Out-Law Guide | 01 Feb 2011 | 11:03 am | 5 min. read
This guide is subject to UK law.
New regulations coming into force in April 2011 aim to encourage more firms to set up electronic money schemes and introduce new protections and safeguards for their customers.
E-money is money that is typically stored on a card which is linked to the user's account and can be used to pay for goods and services.
It is a rapidly expanding market. According to the Electronic Money Association, the number of e-money accounts operated by e-money issuers in Europe grew from 15 million in 2005 to 125 million by the end of 2009.
By far the largest volume of e-money business is currently carried out by issuers who fall outside the scope of regulation because their pre-paid cards can only be used for a limited purpose, such as in a single retail chain or at the office canteen.
But firms operating schemes in which the card is used to pay for goods and services with someone other than the issuer (such as a gift card or travel money card) must either be authorised by the Financial Services Authority (FSA) or registered with the FSA as a "small e-money issuer".
This regulatory framework was first put in place in 2000 by the First E-Money Directive. But in 2008, the European Commission concluded that the e-money market was developing more slowly than expected and that the Directive was holding it back.
The result was the Second E-money Directive of 2009, which is designed to encourage new entrants to the market by imposing lower capital requirements and a lighter regulatory regime for small e-money issuers.
Its provisions will be implemented in the UK by the Electronic Money Regulations 2011, which come into force on 30th April 2011.
Tim Dolan, financial regulation expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said all firms currently issuing e-money should start reviewing the new rules now.
"The Directive contains fundamental changes which mean that some firms who have been exempt from the e-money regime will now be caught by it, while others will now be exempt," he said. "In addition, there are significant changes to the amounts of capital which authorised e-money issuers are required to hold."
Dolan added: "It will be interesting to see whether the new regime results in more firms becoming small e-money issuers and firms such as mobile phone operators entering the money transmission market."
Organisations that are not either a bank or a building society, or otherwise exempt under the Directive, will need to become an authorised e-money issuer, registered as a "small e-money issuer" (see below), or registered as an agent of an authorised e-money issuer, EEA authorised e-money issuer or a small e-money issuer.
Under the transitional provisions, firms that are already authorised e-money issuers will be able to benefit from grandfathering provisions and will not have to re-apply for authorisation. But they must tell the FSA by 30th June 2011 whether they want to remain an authorised e-money issuer or become a small e-money issuer.
One of the major changes under the new law is that e-money issuers will be able to engage in activities other than issuing e-money. The UK Government hopes this will encourage new market entrants such as mobile phone operators.
There is also a wider definition of e-money than under the First Directive. It now specifically includes "magnetically stored monetary value", such as payment cards and computer hard drives.
The new regulations change the qualification threshold for small e-money issuers. Under the existing rules, a small e-money issuer's total business activities should not normally generate total liabilities relating to e-money of more than €5 million and should never exceed €6 million.
Under the new regulations, the firm's average outstanding e-money must not exceed €5 million in any six-month period and none of those responsible for running the business must have been convicted of money laundering or terrorist financing offences.
In addition, small e-money issuers are no longer subject to a €150 cap on the amount that can be stored on devices. However, they will still be ineligible to trade in other European member states under an EEA passport.
Small e-money issuers that are already registered have until 30th April 2012 to re-register under the new regulations. But they will have to comply with new conduct of business rules on redemption and fees as from 30th April 2011.
Until now, authorised e-money issuers have been required to maintain an initial and ongoing capital of €1 million.
Under the new regulations, a fully authorised e-money issuer must have initial and ongoing capital of the greater of €350,000 or an amount calculated in accordance with one of four methods which take into account various factors, such as payment volume and whether the firm carries on activities other than issuing e-money.
E-money issuers that carry on business activities other than issuing e-money will also be subject to additional prudential requirements.
Small e-money issuers must maintain initial and ongoing capital of at least 2% of the average outstanding e-money of the firm, but only if their business activities generate on average outstanding e-money of €500,000 or more.
The new regulations have simplified the rules limiting the investments issuers can make with e-money funds.
Cash invested in funds must be held in secure, liquid low-risk assets which are held by a custodian or placed in a segregated account. Alternatively, the firm may hold an insurance policy or bank guarantee to safeguard the funds.
An additional safeguard is that customers should now rank above other creditors in access to those funds if the e-money issuer becomes insolvent.
Under the new regulations, e-money issuers must issue e-money to customers on receipt of funds at face value and without delay. They must also refund any outstanding balance (again, at face value) at any time if the customer requests it.
A redemption fee can be charged if a refund is requested before the contract ends, if the customer terminates the contract before the end date, or if a refund is requested more than a year after the contract ends. The fee must be proportionate and reflect the cost actually incurred by the e-money issuer.
Refund conditions, including any redemption fees, must be clearly and accurately reflected in the e-money issuer's terms and conditions and the customer informed of them before entering into the contract. Firms will need to consider how they handle dormant funds (i.e. e-money which has not been redeemed by the customer).
There is, however, a new six-year limitation period, which means that e-money issuers will not be obliged to make a refund if over six years have passed since the date the contract was terminated.
There will be a new broader "limited network" exemption to cover e-money which is only used for a limited range of goods and services as well as a limited number of undertakings. This brings the exemption into line with the limited network exemption for payment services under the Payment Services Directive. Firms that are already authorised or registered may be able to benefit from this.
Tim Dolan advised e-money issuers which are subject to the Directive to review their customer terms and conditions to make sure they comply with the new rules, particularly on refunds, and make sure they clearly disclose any redemption fees.
"It is also likely that firms will need to adjust their business and operational processes to take into account differences in safeguarding and dealing with dormant funds," Dolan added.
"Compliance teams should also be reviewing the new reporting requirements as the returns forms have been changed to reflect the new safeguarding requirements."
Contact: Tim Dolan