continued adherence to several pieces of EU payments legislation without having a formal say or vote over any future amendments or revisions, even if these would not have de jure direct effect domestically or supremacy over UK law.
13.12Outside of SEPA, the costs of euro payments for UK businesses and consumers would be likely to rise as banks would lose access to the centralised payments clearing and settlement infrastructure that currently keep costs low (including those that underpin the EPC’s new instant credit transfer scheme for euros, which allows payments to be made and received across borders in 10 seconds). Even if the UK remained part of SEPA but stayed outside the Single Market (like Switzerland), it is unclear whether the Regulation to equalise fees for cross-border euro payments with domestic payments in sterling would apply to British banks, or whether such a restriction pricing would need to be introduced separately for the UK by Parliament or the Financial Conduct Authority.
13.13Given the uncertainty around Brexit and the future of the UK’s participation in the Single European Payments Area, we ask the Minister to write to us by 22 June 2018 to:
13.14In anticipation of the Minister’s reply to our questions, we retain the proposed Regulation under scrutiny and draw it to the attention of the Treasury Committee. We also ask him to keep the Committee updated on any significant developments in the legislative process in the Council and the European Parliament. In due course, we also expect the Treasury to alert us to the publication of the European Commission’s Delegated Act on the transparency of currency conversions, given that the UK is unlikely to have a vote when the Council considers this legal act but it may still apply in the UK under the terms of the post-Brexit transitional arrangement.
13.15The Single Euro Payments Area (SEPA) harmonises the way electronic payments in the single currency are made across the European Economic Area. Its aim is to ensure that, through the “removal of all technical, legal and commercial barriers between […] national payment markets”, payments made in euros across borders within SEPA are indistinguishable from those made domestically.
13.16While the practical implementation of SEPA is largely in the hands of the European banking and payment industry via the European Payments Council (EPC), the legal framework that underpins it is laid down in EU law. The legal foundation for SEPA was laid in Regulation 2560/2001, which prohibited payment service providers from imposing different charges for domestic and cross-border payments or cash withdrawals in euro within the EU. In early 2008, the EPC introduced the Credit Transfer (SCT) scheme as a transfer service for either single or bulk payments made in euro within or between SEPA countries. This was followed in 2009 by similar schemes for euro-denominated Direct Debits and Business-to-Business (B2B) payments. A new scheme for instant credit transfers in euros was introduced in 2017.
13.17In 2009, the European Parliament called for the mandatory transfer of national payment schemes within the EU for transactions in euro to the relevant EPC schemes. As a result, in February 2012 a new Regulation mandated the use of the SEPA credit transfer and direct debit schemes for all payments in euro within the EU. These were to take effect in February 2014 within the Eurozone (later postponed until August 2014) and October 2016 in the other Member States, including the UK. The practical effect of the Regulation was to replace national credit transfer and direct debit schemes for euros with the corresponding SEPA schemes.
13.18The Single European Payments Area now comprises not only the European Union and the three EFTA-EEA states Norway, Iceland and Liechtenstein (which apply Single Market legislation), but also Switzerland, Monaco and San Marino. However, the European Payments Council states on its website that “legislation adopted for the European Economic Area […] only fully and directly applies to payment transactions between institutions located within the […] EEA”.
13.19As part of the creation of a Single European Payments Area, EU law requires the equal treatment of domestic and international euro transfers within the European Union. Concretely, this means that a payment services provider like a bank cannot charge more for a cross-border transfer in euros (whether the user is receiving or sending a payment) than an identical payment in euros would cost if conducted domestically. The practical effect of the Regulation has been to almost eliminate fees for cross-border payments within the Eurozone (as well as euro payments sent from the Eurozone to a non-Eurozone EU country), as most payment services providers that operate within the single currency area do not charge users for domestic transactions in euro. For example, while sending €100 between Eurozone countries cost nearly €20 in 2001, it is virtually free of charge now.
13.20The impact of SEPA for consumers and businesses in the EU’s Member States that do not use the euro has been far less pronounced. The requirement for cross-border transactions in euro to cost the same as a domestic transaction in euro has not led to significant reductions in charges, as domestic payments in euro are rare and therefore not normally free of charge, if a payment services provider offers the option at all. In an impact assessment on extending the price equalisation measure to the EU’s non-Eurozone countries, the Commission has cited figures that show that the cost to someone sending sterling or euro from the UK to another EU Member State could be up to €11.37 euro (£10) for routine cross-border transfers between €10 and €1,000, where a transfer of the same value within the Eurozone would usually be free. Similarly, making a €10 payment within the Eurozone using a UK debit or credit card could cost €1.98 with some card issuers, whereas a cash withdrawal in the Eurozone with the same card could cost up to €2.55 (£2.25), a twenty-five per cent mark-up.
13.21Moreover, although Regulation 924/2009 allows individual non-Eurozone countries to extend the principle of equalisation of fees to their national currency (meaning that a cross-border transfer in that currency should cost the same as a domestic transaction of equal value), only Sweden has made use of this option. A second ‘opt in’ scheme, under which a non-Eurozone Member State could require their domestic payment services providers to price a cross-border transfer in their local currency and euros the same as a domestic transfer in an (equivalent) amount of the national currency, has not been used by any Member State. The Commission has stated that the cost of either of the opt-ins for payment services providers would be high “in view of the major difference in costs [to the PSP] for domestic and cross-border payments, at least when it comes to non-euro transactions”, and could lead them to “raise the prices of domestic transactions to recoup the losses they would incur on costly cross-border transactions”.
13.22As a result, the Commission concluded that fees for cross-border transactions outside the Eurozone have “remain[ed] very high”, and that “an extension of the Regulation to all currencies in the EU would bring down the costs of cross-border transactions in all Member States”.
13.23In addition to the persistent high fees for cross-border transactions for consumers and businesses in non-Eurozone EU countries (for payments in both the national currency and the euro), the Commission also identified a consumer protection issue where consumers use their domestic debit or credit card to make a payment or cash withdrawal in an EU Member State that uses a different currency (e.g. a British tourist withdrawing euros in France using a UK-issued debit card).
13.24When making a card payment abroad (i.e. making a cash withdrawal at ATMs and card payments at a point of sale) in a different currency than their ‘home’ currency, a payment service user faces two possibilities:
13.25While the EU’s second Payment Services Directive requires any party offering currency conversion services to disclose to the payer all charges as well as the exchange rate used for converting the payment transaction, the nature of on-network conversion means that this cannot be disclosed at the time of the transaction itself. As such, the consumer cannot compare the value of DCC versus on-network conversion. In its 2017 Retail Financial Services Action Plan, the Commission therefore committed itself to assess the options for further action to improve the transparency of currency conversion charges for consumers.
13.26On 28 March 2018, the European Commission published a legislative proposal to bring down the fees faced by payment services users within the EU but outside the Eurozone when receiving or making payments in euros from another EU country, and to impose new statutory transparency requirements for firms that offer currency conversion to consumers.
13.27The amendment to Regulation 924/2009 put forward by the Commission would instead require PSPs to treat euro-denominated transfers as if they are a domestic transfer in the national currency. In practice, it would mean for example that a UK bank has to price a receipt of euros into a customer’s bank account as if it were a deposit in sterling. Similarly, for withdrawals of cash in another currency within the EU—e.g. a British tourist withdrawing cash in France using a UK debit card—the change means the fee charged would have to be the same for making a withdrawal in the UK in pound sterling.
13.28The Commission estimates that the reduction in cross-border fees resulting from the changes to the Regulation “will result in overall savings for consumers of €900 million [a] year at the expense of PSPs”.
13.29With respect to the cost of non-euro cross-border transactions within the EU, the European Commission assessed whether it was feasible to require all Member States to impose equalised fees for cross-border and domestic transactions in their national currency (as the Eurozone and Sweden currently do). The Commission also considered the creation of a ‘true’ Single European Payments Area where transfers in any EU currency between any two EU countries would have to be priced the same as a domestic transfer in the national currency of the payment services provider. For example, a UK bank would have to price a transfer of Polish zloty to an account in France as if it were a domestic transfer in sterling.
13.30The Commission ultimately dismissed these options because of the low volume of transactions in non-euro currencies that would benefit (as only 0.5 per cent of cross-border transfers made from non-Eurozone EU countries to another EU Member State are not denominated in euro), and—especially in the case of the last option—the high costs it would impose on payment services providers when creating the necessary clearing and settlement infrastructure. Under any of these options, PSPs would likely have to offer cross-border transactions at a loss, leading to higher fees for domestic transfers to act as a cross-subsidy. As such, the Commission judged the cost-to-benefit ratio to be too low to pursue legal EU-wide restrictions on the costs of cross-border transactions involving currencies other than the euro. Its latest proposal therefore only affects payments made or received in euros in non-Eurozone Member States.
13.31The second element of the Commission proposal would mandate greater transparency for cross-border payments that include a currency conversion. From 2022 onwards, payment services providers will have to provide consumers with details of the difference between the exchange rate they receive and the inter-bank exchange rate that the PSP can use when actually converting the transaction. These requirements will apply to any cross-border payments within the EU, irrespective of whether they are denominated in euros.
13.32The European Banking Authority (EBA) will develop regulatory technical standards with detailed rules to ensure the comparability of different currency conversion-service options available to users of payment services, for example an estimated total local currency equivalent for non-DCC models to be presented in parallel to the DCC offer at the spot. The EBA will also propose a maximum currency conversion charges that can be applied in between the adoption of the technical standards (which is likely to be in late 2019) and their entry into force (in early 2022). The EBA’s proposals would have to be given legal force by the Commission in the form of a Delegated Act, which can be vetoed by the European Parliament or a qualified majority of Member States. The Commission additionally notes that increasing transparency of conversion charges would dissuade payment services providers from trying to recoup revenue lost from restrictions on charges for cross-border payments in euros (as required by the new Regulation) by increasing currency conversion charges.
13.33Given the nature of the proposal, and the fact that the clearing and settlement infrastructure for payments in euros is already in place for all EU banks, formal adoption by the European Parliament and the Council is expected by the end of 2018. The new rules on equalisation of fees would then apply from 1 January 2019, while the transparency requirements for currency conversion would become binding by early 2022.
None, this is a new legislative proposal.
54 See Regulation 2009/924, into the EEA Agreement in 2013.
55 See Commission Impact Assessment , p. 85.
56 Sweden has made use of a voluntary opt-in under Regulation 2009/924, under which it has by force of law equalised the pricing of domestic and cross-border transactions in Swedish krona. The Commission impact assessment for its new proposal does not refer to the EFTA-EEA countries.
57 Cross-border payments within the EU in other EU currencies, like pound sterling, amounted to 0.5 per cent of all cross-border transactions originating in non-Eurozone EU Member States.
58 The European Commission refers to the findings from a recent study into the differences in costs of cross-border money transfers between the Eurozone and other EU Member States in the impact assessment accompanying the proposal to amend Regulation 2009/942. We have cited some in the “Background” section of this Report.
59 See Commission document .
60 The new requirement would also apply to Norway, Iceland and Liechtenstein as and when the new Regulation is incorporated into the EEA Agreement.
61 submitted by HM Treasury (26 April 2018).
62 Similarly, it would become cheaper for consumers and businesses in other non-Eurozone EU countries to send euro-denominated credit transfers to the UK.
63 €1 = £0.87680 Or £1 = €1.14051 at 30 May.
64 is an inter-bank payments system for euros operated by the Eurosystem (the European Central Bank and the Central Banks of the Eurozone countries).
65 As by the European Banking Authority, EURO1 is “the only private sector large-value payment system for single same-day euro transactions at a pan-European level. The EURO1 system processes transactions of high priority and urgency, and primarily of large amount, both at a domestic and at a cross-border level”. It is overseen by the European Central Bank.
66 Including parts of the second Payment Services Directive, the Funds Transfer Regulation, the Capital Requirements Directive, the SEPA Regulation and the Anti-Money Laundering Directive.
67 See .
68 The UK is due to cease being represented on the Council on 29 March 2019, whereas the Delegated Act is expected to be presented (based on a recommendation by the European Banking Authority) towards the end of that year.
69 See for more information the .
70 Electronic cross-border payments within the EU are also affected by general EU law on payment services, such as the first and second Payment Services Directives and the Interchange Fees Regulation for card payments.
71 This Regulation predated the physical introduction of euro notes and coins, which took place in January 2002.
72 Regulation 260/2012.
73 Regulation 248/2014.
74 Although the Regulation applies directly, it was implemented in the UK by means of the Payments in Euro (Credit Transfers and Direct Debits) Regulations 2012.
75 Monaco and San Marino have monetary agreements with the EU and use the euro as their official currency. Andorra and Vatican City are in a similar position, but are not members of SEPA.
76 See .
77 See Commission Impact Assessment , p. 85.
78 €1 = £0.87960 Or £1 = €1.13688 as at 30 April.
79 See Commission Impact Assessment , p. 14.
80 Among the non-Eurozone countries, the UK had the third-highest maximum charge for a €10 card payment but the second-lowest maximum charge for a €10 cash withdrawal. In Romania, some card issuers charged nearly €15 for a €10 cash withdrawal in the Eurozone.
81 This means that a transfer of Swedish krona to a payee based elsewhere in the EU costs the same as a transfer of krona to another Sweden-based payee. See articles 3(1) and 14 of Regulation 924/2009. The formal notification of the Swedish decision was published in the Official Journal .
82 See article 3(3) of Regulation 924/2009. This option, as formulated in the Regulation, can only be used in respect of cross-border transactions denominated in both the national currency and euros. It does not allow for the equalisation of fees for cross-border transfers of euros with domestic transfers in the national currency only.
83 See Commission document .
84 The mark-up functions, partially, as a way of factoring in the risk of fluctuation in currency rates.
85 . See the previous Committee’s 014 for more information.
86 The Commission notes that the ability of consumers to make an informed choice is further constrained by the environment in which the decision for DCC or non-DCC has to be made, i.e. a queue in a shop or for a cash machine.
87 See Commission document . The Action Plan was considered by the previous European Scrutiny Committee 017.
88 See Commission document .
89 See Commission , p. 42.
90 The Commission estimated that the investment necessary to create the true ‘Single European Payments Area’ would amount to 30 billion euro (£26.5 billion), which would only be recouped after thirty years of efficiency gains. Moreover, the future adoption of the single currency by more Member States would reduce the need for this option and further increase costs vis-à-vis benefits.
91 Euro payments benefit from standardised technical standards combined with EU-wide clearing and settlement infrastructures (EBA Clearing and Target 2). Non-euro transfers are not harmonised in this way, and there is no common European platform such as TARGET 2 for such payments. Therefore, in order to transfer money in another currency, the bank of the initiator needs a partner bank called ‘a correspondent bank’ which facilitates credit transfers completed in the correspondent bank’s local currency by having access to local clearing systems.
92 See the Commission , section 6.3.2.
93 However, these countries would remain free to ‘opt in’ to the other schemes available under the Regulation (i.e. the equalisation of fees between domestic and cross-border transfers in the national currency). As the second ‘opt in’ under Regulation 2009/924 relates to equalization of fees between domestic payments in the local currency and cross-border payments in euro, this will effectively become obsolete as this would be mandatory under the Commission proposal.
94 The UK is not expected to have a vote at this stage as it will cease to be represented on the Council on 29 March 2019.
95 Two-thirds of individuals’ responses to a public consultation by the Commission on cross-border payments argued consumers are not aware of the different options for currency conversion.
Published: 12 June 2018