Introduction

The EU's e-Money Directive has a number of specific objectives:

• To protect the consumer and to ensure bearer confidence
• To improve the single market in financial services
• To avoid distortion of competition for issuance of e-Money between traditional credit institutions and Electronic Money Institutions by subjecting both kinds of institutions to prudential supervision
• Establishing legal certainty necessary for e-Commerce to develop.

The Directive defines Electronic Money ("e-Money") as "monetary value that is stored on an electronic device (such as a chip or computer memory), that is accepted by undertakings other than the issuer and that is generally intended to make payments of a limited amount".

The Directive considers e-Money to be an electronic surrogate for coins and bank notes. The European Union issued two directives on the subject in September 2000. The main Directive was on taking up, pursuit of and prudential supervision of the business of electronic money institutions. The second Directive includes electronic money institutions in the definition of "credit institutions."

The UK Treasury has adopted a positive approach towards the introduction of e-Money as a payment mechanism for facilitation of e-Commerce and other new ways of conducting business. It wishes to encourage the introduction of non-bank e-Money issuing institutions from sectors such as the telecommunications, retail and telecommunications sectors. The UK Treasury seeks to introduce the e-Money Directive into UK law in a way which provides a balance between competition, consumer protection and financial stability.

Implementing the e-Money Directive

• Issuing e-Money will become a regulated activity under the Financial Services and Markets Act 2000(FSMA 2000) by the Financial Services Authority (FSA), the organisation established under the Act to regulate the conduct of Financial Services activities in the UK
• Persons not authorised, other than through waiver, will be prohibited from carrying on the business of issuance of e-Money.
• As a result of the responses to the proposals contained in the consultation paper, the UK Treasury will determine, to what extent and how, the range of provisions governing the regulation of financial services under the act should apply to e-Money.
• The legislative timetable for implementation of the EU Directives through UK Legislation envisages the legislation going to Parliament in February 2002 following any amendments arising from the consultation paper. The legislation will come into effect from the end of April 2002 with six months transition. Transitional arrangements envisaged are discussed below under key implementation issues.
• The FSA must prepare itself for supervision of the new regime. It will consult later this year on the actions it will be required to take in order implement other detailed provisions of the e-Money Directive.

Key issues in implementation

• Definition of e-Money
  The definition of e-Money in the EU Directive includes a statement that e-Money "must be issued on receipt of funds of an amount not less in value than the monetary value issued." This definition excludes e-Money issued at a discount (that is when more value is issued than funds received). Discounted issue of e-Money would, therefore, appear to be outside the scope of the directive and not a regulated activity. While the Directive may have intended to prohibit the issue of e-Money at a discount to prevent e-Money issuers creating money in an uncontrolled way, the provisions of the EU Directive exclude the issue of discount e-Money. To bring this back into the scope of the Directive, the UK Treasury propose to give the FSA the power to make a rule prohibiting the issue of e-Money at a discount.
• Waivers
  So that new entrants may be able to start and grow without the cost of authorisation and the burden of regulation the UK Treasury proposes to allow as many e-Money issuers as possible to be waived from authorisation. It is hoped this will encourage competition and innovation. The FSA will be empowered to grant waivers to all e-Money issuers on a case-by-case basis who meet at least one of the relevant criteria. Waiver criteria
  
  1. If the aggregate amount of issued e-Money is limited
     To come within this definition the total financial liabilities related to the e-Money activities must not normally exceed Euros 5 million and never exceed Euros 6 million.

  2. If the e-Money is accepted only by related companies
     To come within this definition e-Money is accepted only by
     
     • the subsidiaries of the e-Money institution which performs operational or other related ancillary functions related to e-Money issued or distributed by itself
     • by the parent company of the e-Money institution
     • other fellow subsidiaries of the parent company of the e-Money institution

  3. If only a limited number of undertakings accept the e-Money and they are either located within a limited geographic area or have a close financial or business relationship with the e-Money institution.
     Under the legislation it is proposed that "limited geographic area" is defined as an area of 4 square kilometres(!!). This means that those operating within such an area will obtain waiver but those who operate in slightly wider area may argue for waiver from regulation. The figure being considered for "the limited number of undertakings" is 100 undertakings.

  Contents of waivers

  The UK intends to disapply as many of the provisions of the Directive as possible. Waived firms will, as a result, not be treated as carrying on a regulated activity under the FSMA 2000. Such firms will be freed from the Directive's prudential requirements as well as the need for their e-Money to be redeemable. However, waived firms will not be able to exercise passport rights to operate in other EEA States as they would do if they were authorised under the FSMA 2000.

  There are a number of provisions, which will not be waived for any e-Money institutions:

  • all firms will have to report to the FSA periodically on their activities.
  • conversely, the FSA will be able to collect information from all e-Money institutions.
  • Money Laundering Legislation will apply to all e-Money institutions on the basis that "they involve Issuing and administering the means of payment."

  Procedures for granting a waiver

  Legislation will set out the procedures for applying to the FSA for a waiver. The FSA will have power to revoke a waiver on its own initiative if it considers that the conditions for waiver have been breached or if a waived firm fails to comply with FSA rules covering provision of information.

  A waived firm may apply voluntarily for its waiver to be revoked, covering situations where the firm wishes to expand its operations in such a way that the waiver condition no longer applies or if it wishes to exercise passporting rights by operating in other EEA States.

  Transitional arrangements

  There will be transitional arrangements for the 6 months following the implementation of e-Money legislation (27th April-27th October 2002). Existing issuers of e-Money at 27th April 2002 will not be treated as carrying on a regulated activity for the first six months, whether they are already regulated under the FSMA 2000 or not.

  During the initial six months both UK and European Economic Area (EEA) e-Money issuers will benefit from this arrangement in the UK (and elsewhere if the individual EEA States take the same approach as the UK).

  In the initial six months, e-Money issuers will have to take the necessary steps to secure authorisation, waivers or passports to comply with FSA regulation.

• Financial Services Compensation Scheme
  It is proposed that there will be no compensation scheme for e-Money initially. Consumers are unlikely to hold significant amounts of e-Money at any one time. Losses arising from the failure of an e-Money institution are likely to be low. It is suggested that new entrants may perceive they may be liable to significant sums if an e-Money firm fails, even though the low level of risk means that the cost of funding such a scheme would be low. This could be a strong deterrent to e-Money entrants.
• Ombudsman Scheme

  Although the FSMA 2000 provides that regulated activities are covered by an Ombudsman Scheme, legislation will allow the FSA to determine whether any the Scheme will apply to e-Money.

• Financial Promotion
  Under the FSMA 2000 any person marketing investments and investment services must be authorised by the FSA. Making the activity of promotion of e-Money subject to approval by authorised persons would mean for example that retailers and other outlets accepting and distributing e-Money could not promote it. This would raise the cost of issuing e-Money. Accordingly it is proposed not to make the activity of issuing e-Money subject to regulation under the FSMA 2000.