EU E-Money Merger ’A Good Thing’, But Concerns Linger

July 17, 2023
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Payments experts are unphased by the merging of requirements in the Electronic Money Directive (EMD2) into the third Payment Services Directive (PSD3).

Payments experts are unphased by the merging of requirements in the Electronic Money Directive (EMD2) into the third Payment Services Directive (PSD3).

"One big theme is the two directives governing payments and electronic money coming together as one,” said Max Savoie, a partner with Sidley Austin, describing the EU payments package proposals released on June 28.

“Firms will need to consider how to navigate them being consolidated in one regime," he told VIXIO.

Last year, it became apparent that the European Banking Authority was strongly in favour of the EU merging PSD2 and the EMD2, hopeful of an end to regulatory arbitrage.

It was unsurprising then that this did make it into the European Commission's final text.

It is seen as the commission's “main example of simplification”, bringing together the two directives under one umbrella.

"The EMD/PSD merger is a good thing for the fact it brings in harmonisation,” said Trisham Chundunsing, vice president for payments at Genpact.

“Different regulators had different views on what e-money is. Luxembourg, Ireland, Sweden all have a different view of what e-money is and what it takes to be regulated,” he pointed out.

An example of this is that one source told VIXIO that although they are authorised as a payments institution in the UK, once they set up a EU subsidiary after Brexit, they found themselves licensed as an electronic money institution by the National Bank of Belgium.

Now, existing regimes for electronic money and other payment services will be combined, meaning that electronic money institutions will need to apply for re-assessment of their regulatory authorisations under the new regime.

Once PSD3 is implemented, firms that are currently authorised as electronic money institutions will become payment institutions, albeit with specific regulatory permissions for their electronic money services.

For example, some residual differences will remain, such as own funds requirements.

"There is some distinction between the two products,” said Chundunsing. “For example, electronic money has different risks to payments, but inherently, it is a good thing to bring these regimes closer, and will stop firms forum shopping."

Forum shopping has arguably been able to fester between the two regimes. This occurs when firms shop around member states, attempting to find more lenient registration and supervisory processes.

No surprises

“This has been discussed for a long time, so I don’t think anyone within payments will have been too caught out by it,” said Lisa Edström, compliance director at Brite Payments.

Edström added that the merger should help to create a more cohesive framework for payment services and electronic money services. “If this occurs, then we might see greater consistency across the market in terms of regulation, which wouldn’t necessarily be a bad thing.”

Pierre Paul Gauci, senior advisor at Embark Malta, told VIXIO: "I have always been an advocate of combining the directives, and am looking forward to it happening.”

However, former regulator Gauci said that although this change will reduce ambiguities, he is yet to be convinced that the draft proposals will not eliminate such unintended regulatory complexities.

“While under the current drafts, the definition of payment institution now encompasses entities offering both payment services and e-money services, the proposals still contain too many distinctions in the prudential treatment between the two types of entities,” he said.

“The technicalities around the blurred distinction between electronic money and funds stored in a payment account for future payments is not really what a consumer understands and necessitates, so long as any type of funds held with a payment institution are available for withdrawal or payment whenever needed,” he continued.

Scott McInnes, a partner at Bird & Bird law firm, also told VIXIO that this is the right move, albeit with some consequences. "Merging these two regulations is a good idea, as currently you can be providing two services and be subject to two different legal texts.

“There will be some issues, however. For example, under EMD2, you have five business days to safeguard funds but under PSD2, firms have 24 hours.”

This has not been acknowledged in the new text, with McInnes warning that e-money firms will now fall under the PSD2 regime of 24 hours.

In addition, there is the chance that the UK will follow suit here, with HM Treasury’s payments white paper, which was published earlier this year, consulting on this possibility.

"Merging the e-money and payments regimes is also on the table in the UK,” said Simon Treacy, senior associate at Linklaters. “I wouldn't be surprised if the UK does something similar.”

As with others, Treacy said that the two regimes are closely related anyway. “There are certain advantages that come with merging from the point of view of simplicity.

“I would say however that any kind of regulatory change always makes the heart sink as there are always complexities involved, as well as extra costs,” he continued, adding that the restructuring per se probably is not going to be what will worry firms most.

For Treacy, more significant than the merger of EMD/PSD is the transition of regulatory obligations from PSD2 into a new regulation, the EU’s first Payment Services Regulation.

“These rules will apply directly and uniformly across the EU, reducing the potential for regulatory arbitrage."

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