A sign of the times: forthcoming regulatory changes at European level will have a profound impact on the payments market
The European payments industry has been faced with a plethora of regulatory initiatives launched by the European Commission (the Commission), aimed at addressing issues that have arisen by virtue of recent developments or at remedying previous legislative measures, which the Commission found wanting when implemented. This article provides an overview of new regulatory initiatives and possible amendments to existing European Union ( ) legislation currently in the pipeline which will impact on the payments industry. According to the Commission, these initiatives are aimed at promoting market integration, improving efficiency, increasing security and transparency as well as strengthening financial stability and consumer protection in the , while at the same time fostering innovation and strengthening the competitiveness of the economy. Banks will have to prepare to meet new regulatory requirements.
This article does not cover the many ongoing competition cases at national and level on multilateral interchange fees (MIFs) which will also have an important impact on the payments industry (see 'related article in this issue' below).
Green Paper 'Towards an integrated European market for card, internet and mobile payments': next steps
The Commission's Green Paper, entitled 'Towards an Integrated European Market for Card, Internet and Mobile Payments' (the Green Paper) (see 'related links' below), was published on 11 January 2012 for a three month consultation. It identified four main drivers for market integration in electronic payments: security; transparency and choice; competition; and innovation. The Commission stated that the contributions to the consultation will determine the need for action on the various issues raised in the Green Paper and the form this action should take. In June 2012, the Commission published its feedback statement (see 'related links' below) on the Green Paper, summarising the various responses received.
The Commission has looked at various practices and developments, including MIFs, cross-border acquiring, co-badging, access to information on the availability of funds and to settlement systems, payment security, price transparency, interoperability between service providers and governance issues. The Green Paper also notes that despite the fact that the banking / card sector and mobile network operators have initiated discussions on cooperation and standardisation, tangible results have yet to be achieved and, in the Commission's view, several important gaps remain; standardisation work in the context of mobile payments (m-payments) should ensure full interoperability between m-payment solutions. Unlike m-payments, the Commission notes that the lack of common standards is less of an issue for electronic payments (e-payments). In its feedback statement, the Commission explains that certain actors are of the view that standards should emerge as a result of market forces rather than through regulatory intervention. In contrast, some other respondents, in particular retailers and terminal manufacturers, have enunciated a request for the establishment of common standards, as a means of fostering investment in new payment channels.
A key area where respondents have identified a need for standard-setting is that of online banking security. It should be noted that any standardisation exercise requires significant stakeholder involvement; and - as if this is not complicated in itself - one needs to further consider the potential competition implications that such an effort may trigger, especially in light of the Commission's approach to competition law enforcement and horizontal cooperation practices pursuant to the revised Guidelines on horizontal agreements1. Another significant aspect of the Green Paper relates to the question of whether non-bank actors should be allowed access to bank account information in order to check whether such accounts contain adequate funds. In the words of the Commission, banks have a "gateway function" to such information2. The Commission is of the view that this access should be opened up to more actors, in order to minimise barriers to entry, subject to certain safeguards, for example, obtaining the agreement of the customer so as to ensure that the new system is "at least as safe and as confidential as the present one"3.
It is expected that the Commission will announce next steps in the coming months, with a view to adopting the relevant proposals in due course, probably by the first quarter of 2013.
For an in-depth analysis of the possible implications of the Green Paper, refer to the article 'Towards an Integrated European Market for Card, Internet and Mobile Payments': Striking the Balance - Interoperability and the Access Dilemma', published in issue 15 of the Newsletter (see 'related articles in previous issues' below). The European Payments Council ( ) does not support a number of assumptions and suggestions put forth in the Green Paper. Consequently, the believes that many of those suggestions will not help achieve the stated objectives and may even undermine their realisation. To learn more, refer to the article ' Response to the European Commission Green Paper 'Towards an Integrated European Market for Card, Internet and Mobile Payments', published in issue 14 of the Newsletter (see 'related articles in previous issues' below).
Proposal for a Regulation on electronic identification and trusted services for electronic transactions in the internal market
As noted in the Green Paper, the e-commerce market has been growing incrementally in recent years. Accordingly, the Commission's proposal for a Regulation on electronic identification (e-identification) and trusted services for electronic transactions (e-transactions) in the internal market4 (see 'related links' below) was adopted on 4 June 2012. This is aimed at providing a legal framework for electronic signatures, seals, time stamping, electronic document acceptability, electronic delivery and website authentication and is based on the objectives identified by the Legislation Team ( ) Task Force set up by the Commission. This Regulation builds on the current eSignature Directive5, which despite having brought a degree of harmonisation to practices across Europe, has not managed to procure the requisite conversion of Member States' legal frameworks. The proposal permits mobile phone signatures, mandates higher accountability and requires mutual recognition between various national e-identity systems. It is expected that this will give rise to controversy from a privacy and data protection perspective and will be scrutinised by the European Parliament and the Council of the European Union. The process will probably take between one and two years.
Review of Single Euro Payments Area governance arrangements
In February 2012, the European legislator adopted the 'Regulation ( ) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009' (see 'related links' below), which is commonly referenced as the Single Euro Payments Area ( ) Regulation. The Regulation defines 1 February 2014 as the deadline in the euro area for compliance with certain of its core provisions. Recital 5 of the Regulation states: "The Commission should (...) review the governance arrangements of the whole project before the end of 2012 and where necessary make a proposal. This review should examine, inter alia, the composition of the , the interaction between the and an overarching governance structure, such as the Council, and the role of this overarching structure." The Council, which brings together representatives from both the demand and supply sides of the payments market, including the , was established by the Commission and the European Central Bank (ECB) in June 2010. Its aim is to promote the realisation of an integrated euro retail payments market by ensuring proper stakeholder involvement at a high level and by fostering consensus on the next steps towards the full realisation of (for more information see 'related links' below).
In a meeting on 25 June 2012, Council members exchanged views on options regarding the institutional aspects of the revised governance structure. Considerations aimed at establishing a cooperative model, under the auspices of the Council, with a clear mandate and possibly a yearly reporting mechanism towards the relevant European institutions seem to be prevailing in the ongoing debate. Fitting the role of the Council within the current European infrastructure and institutional map will certainly be a challenging task. The outcome of the ongoing review process and the proposal of the Commission and the ECB for a revised governance structure, expected to be finalised by the end of 2012, will be monitored with interest by all market participants.
The Regulation also redefines the process governing the evolution of the Credit Transfer ( ) and Direct Debit ( ) Schemes. Accordingly, the schemes will have to comply with the technical requirements detailed in Article 5 and in the Annex to the Regulation. The Regulation empowers the Commission to amend the technical requirements set out in the Annex to the Regulation through delegated acts. 'Delegated acts' are a new addition to the decision-making landscape. They were introduced by the Lisbon Treaty, which entered into force in December 2009 and more specifically, by Article 290 of the Treaty on the Functioning of the European Union (TFEU). Whereas European legislation is adopted by the legislator, Article 290 TFEU allows the Council of the European Union and European Parliament to delegate the power to adopt non-legislative acts to the European Commission (the executive body). By amending the technical requirements for credit transfers and/or direct debits the Commission can de facto take over the role of scheme manager.
Amendment of the Regulation on cross-border payments in the Community
Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community and repealing Regulation (EC) No 2560/20016 (see 'related links' below), introduced certain provisions aimed at promoting financial integration in a environment, building on the foundations laid by its predecessor7. Specifically, this Regulation ensures that banks cannot impose different charges for domestic and cross-border euro (and 'opt-in' currencies) payments or automated teller machine (ATM) withdrawals within the . It also imposed price parity requirements on direct debits. As mandated by Article 8 of Regulation (EC) No 924/2009, since 1 November 2010, all payment service providers ( ) in the euro area that are reachable for national direct debits must be reachable for cross-border direct debits (for example, the Core Scheme).
The rules of Regulation (EC) No 924/2009 on the reachability obligation in respect of cross-border direct debit collections and MIFs8 for direct debits, are clarified in line with the Regulation. The Regulation stipulates that the prohibition of MIFs for regular9 cross-border direct debit payments will apply as of November 2012; for national direct debit payments existing practices will be allowed to continue until February 2017.
Review of the Payment Services Directive
Most actors in the payment services industry will be excused for feeling that as soon as they began grappling with the maze of the Payment Services Directive10 (the PSD) (see 'related links' below), ' ' appeared. The PSD was implemented by most Member States by 1 November 2009 and aims to establish a modern and comprehensive set of rules as a harmonised legal framework applicable to a wide range of payment services in the . Article 87 of the PSD requires the Commission to present a report on the implementation and impact of the PSD, together with proposals for its revision, by 1 November 2012. Based on a call for tender to conduct a study on the application of the PSD and Regulation (EC) 924/2009 issued by the Commission in 2011, it seems likely that the Commission will address the following items:
- The question of whether to extend the scope of the PSD to payment transactions where at least the payer's is acting from within the community (so- called 'one leg' transactions).
- The question of how to achieve greater consistency in respect of the treatment of the 'negative scope' exemptions of the PSD across different Member States and how to improve the operation of the passporting regime.
- The application and functioning of the liability regime in relation to unauthorised payment transactions.
- The treatment of different categories of payment actors, including Electronic Money Institutions11 and the prospect of updating the Payment Institution (PI) definition to encompass such actors.
- The Commission is contemplating amending the current prudential requirements for PIs, in particular with regards to their 'own funds' requirements and safeguarding requirements (so-called 'ringfencing').
The publication of the Commission's proposal for was projected for November 2012, with a view to taking the dossier forward in the first half of 2013; it has been suggested that the proposals will be published in April 2013, although it should be noted that this has not been officially confirmed.
Revision of the Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (AML Directive)
On 11 April 2012, the Commission adopted its report on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing12 (the 'AML Directive') (see 'related links' below). In a feedback statement published in July 2012, the proposed alignment of the relevant provisions to the revised Financial Action Task Force (FATF) standards13 and their risk-based approach were welcomed. Some contributors expressed their preference for a consultation of interested parties affected by Regulation (EC) No 1781/2006 on information on the payer accompanying transfers of funds that came into force in January 200714, which lays down the rules pursuant to which have to send information on the payer throughout the payment chain, aiming to ensure the traceability of funds. Two areas that have sparked debate relate to the provisions on beneficiary information and on national arrangements with respect to third countries. The Commission is currently working on a legislative proposal to revise the AML Directive, which is scheduled for adoption by the Commission before the end of 2012.
The Commission has also been working on the terrorist financing tracking system (TFTS). On 13 July 2011, the Commission published a communication entitled "a European terrorist finance tracking system: available options"15, which examined the scope for establishing the TFTS in the and set out the different options for establishing such a system. A European TFTS would contribute to the fight against terrorism and its financing within the and would limit the amount of personal data transferred to third countries. The system should, in the Commission's view, be subject to European data protection principles and legislation. A follow up review is expected to be carried out during 2012.
Implementation of the European Market Infrastructure Regulation (EMIR)
In addition to security, transparency has also been on the Commission's agenda. As such, the Commission tabled the European Market Infrastructure Regulation (EMIR)16 (see 'related links' below), which introduced various reporting obligations and information requirements on over-the-counter (OTC) derivative contracts entered into by European financial and non-financial firms. EMIR also contains provisions on capital requirements, organisational rules and conduct of business standards for central counterparties (CCPs). It mandates clearing for certain standardised contracts and exchange of collateral as a risk mitigation technique and includes provisions aimed at reducing operational risk. Unlike its US counterpart, EMIR does not exempt foreign exchange (FX) derivatives from its scope, leaving such products exposed to margin requirements. Moreover, there is a risk that different collateralisation requirements for FX derivatives in the two jurisdictions could result in regulatory arbitrage. EMIR came into force on 16 August 2012. Before its rules are fully implemented however, the European Supervisory Authorities have to develop the relevant technical standards. With most of these nearly completed, it is expected that the new standards will be fully adopted by the Commission by the end of 2012.
Proposal for the implementation of a financial transaction tax
Moreover, on 28 September 2011, the Commission unveiled a proposal for the implementation of a financial transaction tax (FTT)17 as of January 2014 (see 'related links' below), to be levied on all securities and derivatives transactions executed in the . The proposal captures a broad range of products, including FX derivatives, and provides for the imposition of a 0.1 percent tax on share and bond trades and a 0.01 percent tax on other transactions. The Commission's reasoning for this proposal is that "through the FTT, the financial sector will properly participate in the cost of re-building Europe's economies and bolstering public finances (...) without posing undue risk to competitiveness"18. The Commission envisages that the tax will assist in preventing fragmentation in the internal market for financial services and in creating appropriate disincentives for transactions that do not enhance the efficiency of financial markets. On 23 May 2012, the European Parliament publicly supported the proposal, but some Member States (most notably the UK) have expressed reservations. France and Germany have recently launched a new bid to resurrect the proposal and there are indications that some Member States will proceed with the FTT using the enhanced cooperation procedure.
Final report of the high level expert group on reforming the structure of the banking sector (Liikanen Group Report)
Amid the critiques levied against the two-year old European Banking Authority ( ) and in light of the governance review, one cannot help but wonder whether the institutional map of European payments industry bodies is about to change - again. It remains to be seen whether the Liikanen Group Report (see 'related links' below), published on 2 October 201219, will undermine the 's role in European banking regulation. The report, which was completed following a public consultation earlier this year20, was prepared by an expert group tasked with determining whether, in addition to ongoing regulatory reforms, structural reforms of banks would strengthen financial stability and improve efficiency and consumer protection. The Commission's proposals are envisaging a leading role for the ECB in the new supervisory system and may result in the losing control over the euro zone countries' banking sectors. The Commission plans on putting the new system in place in 2013.
Commission Staff Working Document: national measures and practices as regards access to basic payment accounts
"Having a bank account should be made a legal right for the 10 percent of citizens who currently do not have one", proclaimed the Economic and Monetary Affairs Committee (ECON) of the European Parliament in May 2012, calling on the Commission to table appropriate legislation by January 2013. On 18 July 2011, the Commission published a Recommendation21 with the aim of enabling consumers to open and use a basic payment account with a set of essential payment services, free of charge or at a reasonable charge, regardless of their place of residence in the . The Commission also published a follow-up report - the Working Document, entitled: 'National measures and practices as regards access to basic payment accounts' (see 'related links' below) on 22 August 201222. This Working Document provides a factual overview and assessment of the current measures in Member States. It focuses on the right to open and use an account, the features of such account and any associated charges. In light of the fragmentation revealed, and noting that to date eleven Member States have no relevant measures in force, the Commission "is assessing the measures taken at national level and may propose any necessary action or measure in order to ensure that the objectives of the Recommendation are met in full throughout the Union."23
Implementation of the Directive on Consumer Rights and review of the Consumer Credit Directive
The protection of consumers clearly holds a prominent position in the Commission's agenda, as enunciated in the Green Paper. The Directive on Consumer Rights, published on 22 November 201124 (see 'related links' below), is aimed at achieving a real business-to-consumer internal market, striking the balance between consumer protection and enterprise competitiveness. The Directive will be transposed by 13 December 2013 and the rules will be applied in all Member States by 13 June 2014. The proposal is aimed at eliminating hidden charges and costs on the internet, as well as surcharges for the use of credit cards and at increasing price transparency by forcing traders to fully disclose the total costs of products. Moreover, the Directive will ban pre-ticked boxes on websites and will enhance consumer protection in respect of digital products. Customers will be given a 14 day period during which they will be able to withdraw from a contract and will get better refund rights. This will facilitate cross-border trading via the codification of a single set of core rules for distance contracts and off-premises contracts, creating a level playing field and reducing transaction costs for cross-border traders.
In parallel, the Commission has embarked on a review of certain aspects of the Consumer Credit Directive25 (see 'related links' below). The Commission has also examined the economic impact of the Consumer Credit Directive and is expected to report its findings to the European Parliament and the Council representing Member States by May 2013. On 14 November 2011 the Commission adopted the Directive on Credit Agreements26 (see 'related links' below). In May 2012, it published a set of Guidelines in relation to costs and the Annual Percentage Rate of charge27, which provides comprehensive explanations on how to delineate the total cost of credit (see 'related links' below).
Commission Communication: "Safeguarding Privacy in a Connected World - a European Data Protection Framework for the 21st Century"
Following a survey on attitudes to data protection, the Commission has also decided to update its privacy laws. Accordingly, in January 2012, the Commission published a communication28, which provides for the introduction of a single set of rules on data protection for the whole . The Commission's proposals include a policy communication setting out the Commission's objectives and two legislative proposals: a Regulation setting out a general framework for data protection and a Directive on protecting personal data processed for the purposes of prevention, detection, investigation or prosecution of criminal offences and related judicial activities. The Commission is focusing on stronger enforcement, by introducing heavy sanctions and provisions shifting the burden of proof. Specifically, companies will have to become more accountable, by notifying their clients of any theft of personal data, by making clear rules on the re-use of data and by making transfers of such data to other providers less complicated. Moreover, the Commission is looking at giving clients the ability to have their personal data deleted in certain circumstances. The regulator is also seeking to enhance transparency and to ensure the applicability of the European rules when personal data is processed outside Europe, aiming to improve consumer trust. Many actors in the payment services industry will be greatly impacted by these measures; among those affected, some are concerned about the joint liability provisions, about the profiling regime (that could capture fraud monitoring and prevention activities, triggering express consent requirements) and about the need to introduce a lighter regime for 'anonymised' and 'pseudonymised' data29. The Commission's proposals are being considered by the European Parliament and the Council of the European Union; the Regulation will be enforceable in all Member States two years after its adoption.
The changing European payments landscape: we are only getting started
The reforms currently carried out at level will have a major impact on . For better or worse, the Commission seems determined to drive forward its vision of an integrated, efficient and stable European financial sector. Chances are that the measures outlined here are only the beginning of an era which will see further regulatory changes affecting the industry.
Dermot Turing is a Partner and Maria Troullinou is an Associate in the financial regulation group at Clifford Chance in London. For additional information, refer to the book 'Clearing and Settlement in Europe', by Dermot Turing, published in September 2012 by Bloomsbury Professional (www.bloomsburyprofessional.com).
Related article in this issue:
Cross-border Interchange Fees: Why the General Court Got it Wrong in the MasterCard v. Commission Case. MasterCard is not an association of undertakings, and default settlement terms (including a default interchange fee - positive, negative or zero) is indispensable to the operation of the scheme
Related articles in previous issues:
What Happens Next? European Authorities to Communicate Their Vision for SEPA 2.0 by End 2012 ( Newsletter, Issue 15, July 2012)
'Towards an Integrated European Market for Card, Internet and Mobile Payments': Striking the Balance - Interoperability and the Access Dilemma. European Commission publishes feedback report on its Green Paper ( Newsletter, Issue 15, July 2012)
Committee on Payment and Settlement Systems' Working Group Publishes Report 'Innovations in Retail Payments'. Central bank research identifies market trends and elements geared to assessing what an innovation-friendly environment should look like ( Newsletter, Issue 15, July 2012)
EPC Response to the European Commission Green Paper 'Towards an Integrated European Market for Card, Internet and Mobile Payments'. EPC identifies key policy considerations with regard to potential European Union initiatives impacting the euro payments market ( Newsletter, Issue 14, April 2012)
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 ( Newsletter, Issue 13, January 2012)
The 2012 Payment Services Directive Review: Too Much too Soon? The European Commission must present its report on the application of the Payment Services Directive by 1 November 2012 ( Newsletter, Issue 13, January 2012)
The Economy of Standards: the 'Pros' and 'Cons' of Standards Competition. An introduction to a comprehensive qualitative efficiency comparison using the example of payment cards ( Newsletter, Issue 12, October 2011)
Innovacompegration (This is Not a Typo). Reflections on the best approach to innovation, integration and competition in payments ( Newsletter, Issue 10, April 2011)
1 Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal cooperation agreements (2011/C11/01).
2 European Commission Green Paper "Towards an Integrated European Market for Card, Internet and Mobile Payments" COM (2011) 941 Final, p. 11.
3 Joaquin Almunia speech/12/325, "Integrating Payments in the : A New Approach", p. 4.
4 Proposal for a Regulation on electronic identification and trusted services for electronic transactions in the internal market COM(2012) 238/2.
5 Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a community framework for electronic signatures.
6 Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community and repealing Regulation (EC) No 2560/2001.
7 Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border payments in euro.
8 As amended by Regulation ( ) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009.
9 For R(eturn) transactions a MIF is still allowed under certain conditions (Article 8).
10 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market.
11 This links into the e-Money Directive (2009/110/EC), that should have been transposed by Member States by 30 April 2011. The Commission is looking at whether other issues in respect of electronic money can be addressed in the context.
12 Report from the Commission to the European Parliament and the Council on the application of Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.
13 This refers to the FATF review of the 40+9 Recommendations (that took place in October 2011) and of the FATF Recommendations relating to the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (that took place in February 2012), which will be reflected in the relevant European Union regulations.
14 This transposes Special Recommendation VII (SRVII) of the FATF, as well as the measures stated in the European Union's Plan of Action to Combat Terrorism.
15 A European terrorist finance tracking system: available options COM(2011) 429 final.
16 Regulation ( ) No. 648/2012 of the European Parliament and of the Council on OTC Derivatives, Central Counterparties and Trade Repositories.
17 European Commission proposal for the implementation of a FTT, COM (2011) 594 final.
19 High Level Expert Group on reforming the structure of the banking sector, Final Report, 2 October 2012.
21 Commission recommendation of 18 July 2011 on access to a basis payment account, 2011/442/ .
22 Commission staff working document, SWD(2012)249 final.
23 Ibid., page 19.
24 Directive 2011/83/ of the European Parliament and of the Council on 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council
25 Directive 2008/48/EC.
26 Directive 2011/90/ amending Part II of Annex I to the Directive on Credit Agreements for Consumers.
27 Commission staff working document, SWD(2012) 128 final.
28 "Safeguarding Privacy in a Connected World - a European Data Protection Framework for the 21st Century" (COM (2012) 9 final).
29 13th Mastercard Europe European Legal and Regulatory Advisory Committee Meeting, 5 October 2012.
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