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Payment Services Update: Proposals to review payment services regulation in the EU

  • Ireland
  • General

01-11-2013

Background

The principal legislation regarding the regulation of payment services in the EU is the Payment Services Directive (“PSD I”), which was transposed into Irish law by the European Communities (Payment Services) Regulations, 2009.

The 2009 Regulations apply to institutions which execute payment transactions, provide money remittance services, issue payment instruments (e.g. credit cards) or provide payment accounts (e.g. current accounts, savings accounts). These payment service providers (“PSPs”) include banks and credit card companies. The 2009 Regulations require such institutions to hold an appropriate authorisation from the Central Bank of Ireland or other competent regulator (e.g. authorisation as a credit institution or a payment institution), and to adhere to minimum capital requirements and conduct of business rules.

In July 2013, the European Commission published proposals to introduce: (i) a new Directive to revise and extend PSD I (“PSD II”); and (ii) a regulation on Multilateral Interchange Fees (the “Regulation”) which is intended to complement PSD II.  These measures have been proposed to enhance consumer protection, take account of recent technological developments and to ensure greater consistency in how payment services are regulated throughout the EU.

The principal changes arising from the proposals are:

  • Extending the scope of PSD I, to include previously unregulated activities.
  • Limiting the scope of the exemptions from the requirement for certain activities to be regulated, which are outlined in PSD I.
  • Strengthening consumer protection and payment security.
  • Reducing interchange fees (a fee paid between banks for the acceptance of card based transactions) which apply to credit cards and debit cards.
  • Prohibition on surcharging in relation to credit cards and debit cards.

PSD II

The key proposals in PSD II are as follows:

  • Third party providers (“TPPs”) of payment initiation services (which usually provide services between the merchant and the paying customer’s bank) and account information platforms, will be required to be authorised as payment institutions. This provision is designed to regulate TPPs which provide services in relation to activities such as mobile banking, and which are currently unregulated.
  • The limited network exemption from the requirement to be authorised as a payment institution will be considerably narrower in scope. The revised exemption now covers services based on specific instruments that are designed to address precise needs that can be used only in a limited way, because they allow the specific instrument holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under a direct commercial agreement with a professional issuer or because they can be used only to acquire a limited range of goods or services. This provision may bring certain multi-purpose gift cards within the scope of PSD.
  • The independent ATM operator exemption of PSD I will be deleted. Therefore independent operators of ATMs will be regulated under PSD II. This development is a response to the European Commission’s concerns regarding independent ATM operators who charge fees which are much higher than those which apply to the use of ATMs provided by banks.
  • The commercial agent exemption of PSD I will be amended, so that it will only exempt agents which act on behalf of either the payer or the payee and not to exempt agents who act for both parties. This will probably have an impact on a number of cash collection agencies and bill payment facility providers who currently avail of the commercial agent exemption.
  • PSPs will be required to comply with the transparency and provision of information rules of PSD, where the payment transaction entails funds being sent out of or sent into the EEA, or where the transaction involves a non-EEA currency. These “one leg out” transactions largely fall outside the scope of PSD I.
  • Customer liability for unauthorised transactions on a payment instrument will be reduced from €150 to €50. Customers will also be entitled to an unconditional refund for a disputed payment transaction, unless the goods or services to which the transaction relates have already been consumed.
  • PSPs will be required to adopt enhanced security requirements for payment instruments. These measures will include “strong customer authentication”, which means a procedure for the validation of identification of a natural or legal person based on the use of two or more elements categorised as knowledge, possession and inherence whereas the selected elements must be mutually independent, in that the breach of one does not compromise the reliability of the other(s).  This proposal may require many PSPs to change their business processes regarding customer authentication of payment transactions.
  • The threshold for being categorised as a small payment institution (in which case, a less onerous regulatory regime will apply to the PSP) will be reduced from a PSP having an average payment transaction turnover per month of < €3 million to <€1 million. Therefore, some existing PSPs may no longer be categorised as small payment institutions and will be subject to the full range of regulations under PSD II.

Interchange Fee Regulation

The proposals under the Regulation will introduce a limit on interchange fees of 0.3% for credit cards (except for schemes with three parties, e.g. commercial credit cards) and 0.2% for debit cards. These limits will apply to cross-border payment transactions immediately from when the Regulation is enacted, and two years from the commencement of the Regulation in the case of domestic transactions.

The Regulation will also prohibit surcharges in relation to credit cards and debit cards.

How to Prepare for the New Regulations

The European Commission intends that the new measures will be enacted in early 2014, but this is widely regarded as an ambitious timetable. It is more likely that the new legislation will be adopted in 2015. Member States must then implement PSD II within two years. The Regulation will take effect immediately upon enactment at an EU level. However, the limits on interchange fees will be introduced on a phased basis, as described above.

The new regulations will have the following implications for payment services:

  • PSPs may be required to update their conduct of business processes and amend their customer terms of business, so as to comply with PSD II and Regulation requirements.
  • Certain businesses will find that some of their activities which are currently unregulated will become regulated under PSD II.  In that case, the business must decide whether to apply to the Central Bank for authorisation, or alternatively, discontinue their activities so as to avoid the requirement to be regulated.
  • Regulated PSPs may be required to apply PSD conduct of business processes to certain of their activities which are not currently regulated, but which will fall within the scope of PSD II. Alternatively, such PSPs could discontinue those activities, in order to avoid an additional regulatory burden.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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