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