Article 6 (1) and (2) of the European Union (EU) ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro’, also known as the Single Euro Payments Area () Regulation, mandates that credit transfers and direct debits in the euro area must be carried out in accordance with the relevant requirements set out in Article 5 of, and in the Annex to, the Regulation by 1 February 2014. To avoid difficulties for non-compliant market participants, in February 2014 the European Commission, the European Parliament and EU governments agreed amending the SEPA Regulation to give the option to continue processing non-SEPA formats in the euro area until 1 August 2014. The main phase of the migration in the euro area was therefore completed on 1 August 2014. (Latvia joined the euro area on 1 January 2014 with a specific migration timeline, namely, 1 January 2015. Lithuania, which became a euro country on 1 January 2015, has to migrate by 1 January 2016.) In non-euro countries, the deadline will be 31 October 2016.
1 August 2014 however, did not mark the end of the migration period in the euro area. This blog focuses on compliance requirements mandated by the SEPA Regulation applicable as of 1 February 2016:
- Transitional arrangements in EU Member States: the SEPA Regulation has introduced several possible exemptions regarding the use of the International Bank Account Number (IBAN), the Business Identifier Code (BIC) and the ISO 20022 XML message standards by the February 2014 deadline. EU Member States have discretion as to whether they use any or all of the options to derogate from the 1 February 2014 deadline (until 1 February 2016) with regard to the use of the IBAN, the BIC and the ISO 20022 XML message standards by payment service users (PSUs).
- Niche products, which have been granted an exemption: the SEPA Regulation, in particular, stipulates that credit transfer and direct debit transactions with a cumulative market share of less than 10 percent in an EU Member State must comply with the provisions set out in this legislative act only by 1 February 2016.
Sources providing further background information as well as those cited are included in the ‘related links’ below.
Recap: Article 5 and Article 16 of the SEPA Regulation
Article 5 of the SEPA Regulation details the technical and business requirements that should be observed when carrying out euro credit transfer and direct debit transactions. These requirements relate, among other things, to the use of the IBAN, the BIC and the ISO 20022 XML message standards.
Article 16 permits individual EU Member States in the euro area to extend the deadline for compliance with some of the regulation’s provisions, i.e. use of the IBAN, the BIC and the ISO 20022 message standards, until 1 February 2016. Article 16 (7) of the SEPA Regulation states that EU Member States must have notified the European Commission by 1 February 2013 of the derogations that they intend to use. The Commission published the document ‘Usage of Member States options - Article 16 of Regulation (EU) N°260/2012’. The European Central Bank (ECB) provides country-specific fact sheets on the transitional arrangements chosen by individual EU Member States.
The option to provide consumers with conversion services for national payment transactions, enabling them to continue using the national account identifier, expires on 1 February 2016
In accordance with Article 5 (1) (c) of the SEPA Regulation, payment service providers () 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 “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)).
The SEPA Regulation gives EU Member States the option to allow 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)). According to Article 2 (14) BBAN means “a payment account number identifier, which unambiguously identifies an individual payment account with a PSP in a Member State and which can only be used for national payment transactions while the same payment account is identified by IBAN for cross-border payment transactions.”
As of 1 February 2016, PSPs will no longer be allowed to offer such conversion services to consumers, i.e. all consumers in the euro area will have to use the IBAN also for national payment transactions.
The ‘IBAN only’ rule applies without exceptions as of 1 February 2016
The SEPA Regulation stipulates the timeline for application of the so-called ‘IBAN only’ rule. This provision is relevant for both PSPs and PSUs. Article 5 (7) of the SEPA Regulation, states: “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) provides EU Member States in the euro area with the option to defer application of the ‘IBAN only’ rule for national transactions to 1 February 2016.
PSPs will, however, have to indicate the BIC when executing a SEPA payment transaction on behalf of a PSU in the interbank space; i.e. when moving funds (money) from account A to account B. The IBAN identifies the account that should be debited or credited; the BIC identifies the bank (branch) where this account is held. As a result, PSPs offering SEPA Credit Transfer () and SEPA Direct Debit (SDD) services will need a tool which allows them to derive the BIC from the IBAN. This will then enable the PSP of the party, from which the payment originates, to add the mandatory BIC information required to send the ISO 20022 payment message to the clearing and settlement mechanism or directly to the PSP of the beneficiary. PSPs need as close as possible to 100 percent reliability when determining the PSP of the receiver in order to ensure timely and proper execution of the payment instruction.
In September 2013, the European Payments Council () hosted a workshop with more than 50 participants representing solution providers, corporate payment service users, national central banks, the ECB, the European Commission and PSPs to initiate a dialogue on the minimum requirements for cross-border ‘BIC from IBAN derivation’ solutions. A summary of the discussions at the workshop was published on the EPC Website. The ECB makes available information on national authorities in SEPA countries that issue bank identifiers used in IBANs.
In December 2014, the Euro Retail Payments Board () agreed a set of recommendations aimed at ensuring that any implementation and functioning issues which might prevent the SEPA payment schemes from delivering their full potential going forward are addressed. Among other things, the ERPB recommends increasing the availability of up-to-date information on valid bank identifiers used in IBANs and corresponding BICs. This will facilitate the use of the IBAN as the unique identifier also for cross-border transactions as of 1 February 2016. Specifically, the ERPB points out that publicly accessible national sources providing data for ‘national bank identifier to BIC’ conversion services are currently either unavailable, incomplete or do not provide the data in a common structure. This constitutes the biggest issue for PSPs wishing to establish internal ‘BIC from IBAN derivation’ tables and for service providers interested in offering ‘BIC from IBAN derivation’ services on the market. The ERPB therefore, calls on existing solution providers to present the full reliability of their respective solutions to meet the market needs for ‘BIC from IBAN derivation’ by 1 June 2015 at the latest to support the IBAN-only implementation by February 2016.
(The ERPB, created and chaired by the ECB, helps foster “the development of an integrated, innovative and competitive market for retail payments in euro in the EU”. Members of the ERPB represent the demand and supply sides of the payments market. The EPC is a member of the ERPB. EU national central banks also participate in the ERPB. The European Commission acts as an observer.)
PSUs in the euro area that initiate or receive individual credit transfers or direct debits that are bundled together for transmission will have to use the ISO 20022 message formats as of 1 February 2016
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 [International Organization for Standardization] 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.
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. (According to European legislation, a “micro enterprise” is defined as an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed 2 million euros.)
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.
As of 1 February 2016, all PSUs in the euro area will have to use the ISO 20022 message formats in line with the provisions of the SEPA Regulation. This requirement does not impact consumers however, it is relevant for businesses and public entities.
Other possible derogations from the February 2014 deadline by EU Member States
Article 16 (3) allows EU Member States to waive all or some of the requirements established with the SEPA Regulation for so-called ‘niche products’, i.e. those credit transfer or direct debit transactions with a cumulative market share, based on the official payment statistics published annually by the ECB, of less than ten percent of the total number of credit transfers or direct debit transactions respectively, in that Member State until 1 February 2016.
Article 16 (4), finally, allows EU Member States to waive all or some of the requirements established with the SEPA Regulation for those payment transactions generated using a payment card at the point of sale which result in a direct debit to and from a payment account identified by the BBAN or IBAN until 1 February 2016.
The recommendation is that impacted market participants in the euro area actively prepare for the next phase of harmonisation, i.e. expiration of transitional arrangements currently permissible in EU Member States under the SEPA Regulation. Get ready for February 2016. Act now.
- Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro (the SEPA Regulation)
- European Commission Website: Information on transitional arrangements in EU Member States permissible under Regulation 260/2012 (the SEPA Regulation) and list of competent authorities responsible for ensuring compliance (items posted on 23.07.2013)
- European Central Bank Website: SEPA Countries. Country overview (fact sheets including information on transitional arrangements chosen by individual EU Member States, migration plans, reports and links) and issuing authorities for bank authorities (national authorities in SEPA countries that issue bank identifiers used in IBANs)
- EPC Website: Summary of workshop on minimum requirements for cross-border BIC from IBAN derivation solutions (24 September 2013)
- European Central Bank Website: Statement of the Euro Retail Payments Board (ERPB) following the second meeting of the ERPB held on 1 December 2014 (see Annex 1 ‘Recommendations related to SCT and SDD post-migration issues’; recommendation number 5 ‘Implementation of IBAN-only’)
- EPC Newsletter (January 2015): Next Steps Agreed by the ERPB with Regard to SCT and SDD Post-migration Issues, pan-European Electronic Mandate Solutions and Instant Payments
- European Central Bank Website: Governance (includes detailed information on the Euro Retail Payments Board (ERPB) and related documentation)
- EPC Blog (17 July 2014): 1 August 2014 Does Not Mark the End of the Migration Process. Get Ready for SEPA 2016. Act Now (this blog summarises best practices identified in the euro area during the migration process relevant, in particular, for market participants in the non-euro area required to achieve SEPA compliance by 31 October 2016)
- EPC Website: The EPC Migration Tool Kit: Get Ready for SEPA
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