Legal base	Articles 47(2) and 95 EC; co-decision; QMV
Department	HM Treasury
Basis of consideration	Minister's letter of 2 April 2009
Previous Committee Report	HC 16-xxxv (2007-08), chapter 3 (12 November 2008)
To be discussed in Council	Possibly May 2009
Committee's assessment	Politically important
Committee's decision	Do not clear; further information requested

Background

7.1 Directive 2000/46/EC, known as the Electronic Money Directive, established a regulatory regime for e-money[36] issuers across the Community and was a response to the emergence of new pre-paid electronic payment products. It was intended to create a legal framework for the e-money market to deliver its full potential. Whilst ensuring an adequate level of prudential supervision, it aimed to encourage new market entrants to the e-money market, so as to promote competition between non-banks and banks.

7.2 In July 2006 the Commission published a review of the Electronic Money Directive which concluded that the European e-money market had not developed as originally anticipated. Further to that review, the Commission proposed, in October 2008, this draft Directive to amend the legislation relating to e-money. The draft Directive would clarify the definition of "electronic money" to ensure legal certainty, with a technologically neutral, simpler definition being proposed, and provide for a new prudential regime, ensuring greater consistency between the prudential requirements of e-money issuers under the revised Electronic Money Directive and prudential requirements of payment institutions under the Payment Services Directive, Directive 2007/64/EC. The main elements of the new prudential rules include:

• an initial capital requirement of €125,000, enabling market access for smaller players, down from €1 million in the present Directive;
• a new formula to determine ongoing capital for e-money issuers in addition to the three methods established by the Payment Services Directive;
• removal of restrictions on mixed business;
• safeguarding requirements for e-money issuers in line with safeguarding requirements for payment institutions under the Payment Services Directive;
• redeemability requirements to ensure customers have the right to redeem funds at all times;
• an updated waiver regime, under which small entities would be able to obtain a derogation for some of the prudential requirements, aligned with that of payment institutions under the Payment Services Directive;
• updated anti-money laundering rules for e-money issuers, including alignment with Payment Services Directive provisions; and
• amendments to the Capital Requirements Directive to change the status of e-money issuers.

7.3 When we considered this proposal, in November 2008, we said that any proposal to improve a regulatory regime is important and, potentially, welcome and we noted the Government's support, albeit nuanced, for the draft Directive. However we added that before considering the matter further we wanted to hear about the outcome of the Government's planned public consultation, any technical changes it is proposing and the likely outcome on them. Meanwhile the document remained under scrutiny.

The Minister's letter

7.4 The Financial Services Secretary to the Treasury (Lord Myners) writes now to tell us that:

• in January 2009 the Government launched a consultation about the proposal and its proposed approach to the negotiations — an impact assessment on the negotiating options formed an annex to the consultation document;[37]
• the consultation was to close on 14 April 2009;
• as part of the consultation process Treasury officials have met a cross-section of interested stakeholders, including e-money issuing banks, the trade association representing e-money institutions and end-user representative groups;
• in general, industry representatives felt that the Commission proposal was a step in the right direction;
• in particular, the proposals to reduce the initial capital requirement, for a new method of calculating ongoing capital and to update and relax the waiver criteria were believed to promote market access, competition, and a more level playing field between the e-money institutions and banks that issue e-money;
• however, industry representatives requested, in connection with the workability of the provisions when compared with existing business models, greater clarity on the scope of the draft Directive, that is which activities and products would be affected, and on the provisions relating to redeemability, particularly in respect of the amounts that may be redeemed and whether a charge may be imposed to cover the costs of redemption;
• end-user representative groups recognised that the proposal would promote greater competition and innovation within the e-money market, resulting in a cheaper and a more diverse range of e-money products; and
• the main concerns raised by these groups related to the level of consumer protection in the event of an e-money issuer entering into insolvency and in the event of an e-money instrument being lost or stolen.

7.5 In relation to negotiations on the draft Directive the Minister explains that the Government has sought to ensure that the outcomes sufficiently meet stakeholder concerns and meet with the Government's priorities of ensuring that the UK and the European payments market are open, competitive, innovative and efficient, balanced with ensuring an appropriate and proportionate regulatory regime for e-money issuance and ensuring appropriate consumer protection. He says that:

• the Government has been working with stakeholders to ensure a final compromise text sufficiently meets the concerns of the industry in terms of scope and workability, balanced with ensuring appropriate consumer protection; and
• in addition to seeking appropriate initial and ongoing capital requirements for e-money institutions, the Government has supported inclusion of provisions relating to safeguarding funds held by institutions in exchange for e-money — the current draft text prescribes that funds received in exchange for e-money must be safeguarded, that is ring-fenced, so that in the event of insolvency of an institution those funds would be available for distribution to the holders of the e-money and would be kept separate from other assets, which would be distributed to other creditors, in the insolvency estate.

7.6 The Minister also comments that:

• with regard to a lost or stolen e-money instrument, under current practice, once an e-money issuer is informed that an instrument has been lost or stolen, it may, if the appropriate arrangements were in place, block the instrument and, in certain circumstances, the issuer could re-issue the outstanding monies to the user;
• the draft Directive does not prevent e-money issuers from continuing this practice;
• more generally, e-money issuers will be subject to the conduct of business provisions of the Payment Services Directive; and
• the provisions, which will be applied with modifications specified in the draft Directive, set out the product information that an e-money issuer must provide to a consumer, including, for example, the terms of redemption, so that the consumer can make an informed choice as to whether to use the product.

7.7 Finally, the Minister tells us that, provided an agreement is reached between the Council, European Parliament and Commission at official level, the ECOFIN Council may be asked to agree a general approach to the draft Directive at its May 2009 meeting. And he asks us to clear the draft Directive from scrutiny, in case of this possibility, in the light of stakeholders' general support for the Commission's aims in revising the present Directive.

Conclusion

7.8 We are grateful to the Minister for his account of the Treasury's consultations on the proposal and of negotiations on its text. However we note that he could only tell us of the emerging conclusions of the consultations, since they did not end until 14 April 2009, and that he was able only to describe the Government's aspirations for the final compromise text of the draft Directive, rather than to what extent they have been achieved.

7.9 We are grateful also to the Minister for drawing our attention to the Treasury's consultation document. However, we note that the "negotiating" version of the Government's impact assessment, published with the consultation document, shows, for the Government's preferred option "Accept the Commission proposal but push for specific amendments":

• present value total costs of £377.00 million to £904.70 million;
• present value total benefits of £30.40 million to £158.00 million; and
• a consequent best estimate net present value benefit over a three year period of £-346.60 million to £-746.70 million.

The assessment appears to imply that these negative monetised benefits would be offset by non-monetised benefits.

7.10 Although the Minister asks for clearance now from scrutiny of the draft Directive, we do not feel able to give this until the Government confirms that:

• the final outcome of its consultations matched the general support of stakeholders that was emerging during the process;
• the final compromise text is likely to meet the Government's key priority, as expressed in the impact assessment, of a proportionate prudential regime; and
• the Government does believe, with reason, that the non-monetised benefits of the proposal will outweigh the negative monetised benefits.

7.11 So, until we hear further on these points, the document remains under scrutiny.

37   See http://www.hm-treasury.gov.uk/consult_emd.htm.  Back