Issue 14 - April 2012
Legal and Regulatory Issues
The Time to Act is Now: Impact of the SEPA Regulation on Payment Service UsersThe SEPA Regulation includes provisions relevant for both the demand and supply sides of the payments market
27.04.12 By Dermot Turing and Maria Troullinou
The European Union (EU) Regulation No. 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation EC No. 924/2009 (the SEPA Regulation), constitutes a major regulatory intervention in the area of payment services. The SEPA Regulation stipulates the mandatory deadlines for compliance with its rules for euro credit transfer and direct debit transactions. In the euro area, this will be 1 February 2014, subject to certain limited exemptions mentioned in the SEPA Regulation. Consequently, market participants need to evaluate its impact on their day-to-day operations. Dermot Turing and Maria Troullinou explain how the SEPA Regulation affects not only payment service providers, but also payment service users (PSUs) such as corporates, small and medium sized enterprises, public administrations and government agencies. In this article, the authors detail specific obligations for PSUs as defined in the SEPA Regulation. They also point out that Article 16 of the SEPA Regulation permits individual EU Member States to extend the deadline for compliance with some of its provisions to 1 February 2016. It is however, strongly recommended that PSUs analyse the impact of the SEPA Regulation on their operational models now, even if EU Member States opt to make use of the derogations permissible under Article 16. To date, the experience of early movers handling major payment volumes indicates that migration to SEPA Schemes and technical standards requires careful planning. The relevant actions and resources should be identified as soon as possible.
Key Information in this Article
The European Union (EU) Regulation No. 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation EC No. 924/2009 (the SEPA Regulation) will not only impact payment service providers but will also have implications on payment service users (PSUs).
This article focuses on PSUs which are not consumers, i.e. corporates, small and medium sized enterprises, public administrations and government agencies. To achieve compliance with the core provisions of the SEPA Regulation, PSUs have to implement significant changes to their operational models, including investing in system upgrades, testing and staff training.
The SEPA Regulation mandates PSUs to:
The SEPA Regulation ensures the continued legal validity of existing direct debit mandates under the SEPA Direct Debit (SDD) Scheme, provided that these fall within the provisions of Article 7. This facilitates the transition to SDD for both billers and their customers. PSUs should also be aware of new mandate management requirements relevant for the collection of direct debits introduced by the SEPA Regulation.
The SEPA Regulation defines 1 February 2014 as the deadline in the euro area for compliance with its provisions, subject to certain limited exemptions mentioned therein. EU Member States have the option to extend the deadline for compliance with some of the SEPA Regulation’s provisions. Full harmonisation will therefore not be achieved until February 2016. This is particularly relevant for PSUs active in more than one EU Member State.
Challenges might also arise due to the fact that the practical implications of the SEPA Regulation have not yet been tested and the interpretation of some provisions remains in doubt.
The experience of early movers on the demand side demonstrates that migration to the SEPA Schemes and to the relevant technical standards generates tangible benefits for PSUs. The scope of the changes however will be extensive and the migration process time-consuming; PSUs should therefore act as soon as possible.
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The SEPA Regulation has far reaching implications for payment service users
It is indisputable that the migration to the Single Euro Payments Area (SEPA) will be a challenging exercise. Some of the main issues may arise from the misconception that the migration exercise will only impact payment service providers (PSPs) and not their customers. The adoption of the European Union (EU) Regulation No. 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation EC No. 924/2009 (the SEPA Regulation; see 'related links' below) has sparked an intense debate about its potential effects on different actors. One important issue worth noting is that the SEPA Regulation, which in practice effectively mandates migration to SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) in the euro area by 1 February 2014, will have an impact not only on PSPs but also on payment service users (PSUs). It is therefore crucial that corporates, small and medium sized enterprises (SMEs), public administrations and government agencies carefully analyse the implications of the SEPA Regulation on their day-to-day operations.
The provisions of the SEPA Regulation that are of the greatest relevance for PSUs are set out in Articles 5, 6, 7 and 16, as well as in the Annex to the Regulation.
- Article 5 details the technical and business requirements that should be observed when carrying out euro credit transfer and direct debit transactions. These requirements relate to the use of the International Bank Account Number (IBAN), the Business Identifier Code (BIC) and the ISO 20022 XML message standards. Article 5 also references the data elements detailed in the Annex to the Regulation that should be provided with a credit transfer and a direct debit payment. Last but not least, Article 5 sets out the rights of consumers with regard to direct debit collections, which are also relevant for payees (billers).
- Articles 6 (1) and (2) stipulate that credit transfers and direct debits shall be carried out in accordance with the relevant requirements set out in Article 5 and in the Annex by 1 February 2014.
- Article 7 states that direct debit mandates1 issued prior to 1 February 2014 and falling within its scope will continue to remain valid after that date.
- Article 16 clarifies that non-euro countries will have to make the transition to SEPA by 31 October 2016 and outlines certain options pursuant to which the 1 February 2014 deadline for the use of IBAN, BIC or the ISO 20022 message standards by PSUs may be extended to 1 February 2016.
EU Member States have discretion as to whether they will use any or all of the options to derogate from the 1 February 2014 deadline with regard to some of the above-mentioned provisions.
This article focuses on the implications for PSUs of the provisions relating to IBAN, BIC, the ISO 20022 message standards and requirements applicable to direct debit mandate management.
How the SEPA Regulation affects PSUs: use of IBAN and BIC
Article 2 (15) of the SEPA Regulation states that IBAN "means an international payment account number identifier, which unambiguously identifies an individual payment account in a Member State, the elements of which are specified by the International Organisation for Standardisation (ISO)."
Article 2 (16) of the SEPA Regulation states that BIC "means a business identifier code that unambiguously identifies a PSP, the elements of which are specified by the ISO."
In accordance with Article 5 (1) (c) of the SEPA Regulation, PSPs must ensure that PSUs (i.e. payers and payees) "use the payment account identifier specified in point (1) (a) of the Annex", namely the IBAN. A payee accepting credit transfers must communicate its IBAN and the BIC of its PSP, "but only where necessary", to its payers (see Article 5 (4)). Similarly, a payer wishing to make a payment by direct debit must communicate its IBAN and the BIC of its PSP "but only where necessary" (see Article 5 (5)). Recital (8) of the Regulation states that "in the vast majority of payment transactions in the Union, it is possible to identify a unique payment account using only IBAN without additionally specifying BIC." The difficulty with these provisions is that it is unclear how payers and payees will be able to determine whether the IBAN alone will be sufficient in each case. Accordingly, some guidance by the legislator on this matter would be helpful.
The SEPA Regulation stipulates the timelines for application of the so-called 'IBAN only' rule. Article 5 (7) of the SEPA Regulation states that "after 1 February 2014 for national payment transactions and after 1 February 2016 for cross-border payment transactions, PSPs shall not require PSUs to indicate the BIC of the PSP of a payer or of the PSP of a payee." Article 16 (6) however, provides that EU Member States have the option to defer application of the 'IBAN only' rule for national transactions to 1 February 2016. Therefore, after 1 February 2016 at the latest, PSPs must be able to identify the appropriate BIC to use where a customer chooses to provide the IBAN only.
The 'IBAN only' rule was introduced at the last stage of the legislative process leading to the adoption of the SEPA Regulation and effectively overwrites the SCT and SDD Schemes, which since their inception have relied on the provision of both the IBAN and the BIC. Early movers on the supply and demand sides have already completed the transition to IBAN and BIC. The European Payments Council's (EPC) recommendation is that, for the time being, PSUs such as businesses, public administrations and government agencies should continue to collect the BICs relating to customer accounts, taking into account the fact that the February 2014 deadline for application of the 'IBAN only' rule for national transactions may be extended by some EU Member States to February 2016 and that the BIC may be required for cross-border transactions until 2016 in certain cases, as specified in Article 5 of the SEPA Regulation.
Moreover, the SEPA Regulation allows Member States to derogate from Articles 6 (1) and (2) by allowing PSPs to provide consumers with conversion services for national payment transactions, enabling them to continue using the national account identifier (Basic Bank Account Number - BBAN) instead of the IBAN until 1 February 2016 (see Article 16 (1)).
How the SEPA Regulation affects PSUs: use of the ISO 20022 XML message standards
Article 2 (17) of the SEPA Regulation defines the ISO 20022 XML message standard as "a standard for the development of electronic financial messages as defined by the ISO, encompassing the physical representation of the payment transactions in XML syntax, in accordance with business rules and implementation guidelines of Union-wide schemes for payment transactions falling within the scope of this Regulation."
The 'implementation guidelines of Union-wide schemes' referred to in this definition would include, for example, the implementation guidelines published by the EPC with regard to the SCT and SDD Schemes, which are available on the EPC Website (see links to 'SEPA Credit Transfer' and 'SEPA Direct Debit' below).
Article 5 (1) (d) of the SEPA Regulation states that PSPs "must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission, the message formats specified in point (1) (b) of the Annex are used". Point (1) (b) of the Annex to the SEPA Regulation specifies that such message formats are the ISO 20022 XML message standards. It should be noted that Article 16 (5) of the SEPA Regulation allows EU Member States to waive the requirement to use the ISO 20022 message formats for PSUs that initiate or receive individual credit transfers or direct debits that are bundled together for transmission until 1 February 2016, except in cases where a PSU requests such a service.
How the SEPA Regulation affects PSUs: direct debit mandate management requirements
Article 7 (1) states that any "valid payee authorisation to collect recurring direct debits in a legacy scheme prior to 1 February 2014 shall continue to remain valid after that date and shall be considered as representing the consent to the payer's PSP to execute the recurring direct debits collected by that payee in compliance with this Regulation in the absence of national law or customer agreements continuing the validity of direct debit mandates". This Article therefore ensures that existing mandates under the SDD Core Scheme continue to remain legally valid, thereby greatly contributing to the facilitation of the migration by bank customers to the SDD Scheme.
Article 5 (3) (d) empowers a payer to be able to instruct its PSP to take the following actions in respect of direct debit collections:
- To limit a direct debit collection to a certain amount and/or periodicity.
- To verify each direct debit transaction and to check whether the amount and periodicity of the submitted direct debit transaction is equal to the amount and periodicity agreed in the mandate (where the mandate under the relevant payment scheme does not provide for the right to a refund) before debiting their payment account, based on the mandate-related information.
- To block any direct debits to the payer's payment account, or to block or authorise any direct debits initiated by one or more specified payees.
Although these mandate checking obligations do not apply where neither the payer nor the payee are consumers, they may nevertheless impact on PSUs. A consumer may instruct its PSP to block all direct debits to its account or to 'black list' a specified biller by blocking direct debits initiated by it. Similarly, under Article 5 (3) (d) a payer may instruct its PSP to only allow collections from a biller identified in a 'white list'. In the event that the biller is included on the 'black list', or excluded from the 'white list', the payment will fail. The SEPA Regulation does not stipulate or offer any guidance as to how billers are to obtain information at a stage preceding a failed collection and what redress, if any, they could obtain in the event of erroneous failed payments.
Two steps forward, one step back on the road to harmonisation: uncertainties introduced with the SEPA Regulation
The majority of market participants recognise the value of establishing mandatory deadlines for migration to SCT and SDD through regulation at a pan-European level in order to ensure planning security. The SEPA Regulation provides certainty as to the timing of migration, which is an essential precondition to successful completion of the SEPA harmonisation exercise. At the same time however, the SEPA Regulation, in an attempt to respond to a broad range of requests for flexibility articulated by various parties throughout the legislative process, has introduced several exemptions. It is arguable that this attempt at flexibility breeds confusion and risks translating into a prolonged patchwork of national variations, leaving PSPs and PSUs uncertain as to what will apply, when, where and how. The market will have more clarity by 1 February 2013, by which time EU Member States must notify the European Commission of the derogations that they intend to use (see Article 16 (7)).
It is regrettable that the testimonies from PSUs that have already successfully concluded the SEPA migration exercise were not taken into account, as their experience in the live SEPA environment is a great indication of the fact that the benefits arising from the migration are proportionate to the level of harmonisation achieved. This is in line with the findings of a study carried out at the request of the European Commission in 20072, which indicates that the potential benefits are dependent on swift migration to harmonised schemes and standards by the demand and supply sides.
Migration to SEPA by PSUs: the time to act is now
From the perspective of the bank customers mentioned in this article, it is important to recognise that the provisions of the SEPA Regulation are not stand alone requirements, but form part of the broader objective of migration to SCT and SDD. The implementation of harmonised SEPA payment schemes will impact business and operational processes beyond the adaptation to new account identifiers and message formats.
When setting up a SEPA migration project, it may be worthwhile to consider the lessons learnt by early movers on the customer side, which are highlighted in the EPC Newsletter and in the new EPC video 'SEPA for Billers: The Time to Act is Now' (see 'related links' below). These early movers concur that migration to SEPA pays off. As Stefan Scheidgen, Head of Cash Management and Accounting at Deutsche Post Pension Service Business Division, points out: "We have accomplished execution times of just one business day for SCTs, which allows our contracting partners to save liquidity. In the process of migrating to SEPA, we consolidated the previous four payment systems into one. We plan to further automate our banking processes, based on the implementation of SEPA Schemes and standards, which will result in even more efficiency." The Deutsche Post Pension Service Business Division started its SEPA migration project in early 2009 and essentially completed the process in June 2011. It disburses 25 million pension payments per month on behalf of the public German retirement scheme to retirees residing in Germany and abroad. It is worth noting that by January 2012, 22.5 million of these payments were SCTs and it is expected that the remainder of the volume will be migrated shortly.
UNIQA Group Austria, which services approximately 7.5 million customers in 21 regional markets, started the migration project (covering both SCT and SDD) at the beginning of 2008 and essentially concluded the transition in 2011. As Thomas Weissmann, Project Manager with the group, clarified: "SEPA is an excellent and necessary idea. It should be kept in mind however, that the dimensions of the SEPA migration project are comparable to those associated with the transition to the euro currency a decade ago"; the migration however, entails great benefits. "Firstly, migrating to the harmonised SEPA payment schemes allows for more efficient account reconciliation. Secondly, being able to collect direct debits throughout Europe using the harmonised SDD Schemes is also a principal advantage for us."
The ceramics manufacturing company Villeroy & Boch headquartered in Germany and represented in 125 countries around the world is a true SEPA pioneer, having embraced the SEPA vision early. The group completed migration to SCT in 2008 and migration to both SDD Core and SDD Business to Business in 2011. Villeroy & Boch processes approximately 175,000 credit transfers with a volume of 310 million euros and 25,000 direct debits with a volume of 75 million euros annually. Dr Warncke, Group Financial Controller at Villeroy & Boch comments: "Our figures demonstrate that the benefits resulting from migration to the SEPA Schemes and standards exceeded the investment in the first year alone. In line with our expectations, we were able to streamline internal processes, lower IT costs, reduce costs based on bank charges and consolidate the number of bank accounts and cash management systems. In addition, we could further centralise our cash management. The fact that there is now one harmonised SDD Scheme, which allows collecting payments throughout Europe, is also a major advantage. We realised significant efficiency gains from the implementation of the ISO 20022 message standards. The reality is that the benefits of an integrated euro payments market outweigh the short-term efforts to get there. The earlier you start the better." This edition of the EPC Newsletter features a detailed article on the Villeroy & Boch SEPA migration project (see 'related articles' below).
Project managers who have already concluded the migration exercise unanimously recommend that organisations that have yet to adapt their systems and operations to SEPA Schemes and technical standards should act immediately.
Dermot Turing is a Partner in the international financial regulatory team at Clifford Chance and Maria Troullinou is an Associate in the international financial regulatory team at Clifford Chance.
Related articles in this issue:
Villeroy & Boch: 'The Long Term Benefits of SEPA Exceed the Short Term Efforts to Get There.' This company completed migration to SEPA Credit Transfer in 2008 and migration to SEPA Direct Debit in 2011
Early Movers Confirm: ISO 20022 Message Standards Generate Tangible Benefits. A guide for payment service users on the impact of provisions in the SEPA Regulation regarding the use of the ISO 20022 message standards
Related articles in previous issues:
The New European Decision-Making Landscape: How the European Commission Rules Through 'Delegated Acts'. SEPA Regulation empowers the European Commission to mandate technical requirements applicable to SEPA payment schemes (EPC Newsletter, Issue 13, January 2012)
1A mandate is signed by the debtor to authorise the creditor to collect a payment and to instruct the debtor's bank to pay the collections in question.
2SEPA: Potential Benefits at Stake. Researching the Impact of SEPA on the Payments Market and its Stakeholders (Capgemini).
Other articles in this issue
27.04.12 EPC Scheme Change Management: Annual Public Consultation Starts in May 2012 - All stakeholders are invited to provide feedback on possible changes to the SEPA payment schemes By Etienne Goosse 27.04.12 EPC Plenary Meeting Update: EPC Elects New Chair Javier Santamaría and Vice Chair Günther Gall to Take Office in June 2012 - Each edition of the EPC Newsletter reports on main decisions taken by the EPC Plenary By Etienne Goosse 27.04.12 The History and Vision of CBI - The EPC Newsletter series provides an overview of banking communication standards in Europe By Liliana Fratini Passi 27.04.12 Challenges and Opportunities: 'The Social Media in Payments Report 2012' - Latest research provides insight on the industry´s approach to new digital communication channels By Simon Hardie 27.04.12 SEPA Migration: Facts and Figures - The state-of-play in April 2012 By Etienne Goosse 27.04.12 Early Movers Confirm: ISO 20022 Message Standards Generate Tangible Benefits - A guide for payment service users on the impact of provisions in the SEPA Regulation regarding the use of the ISO 20022 message standards By Francis De Roeck 27.04.12 On Innovation: What the European Union Could Learn from Apple and Facebook - Reflections on the evolution of SEPA in the new regulatory reality governing the euro payments market By Javier Santamaría 27.04.12 Step Up to the Challenge: SWIFT White Paper Sets out Steps to Build a SEPA Migration Plan - A strategy to achieve SEPA compliance by 1 February 2014 By Gottfried Leibbrandt and Harry Newman 27.04.12 Villeroy & Boch: "The Long Term Benefits of SEPA Exceed the Short Term Efforts to Get There." - The group completed migration to SEPA Credit Transfer in 2008 and migration to SEPA Direct Debit in 2011 By Dr Markus Warncke (Interview) 27.04.12 SEPA Direct Debit for Billers: Exception Handling - EPC Newsletter series provides support for billers preparing migration to the SDD Schemes By Javier Santamaría and Herman Segers
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