Transcript E-money regulatory update - SmartCard Networking Forum

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/hand
book/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
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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:
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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 emoney 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 derestrict activities of ELMIs
Waivers
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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
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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 emoney 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: [email protected]