The regulation of electronic money institutions—essentials
Produced in partnership with DLA Piper

The following Financial Services practice note produced in partnership with DLA Piper provides comprehensive and up to date legal information covering:

  • The regulation of electronic money institutions—essentials
  • Background to the second Electronic Money Directive
  • Key requirements under 2EMD
  • HM Treasury 2EMD implementing consultation and responses
  • Other legislation applicable to EMIs
  • Amendments to the EMRs
  • The Financial Services Authority (FSA) consultation and final rules
  • Supervisory approach and guidance
  • Authorisation and registration as EMI
  • Application of FCA Handbook requirements
  • More...

The regulation of electronic money institutions—essentials

BREXIT: 11pm (GMT) on 31 December 2020 (‘IP completion day’) marked the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. Following IP completion day, key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see: Brexit and financial services: materials on the post-Brexit UK/EU regulatory regime.

Background to the second Electronic Money Directive

The first Electronic Money Directive was implemented in the UK in April 2002 (Directive 2000/46/EC) (EMD).

In October 2008, the European Commission reported that the legal framework set by the first Electronic Money Directive was holding back development of the e-money market. The main causes identified were:

  1. uncertainty over the application of the framework to new business models

  2. excessive prudential requirements, and

  3. inconsistent application of the rules by European Member States

A recast Electronic Money Directive (2EMD) was adopted by the European Parliament and the Council on 16 September 2009 which repealed the original Electronic Money Directive. European Member States were required to transpose the new directive into national law by 30 April 2011. 2EMD applied the authorisation requirements of the Payment Services Directive (Directive 2007/64/EC) (PSD) by making the necessary changes to apply to electronic money. The Payment Services Directive was replaced

by the revised Payment Services Directive (Directive (EU) 2015/2366) (PSD2) in January 2018. Consequently, a number of amendments where made to the EMRs by the Payment Services Regulations 2017, SI 2017/752 (PSRs 2017) (see Amendments to the EMRs.

Key requirements under 2EMD

Key requirements introduced by 2EMD include:

  1. Scope of 2EMD and the definition of e-money: Under 2EMD ‘electronic money means electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which is:

    1. issued on receipt of funds for the purpose of making payment transactions as defined in Article 4(5) of the Payment Services Directive (Directive 2007/64/EC), and

    2. accepted by a person other than the electronic money issue. For example, it includes held on a plastic card or on an IT server

    For more information on the definition of e-money, see Practice Note What is electronic money?.

  2. Authorisation: Electronic money institutions (EMIs) are required to apply to the competent authorities of its home Member State for authorisation to issue e-money.

  3. Lighter regime for small EMIs: Member States were given the option to impose a lighter regime to small EMIs (eg institutions with average outstanding electronic money not exceeding €5 million). For more information about the authorisation process for EMIs and the registration process of small EMIs in the UK, see Practice Note: Authorisation, registration, variation and cancellation of electronic money institutions.

  4. Initial capital requirement: The minimum initial capital requirements for EMIs were lowered from €1 million to €325,000 from the requirement contained in the EMD. Further amendments to initial capital requirements where made as a result of the implementation of PSD2

  5. Ongoing capital requirement: The ongoing capital requirements in the EMD were replaced with new methods of calculating based on the nature and the risk profile of the relevant EMI. Further amendments to initial capital requirements where made as a result of the implementation of PSD2. For more information about the initial and ongoing capital requirements for EMIs, see Practice Note Electronic money institution prudential requirements.

  6. Limited network exclusion: The limited network exclusion was redefined and aligned with the definition applied by the PSD and was subject to further amendment by changes brought by the PSRs 2017. For more information about the limited network exclusion, see Practice Note What is electronic money?

  7. Widening scope of activities: The prohibition contained in the EMD on EMIs from engaging in business activities other than the issuance of e-money was removed by EMD2.

  8. Safeguarding requirements: Under the EMD2, EMIs are required to safeguard funds received in exchange for electronic money that has been issued in line with the safeguarding requirements under PSD2. For more information about the safeguarding requirements, see Practice Note Electronic money institution prudential requirements.

  9. Redeemability: The refund requirements were clarified. Under 2EMD, customers are entitled to reclaim any unused funds at any time during or after a contract. Redemption may only be subject to a fee (which is commensurate with actual costs to the issuer) if stated in the contract and where:

    1. redemption is requested before the termination of the contract

    2. the contract provides for a termination date and the electronic money holder terminates the contract before that date, or

    3. redemption is requested more than one year after the date of termination of the contract. For more information, see Practice Note Issuing and redeeming e-money.

HM Treasury 2EMD implementing consultation and responses

On 21 October 2010, HM Treasury published a consultation paper titled ‘Laying of regulations to implement the new E-Money Directive’ which outlined:

  1. changes to be made to the UK legal framework for e-money, and

  2. the government's proposed approach to the discretionary elements left open by 2EMD

The government's approach was aimed at promoting the growth of the e-money market, encouraging innovation and new entrants to the market (both on-line and in the card market) and consumer protection. The consultation closed on 30 November 2010.

HM Treasury published responses to its consultation on 10 February 2011. HM Treasury noted:

  1. concerns about the potential impact of the new redemption rights for consumers, particularly in implementing an indefinite time limit for redemption requests. However, the government felt that including a prescription period of six years strikes the right balance between mitigating business impacts whilst still protecting consumers. The prescription period will apply to e-money issued by banks, building societies, and non-banks to avoid customer confusion

  2. a desire for greater clarity in the definition of an exempt ‘limited network’, but that a small majority of respondents supported the government's proposed approach to deal with the issue through the Financial Services Authority (FSA) (predecessor to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)) guidance

  3. unanimous support for increasing the threshold for anti-money laundering customer due diligence checks from €250 to €500, mainly on the grounds of cost. The government noted that the benefits of raising the limit for due diligence are for those who do not have access to a bank account or debit or credit card, cautious individuals who do want to give out their bank/card details and those people that use anonymous prepaid cards for gifts. The government therefore decided to raise the due diligence exemption to €500, and

  4. that it would set a threshold of €500,000 of average outstanding e-money, above which small EMIs would be required to hold capital equivalent to 2% of their average outstanding e-money balances. This means that the starting level of capital will be €10,000 based on average outstanding e-money of €500,000, rising to €100,000 capital required to support the maximum of €5 million average outstanding e-money per firm.

Other legislation applicable to EMIs

The Electronic Money Regulations 2011, SI 2011/99 (EMRs) were laid before Parliament on 19 January 2011. Certain provisions relating to authorisation, registration and FSA functions came into force on 9 February 2011, but the majority of provisions (eg those relating to supervision and enforcement, certain offences, safeguarding requirement and capital requirements) did not come into force until 30 April 2011.

The EMRs where significantly amended by the Payment Services Regulations 2017, SI 2017/752 (PSRs 2017), which implemented the recast Payment Services Directive (Directive (EU) 2015/2366) (PSD 2), EMIs also invariably carry out payment services and must also comply with the requirements of the PSRs 2017 for the payment services aspects of their businesses. For more information about the applicability and content of the PSRs 2017 see Payment services—overview.

Other legislation that EMIs may be required to comply with include:

  1. The Consumer Credit Act 1974

  2. The Distance Marketing Directive (2002/65/EC) (and the Distance Marketing Regulations 2004 (SI 2004/2095)

  3. Regulation (EC) 924/2009 on cross-border payments

  4. Second Wire Transfer Regulation (Regulation (EU) 2015/847) (WTR2) (For more information, see Practice Note: Second Wire Transfer Regulation (WTR2)—essentials

  5. Regulation (EU) 260/2012 on establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation 924/2009 (SEPA)

  6. The E-Commerce Directive (2000/31/EC)

  7. Consumer Rights Act 2015, and

  8. The Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277)

Amendments to the EMRs

The EMRs have been amended by several other statutory instruments, for example:

  1. the Payment to Treasury of Penalties Regulations 2013, SI 2013/429

  2. the Financial Services Act 2012 (Consequential Amendments and Transitional Provisions) Order 2013, SI 2013/472

  3. the Payment to Treasury of Penalties (Enforcement Costs) Order 2013, SI 2013/418

  4. the Financial Services Act 2012 (Transitional Provisions) (Rules and Miscellaneous Provisions) Order 2013, SI 2013/161

The EMRs where also significantly amended by Schedule 8, Part 2, Paragraph 5 of the PSRs 2017.

The Financial Services Authority (FSA) consultation and final rules

On 29 October 2010, the FSA published a consultation paper (CP10/25) on implementing 2EMD. The consultation covered the following matters:

  1. changes to the FSA's (now FCA's) Perimeter Guidance manual (PERG) to include guidance on the scope of the EMRs

  2. proposals about reporting requirements, including a change for payment services providers

  3. changes to the jurisdiction of the Financial Ombudsman Service so it can perform an out-of-court redress function for issuing and redeeming e-money and consequent changes in the scope of the complaints-handling rules

  4. changes to the Enforcement Guide, and

  5. consequential changes to the Handbook

On 10 February 2011, the FSA published a policy statement reporting on responses it received from its consultation on 2EMD and its final Handbook rules, directions and guidance. The FSA reported that whilst respondents were generally supportive of its approach, there were concerns in relation to the proposed content of PERG, the FSA's intention to require EMIs to submit reporting returns by email, and transitional provisions for existing EMIs and small EMIs that had entered into certain e-money contracts before 30 April 2011.

The FSA adopted its policies set out in CP10/25, but made certain changes in light of the responses received and to reflect the changes which followed HM Treasury's consultation in relation to capital requirements for small EMIs and the FSA's disciplinary powers.

Supervisory approach and guidance

The FCA's guidance on the scope of the EMRs can be found in PERG 3A. This includes guidance on the definition of electronic money and exclusions from the definition of electronic money, including the limited network exclusion.

In March 2011, the FSA published a document (Approach Document) outlining its general approach to the EMRs and how e-money issuers were to interact with the FSA. As a result of the interaction between the EMRs and PSRs 2017, in September 2017, the FCA combined its previous PSRs and EMR approach documents into ‘The FCA’s role under the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 — Our Approach’ document (FCA Approach Document). The FCA Approach Document sets out the FCA’s approach to implementing the PSRs 2017, the EMRs and the small number of payment services and e-money-related rules in our Handbook of Rules and Guidance (the Handbook). Its purpose is to give readers a comprehensive picture of the payment services and e-money regulatory regime in the UK. It also provides guidance for a practical understanding of the requirements, the FCA’s regulatory approach and how businesses will experience regulatory supervision. The Approach Document covers the following issues:

  1. Scope of the EMRs: Summary of the scope of the EMRs and where further information on scope issues can be found

  2. Authorisation and Registration: Guidance on how the FSA will apply the provisions of the EMRs dealing with becoming an authorized EMI; registering as a small EMI; and the FSA's decision-making process in relation to both types of applications. For more information about the authorisation process for EMIs and the registration process of small EMIs in the UK, see Practice Note: Authorisation, registration, variation and cancellation of electronic money institutions

  3. Changes in circumstances of authorisation or registration: EMIs are required to provide the FCA with two types of information - reporting information (provided on a regular and periodic basis) and notifications (provided when there is a change in any information already provided to the FCA). This section sets out the different notifications requirements for authorised EMIs and small EMIs. For more information about the requirements relating to such changes, see Practice Note: Authorisation, registration, variation and cancellation of electronic money institutions

  4. Appointments of agents and use of distributors: This section explains the difference between agents and distributors and describes the application procedure that authorised EMIs and small EMIs must go through to register agents with the FCA. For more information about the requirements relating to appointments of agents and use of distributors, see Practice Note: E-money—passporting, outsourcing and use of distributors an agents

  5. Passporting: Authorised EMIs have the right to issue, distribute or redeem e-money or provide payment services in another EEA State (passporting). This section sets out the passporting process for UK Authorised EMIs and how the FCA deal with incoming passport notifications.For more information about the requirements relating to passporting, see Practice Note: E-money—passporting, outsourcing and use of distributors an agents

  6. Status disclosure and use of the FSA logo: This explains what EMIs may say about their regulatory status and the circumstances under which the FCA logo may be used.

  7. Conduct of business requirements: Description and guidance on conduct of business requirements in the EMRs and Payment Services Regulations 2009 (PSRs) and interaction with other legislation. The PSRs set out conduct of business requirements for all payment service providers, including electronic money issuers.

  8. Capital resources and requirements: Description and guidance on initial and ongoing capital requirements for EMIs; how capital resources are to be calculated and met by EMIs; qualifying items to meet the own funds requirement for authorised EMIs and small EMIs; and worked examples for authorised EMIs..For more information about the initial and ongoing capital requirements for EMIs, see Practice Note: Electronic money institution prudential requirements.

  9. Safeguarding: The EMRs impose safeguarding requirements to protect customer funds. This section explains the safeguarding requirements for authorised EMIs, small EMIs and credit unions that issue e-money and their responsibility to ensure appropriate organisational arrangements are in place to protect the safeguarded funds. For more information about the safeguarding requirements, see Practice Note: Electronic money institution prudential requirements.

  10. Financial crime: All EMIs must comply with legal requirements to deter and detect financial crime, which includes money laundering and terrorist financing. EMIs are also subject to the various pieces of legislation that implement the UK’s financial sanctions regime. This section sets out the FSA's expectations with respect to how EMIs are to comply with such requirements.

  11. Complaint handling: Summary of the complaint handling requirements that apply to EMIs within the scope of 2EMD.

  12. Supervision: Description of the FCA's approach to its responsibilities for supervising EMIs.

  13. Reporting: Summary (and guidance) of the reporting requirements for EMIs. For more information about the reporting requirements for EMIs, see Practice Note: EMI operational, supervision and enforcement requirements

  14. Enforcement: This section describes the FCA's approach to enforcement. For more information and the FCA's approach to supervision and enforcement in relation to EMIs, see Practice Note: EMI operational, supervision and enforcement requirements

  15. Fees: Summary of the FSA's structure for levying fees from EMIs to recover our set-up and ongoing costs in meeting our regulatory responsibilities under the EMRs

  16. Transitional provisions for businesses issuing e-money under the PSRs 2017

The FCA took over responsibility for electronic money regime from the FSA on 1 April 2013. In June 2013, the FCA published its version of the Electronic Money Approach Document. Following the implementation of the PSRs 2017, the FCA amalgamated the Electronic Money Approach Document with the Payment Services Approach Document. The FCA’s updated Payment Services and the Electronic Money Regulations Approach Document sets out details of transitional provisions contained in the PSRs 2017. The PSRs 2017 contain transitional provisions which allow existing authorised payment institutions and EMIs to continue carrying on payment services activity without applying for authorisation under the regulations until 12 July 2018. If these businesses wish to continue with these services after this date they had to provide the FCA with additional information. This information had to be submitted before 12 April 2018.

Among other things, the FCA Approach Document also clarifies information provided in relation to:

  1. Spent convictions: The FCA requires disclosure of unspent criminal (as well as spent) convictions and cautions unless the relevant conviction or caution is protected under the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975, the Rehabilitation of Offenders (Exceptions) Order (Northern Ireland) 1979 and the Rehabilitation of Offenders Act 1974 (Exclusions and Exceptions)(Scotland) Order 2013.

  2. The definition of a head office: Although the FCA will judge each application on a case-by-case basis, the FCA clarified that the key issue in identifying the head office of a body corporate is the location of its central management and control (ie the location of its directors/senior management who make decisions relation to the business's central direction and day-to-day decisions; and central administrative functions).

  3. When the FCA may cancel an EMI's authorisation or registration: In addition to the ability to cancel on request by the EMI, the FCA may also cancel an EMI's authorisation where:

    1. the EMI has not issued e-money within 12 months of becoming authorised or registered

    2. the EMI obtained authorisation through false statements or other irregular means

    3. the EMI no longer meets (or is unlikely to meet) certain conditions of authorisation or registration or the own funds requirement

    4. the EMI has issued e-money or provided payment services other than in accordance with its permissions

    5. the EMI constitutes a threat to the stability of a payment system

    6. the EMI's the issuance of e-money or provision of payment services is unlawful, or

    7. where cancellation is desirable in order to protect consumer interests

    For more information about the FCA's ability to cancel an EMI's authorisation or small EMI's registration, see Practice Note: Authorisation, registration, variation and cancellation of electronic money institutions

  4. The passporting process: Reference is made to Regulation 28 of the EMRs which sets out the procedure for the exercise of passporting rights. References are also made to PERG 3A and the passporting section of the FCA website where further guidance on when a passport notification needs to be made. The FCA clarified that the identity of directors (as well as persons responsible for management of the proposed EEA establishment (branch, agents or distributors) needs to be provided in the passporting notice, together with evidence that they are fit and proper persons. For more information, see E-money—passporting and branches

  5. The application of host state legislation to FCA-authorised EMIs: Host state’s anti-money laundering and terrorist financing laws are applicable to FCA-authorised EMIs.

  6. The use of the FCA logo: Firms are not allowed to use the FCA logo in any circumstances.

  7. The application of the conduct of business rules to distributors and the SEPA legislation: The conduct of business requirements in the EMRs also applies to distributors. The FCA also noted that SEPA came into force in March 2012. The UK legislation implementing parts of Regulations 924/2009 and 260/2012, the Payments in Euros (Credit Transfers and Direct Debits) Regulations 2013, entered into force on 1 February 2013.

  8. The process for submitting reporting returns: Returns need to be completed electronically in Microsoft Excel and emailed to E-MoneyReturns@fca.org.uk. The FCA cannot accept scanned copies of returns. EMIs preferring to email their returns in encrypted form by secure email can request this option by email to the address noted above.

  9. The fees applicable to e-money issuers: Authorised EMIs that wish to provide payment services through agents (after authorisation)

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