Setting deadlines for migration to the Single Euro Payments Area ( ) through Regulation provides planning security to all market participants
On 16 December 2010, the European Commission published a proposal for a Regulation establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924/2009 (the 'proposal').
The European Payments Council ( ) welcomes the European Commission's willingness to legislate on end dates for migration to in order to provide certainty to all market participants. The takes this as an indication that the European Commission (the Commission) is committed to finalising the process initiated with adoption of Regulation 2560/2001 on cross-border payments in euro in December 2001. The understanding throughout the past decade shared with the Commission is that this process aims at replacing national euro payment schemes by the Credit Transfer ( ) and Direct Debit ( ) Schemes developed by the . The forthcoming Regulation should result in the replacement of national legacy euro payment schemes by Schemes. In line with expectations expressed by the Finance Ministers, the European Parliament and the European Central Bank, the forthcoming Regulation must set end dates for the phasing out of existing national euro credit transfer and euro direct debit schemes to ensure that the high costs of running multiple payment schemes in parallel can be eliminated.
The explanatory memorandum accompanying the proposal states that "full integration of the payment market will only be achieved once Union-wide payment instruments replace completely the national legacy instruments". The proposal further states that credit transfers shall be carried out in accordance with this regulation twelve months after it comes into force; direct debits shall comply 24 months after it comes into force.
Articles 5 (4) and 12-15, which specify that the European Commission could amend the technical requirements through delegated acts, should be deleted from the proposal
The Annex to the proposal lists the technical requirements to be met by euro credit transfers and direct debits as of the defined end date(s). These requirements are set out in an Annex for the following reason: by not including these requirements in the core legal text of the Regulation, the Commission could be authorised to amend these requirements through so called 'delegated acts' (Articles 5 (4) and 12-15 of the proposal) without having to obtain approval by the European Council and the European Parliament for such amendments. In other words, the Commission is now determined to take over the task of developing payment functionalities. According to the proposal, the Commission does not foresee any involvement of market participants (users and suppliers) in the process of identifying these technical requirements.
The proposal fails to deliver a convincing rationale which would justify the granting of such extensive and unilateral powers to the Commission ahead of the three year review foreseen under Article 16. Any modification to the payment functionalities already requires a minimum of two years for processing and implementation by both the demand and supply sides, as part of a recognised change management cycle in the industry.
These powers would be completely unnecessary if the final list of technical requirements in the Annex meets the test set out in Recital (10) of the proposal that any such requirements "should not restrict flexibility and innovation but should be open to and neutral towards potential new developments and improvements in the payments market". If indeed, the technical requirements to be included in the Annex to the proposal are all flexible and future-proof, as this recital explicitly asks for, then the Commission does not require extensive powers to review and amend these requirements through delegated acts ahead of the three year review clause mentioned above. Accordingly, the Commission would not need delegated powers. It is simply not warranted or efficient that standards should be defined and evolved by law on an ongoing basis.
Moreover, it is the 's view that it is inappropriate for the Commission to take on the role of a de-facto scheme manager and standard setter1 responsible for the development of payment functionalities. This Regulation currently also disregards the basic principles of good governance and legal certainty: the technical requirements will impact the entire payment services user community on both the demand and supply sides.
The scope of the potential 'technical requirements', and consequently the scope of the delegation of powers to be conferred to the Commission, remains undefined. This lack of definition of the delegation of powers to the Commission as foreseen is not acceptable. The chosen terminology 'technical requirements' should furthermore be considered as misleading in light of the current content of the Annex to the proposal. The Annex not only includes references to message formats and identifier standards but it also includes 'rules' which should not be commonly labelled as purely 'technical requirements'.
With regard to the delegated powers to be conferred to the Commission, the proposal fails to meet the key criteria applicable to Regulation: (a) there is a lack of proportionality of the delegated powers with respect to the intended objective of the proposal which is to ensure migration to ; (b) the subsidiarity principle would suggest that self-regulation is better placed to achieve the stated objectives of Articles 5 (4) and 12 - 15, i.e. innovation in the payments market; (c) the proposal would incur additional costs and administrative burden on payment services users and payment service providers ( ). These would have to invest in the renewal of their payments applications to comply with standards and scheme rules defined by international standardisation organisations and European scheme management bodies and with 'technical requirements' set by the Commission. Such additional costs and administrative burden, however, would not be offset by any advantages.
Last but not least: Recital 22 of the proposal states that "The Commission should be empowered to adopt delegated acts in accordance with Article 290 of the Treaty in respect of the update of the technical requirements for credit transfers and direct debits".
Article 290 (1) of the Treaty on the Functioning of the European Union however, clarifies that a "legislative act may delegate to the Commission the power to adopt non-legislative acts of general application to supplement or amend certain non-essential elements of the legislative act". The points out that the requirements set out in the Annex to the proposal were referred to as 'essential' requirements in previous drafts of this proposal. The assumes that the term 'essential' formerly applied to describe these requirements was changed to 'technical' for the sole purpose of suggesting compliance of Articles 5 (4) and 12 - 15 of the proposal with the Treaty. The confirms that the requirements set out in the Annex to the proposal are essential to the functioning of a payment scheme. In the view of the , therefore, Article 5 (4) and 12 - 15 are not compatible with Article 290 of the Treaty.
The is therefore in favour of deleting Articles 5 (4) and 12 - 15 from the proposal.
The invites the legislator to recognise that self-regulation by banks has generally proven to be the most efficient means to create and maintain innovative, effective, secure and stress-resistant payment systems. It is the 's firm belief that innovation must not be hampered by the Commission's interference in the development process in the context of this regulation to the detriment of both the demand and supply sides.
The proposal should refrain from mandating 'interoperability' between payment schemes (Article 4 (2) of the proposal)
As requested by the political drivers of the vision, the , in close dialogue with the user community, developed and launched the Scheme and the Schemes. At the end of 2010, 4499 have formally adhered to and 3904 participate in the Core Scheme. Of those, 3374 also offer business to business services. Since November 2010, all in the euro area providing euro direct debit services domestically must be reachable for cross-border direct debits, as mandated by Regulation (EC) No 924/2009.
The Commission insists that on grounds of general public policy it would not be possible to mandate de jure migration to the single set of payment schemes developed by the . The proposal therefore implies a theoretical scenario of multiple 'Union-wide' payment schemes existing in parallel and mandates 'interoperability' of such schemes. The concept of multiple, 'interoperable' payment schemes, however, disregards that an optimally efficient payment environment would require that all of all payment services users adhere to the exact same scheme rules and standards (which does not prevent competition on payment products and services), so that a payment is executed by parties which adhere to the rules and standards of the same payment scheme. 'Interoperability' between multiple competing euro credit transfer and direct debit schemes, respectively, would require onerous agreement at an extremely high level of detail to allow fully automated processing of payments across multiple payment schemes. It would do little to overcome the fragmentation of the euro payments market.
In the view of the , reference to 'interoperability' of payment schemes should be deleted from the proposal.
Annex to the proposal: the technical requirements proposed in section 3 (c) and (d) should be deleted; section 3 (e) should be amended
Several of the technical requirements, applicable to direct debit transactions and proposed in section 3 of the Annex to the proposal, disregard the preferences of the vast majority of consumers in Member States using direct debits today. These requirements are oblivious to the consensus reached on the principles governing the Union-wide direct debit scheme currently in the market (the Core Scheme developed by the ).
Specifically, the technical requirements proposed in section 3 (c), (d) and (e) would, if endorsed by the legislator, make mandatory such features which are optional in the Core Scheme or which could be provided as an Additional Optional Service (AOS) by a community of payment service providers, or by an individual payment service provider, in response to actual market demand. This would make direct debits more costly for all and restrict competition among payment service providers. The technical requirements proposed in section 3 (c) and (d) of the annex should be deleted; section 3 (e) should be amended.
The proposed technical requirements applicable to euro direct debits disregard the consensus of the broad majority of payment services users on the principles governing the Scheme
The Schemes are based on a 'creditor-driven mandate flow' (the creditor is the biller). This means that the payer completes and signs a paper-based mandate and sends it directly to the biller2. The biller is responsible for storing the original mandate, together with any information regarding amendments relating to the mandate or its cancellation. In this scenario, the payer's bank does not receive any mandate-related information from its customer nor is the payer's bank responsible for checking the right of a biller to collect payment from a payer's account. The payer's bank receives the mandate-related information with the first collection. This model is used in a large number of Member States today - for example in Austria, Germany, the Netherlands and Spain. The latter four countries represent those Member States where direct debits are used much more often to make payments than in other countries. Out of 17,656 million direct debits processed in the euro area in 2008, according to the ECB Blue Book a total of 12,968 million direct debits or 73.45 percent were processed in Austria (841 million), Germany (8,424 million), the Netherlands (1,272 million) and Spain (2,431).
While the Schemes build on this national, pre- direct debit model implemented in a large number of Member States today (the creditor-driven mandate flow), it is recognised that some Member States use an alternate pre- direct debit model. This alternate model is based on a 'debtor-driven mandate flow' (the debtor is the payer - a consumer, for example). This means that the biller informs the payer's bank that the payer has requested to make payments by direct debit. The payer's bank then informs the payer and issues the actual mandate. In this model, the mandate stays with the payer's bank. When a biller presents a direct debit collection to the payer's bank, the payer's bank might choose to check the authorisation of the biller to collect payment based on the mandate. This model is used, for example, in Belgium, Portugal, Italy3 and France today. Out of the total 17,656 direct debits processed in the euro area in 2008, according to the ECB Blue Book a total of 4,322 million or 24.48 percent were processed in Belgium (260 million), Italy (576 million), Portugal (221 million) and France (3,265).
The main difference between these two alternate direct debit models is in the expectation of the consumer. A consumer used to the debtor-driven mandate flow assumes that his bank verifies whether he has authorised a direct debit collection prior to debiting his account. Those consumers who are used to the creditor-driven mandate flow, by contrast, do not require such verification. As mentioned above, the vast majority of consumers in the European Union who make a direct debit payment today rely on the creditor-driven mandate flow; which is the model governing the Scheme. In fact, the ratio of direct debits based on the creditor-driven mandate flow to those made on the debtor-driven mandate flow is 3:1.
The Scheme caters to the needs of all payment services users
To help in meeting the preferences of consumers living in countries currently using the debtor-driven mandate flow, the Core Scheme already includes various optional features which allow banks to offer services such as the verification of mandates by the payer's bank.
As each mandate is identifiable based on the 'Unique Mandate Reference' and the 'Creditor Identifier', each collection can be traced back - immediately and unmistakably - to the biller. As a result, any biller collecting SDDs can be rapidly and unequivocally identified. Any gains based on a fraudulent direct debit collection would therefore not be sustainable. For these reasons, it is highly improbable that fraudulent individuals or businesses would choose as a vehicle for fraudulent actions.
The Core Scheme goes beyond the requirements of the Payment Services Directive (PSD), by granting consumers a 'no-questions-asked' refund right during the eight weeks following the debiting of a consumer's account. This means that during this time any funds collected by will be credited back to the consumer's account upon request. In the event of unauthorised direct debit collections, the consumer's right to a refund extends to thirteen months as stipulated in the PSD.
Last but not least, banks must ensure that only trustworthy billers are able to collect payments via . This is also in the interest of payment service providers as they would have to cover any losses resulting from fraudulent and / or erroneous direct debits.
The risk of any fraudulent or erroneous collections is actually born by the biller's bank - never by the payer. The actual mitigation of these risks is based on the intervention of the payer's bank. The Commission and the European Central Bank confirmed that the Scheme is based "on proven national concepts, fully meets the respective legal requirements and - in some points - goes even further than required by the Payment Services Directive in order to better satisfy customer needs"4. Both institutions also encouraged the to give due consideration to the provision of additional features designed to further increase the trust in services in particular by consumers used to the 'debtor-driven mandate flow'. The Schemes, as outlined above, include these optional features.
Exclusion of high value payment systems from the scope of the Regulation
The scope of the Regulation as proposed in Article 1 (1) is too broad since such a description would also encompass euro payments made via high value systemically important payment systems such as the European Central Bank's TARGET2 and Euro Banking Association's EURO1. These payment systems should be excluded.
Subject to further review, the will comment on other key aspects of the proposal
The is in the process of evaluating the implications of this legislative initiative and will communicate the results of its detailed analysis shortly. Subject to further review, the will comment on other key aspects of the proposal and provide detailed suggestions for amendments to the proposal for consideration by the legislator.
Gerard Hartsink is the Chair of the .
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Related article in previous issue:
So What´s in a Name? Explaining Payment Schemes, Instruments and Systems. Clarity on payment terms is critical in the debate over the approach to setting end dates for migration to SEPA through EU Regulation ( Newsletter, Issue 8, October 2010)
1If endorsed by the legislator, the forthcoming Regulation would also impact the governance of, for example, the International Organization for Standardization (ISO). The and schemes developed by the are based on global standards such as ISO standards. The and Implementation Guidelines of the are MIG's (Message Implementation Guidelines) of ISO.
2The technical terms used in the Scheme Rulebooks refer to the payer as 'debtor' and to the biller as 'creditor'.
3In Portugal and Italy both models - the creditor-driven mandate flow and the debtor-driven mandate flow - coexist.
4Joint letter of the European Commission and the European Central Bank to the in March 2010.
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