COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC-Treaty concerning the Common Position adopted by the Council with a view to the adoption of a European Parliament and Council Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money institutions and a European Parliament and Council Directive amending Directive 77/780/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC-Treaty concerning the

Common Position adopted by the Council with a view to the adoption of a European Parliament and Council Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money institutions and a European Parliament and Council Directive amending Directive 77/780/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions

1. BACKGROUND

1. On 29 July 1998 the Commission adopted a proposal for a European Parliament and Council Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money institutions and a proposal for a European Parliament and Council Directive amending Council Directive 77/780/EC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (COM(1998) 461 final).

2. The Council began to examine the proposals on 19 October 1998.

3. At its Plenary Session on 19 January 1999, the Economic and Social Committee adopted a favourable opinion on the Commission proposals.

4. The European Central Bank gave its opinion on 18 January 1999.

5. The European Parliament adopted the legislative resolution (first reading) introducing 25 amendments on 15 April 1999. (PE A4-156/99)

6. On 29 November 1999 the Council adopted the common position which is the subject of this communication.

2. PURPOSE OF THE COMMISSION PROPOSALS

The main purpose of the proposal is to create a harmonised single market in the provision of electronic money in the European Union. The proposal deals only with the regulatory and prudential issues relating to non-bank issuance of electronic money. However, as it is clear that traditional credit institutions too will play an important part in this segment of retail financial business, the fundamental rules concerning free circulation under the principle of mutual recognition and the supervisory regime to which they are subject, such as authorisation, capital requirement, supervision etc. should also be applied in an appropriate way to electronic money institutions.

The proposal to amend the definition of credit institution in the First Banking Directive to allow institutions, which are not willing to enter into full banking operations, to issue electronic money under the fundamental rules governing all other credit institutions will promote the harmonious development of the activities of all credit institutions throughout the Community, in particular as regards the issuance of electronic money, and will avoid distortion of competition between electronic money institutions even as regards the application of monetary policy requirements.

3. COMMENTS ON THE COMMON POSITION

3.1 General considerations

The Council's common position is in line with amendments suggested by the European Parliament and with the Commission's proposal.

A number of clarifications, which have been included in the Council's common position, improve the text while a number of additional provisions accord with amendments proposed by the European Parliament.

1998/0252 (COD)

3.2 The common position in relation to the European Parliament's amendments in first reading and to the Commission's proposal for a European Parliament and Council Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money institutions.

3.2.1. Recitals

Recital 3 has been inserted to substitute for the text of Article 1(3)(b)(iii) and (iv) of the Commission proposal. By inserting this text in the recitals, the definition of electronic money is simplified in the text of the Directive.

Recital 7 makes it clear that the issuance of electronic money must be immediate. Acceptance of cash now for issuing of electronic money at some future point is not allowable (Original Article 2(4)(b) of the Commission text).

Recital 8 underpins the previous amendment - clarifying that only credit institutions can operate cash accounts for advancing electronic money.

Recital 9 is in line with the "redeemability" clause provided for in Article 3. It is also in line amendment 10 proposed by Parliament.

Recital 11 incorporates amendment 1 proposed by Parliament and also underpins amendments in the text of the Directive as proposed in amendments 21 and 22 proposed by Parliament.

Recital 12 The Commission proposal included an Article providing for the supervision of "outsourced" activities (Article 6). These additional provisions have been deleted in the common position as there is a view that there should be horizontal treatment of outsourced activities of all financial institutions. The broad thrust of the Commission proposal on outsourcing included in the original text has now been moved to this recital.

Recital 13 recognises the effect that electronic money issuance may have on the financial system generally and the need for co-operation in assessing the integrity of e-money schemes.

Recital 14 Reference in the original recital to "thresholds" has been deleted as the common position provides for a more extensive "waiver" of the provision of the directive to certain limited schemes, without specific financial thresholds.

Recital 16 reflects the provisions of the new Article 11 which provides for a "review clause" so that the application of the Directive will be reviewed by the Commission 54 months after the entry into force of the Directive.

3.2.2. Articles

Article 1(3)(a) of the Council common position inserts "or any other legal person" to the definition of electronic money institution. This adds legal clarity to the text and is in line with amendment 14 proposed by Parliament. Furthermore, Council common position deletes the text "or which invests the proceeds from such activities without being subject to Council Directive 93/22/EEC;" Only institutions that issue electronic money will be covered by the Directive.

Article 1(3)(b) of the Council's common position inserts into the definition of electronic money the text "as represented by a claim on the issuer". This text ensures consistency with the redeemability clause.

Article 1(3)(b)(i) of the Council's common position deletes the text "such as a chip card or a computer memory;." This simplifies the text. However, the deleted text has been inserted in Recital 3.

Article 1(3)(b)(ii) introduces a new provision to ensure parity between cash and electronic money.

Article 1(3)(b)(iii) and (iv) of the original proposal have been deleted and the text inserted in recital 3.

Article 1(4) of the Council common position inserts a new provision that ensures that only EU authorised institutions can issue e-money. This adds legal certainty as to who may provide e-money services within the EU.

Article 1(5)(a) in the Council common position prohibits electronic money institutions from issuing any form of credit, to ensure that electronic money institutions would not be exposed to serious exposure arising from credit risk.

Article 1(5)(b) of the Council common position modifies the text of the original proposal to specify that the storing of data on the electronic device must be on behalf of other undertakings. This restricts the business activities of the electronic money institutions themselves and, consequently, the potential risks to which they can be exposed.

Article 2(1) of the Council common position simplifies the text of the original proposal and is in line with amendments 16 and 17 as proposed by Parliament.

Article 2(2) of the Council common position slightly modifies the text of the original proposal by clarifying the intention of the provision.

Article 2(3) of the Council common position is a simplification of the original text which clearly establishes that e-money issuance is not a deposit taking activity.

Article 3 of the Council common position introduces a new provision on "redeemability". This is in line with amendments 18 and 19 proposed by Parliament.

Article 4(1) of the Council common position clarifies that the "own funds" of electronic money institutions are as defined in the Own Funds Directive. It also increases the initial capital requirement from EUR500,000 to EUR1m.

Article 5(1)(c) and 5(3) of the Council common position substitutes the expression "sufficiently liquid" for "highly liquid" in the original proposal. This is in line with amendments 21 and 22 proposed by Parliament.

Article 5(1)(c)(4) of the Council common position substitutes the expression "qualifying holding" for the expression "direct or indirect holding" in the original proposal. The new text clarifies the nature of the holding (10%).

Article 6 The Council common position modifies the text to bring the provision in line with a similar provision for credit institutions as set out in the Solvency Ratio Directive.

Article 7(1) New text in the Council common position requires internal management and control procedures which are responsive to risks associated with outsourced activities.

Article 7(2) and (3) relating to supervision of outsourced activities have been deleted and the broad thrust of the provisions inserted as Recital 12.

Article 8(1) extends the range of provisions which the Member States may allow their competent authorities to waive to certain limited institutions.

Article 8(1)(a) of the Council common position reduces by half the thresholds for exemption of open three party e-money schemes to EUR5m.

Article 8(1)(b) of the Council common position introduces a waiver for e-money schemes where the e-money is accepted only by related undertakings. This is in line with part of amendment 15 proposed by Parliament.

Article 8(1)(c) of the Council common position introduces a waiver for e-money schemes which are restricted three party systems (i.e. where there is a clear and identifiable limit on the acceptors).

Article 8(3) of the Council common position introduces a reporting requirement on schemes that benefit from the waiver.

Article 9 of the Council common position introduces modifications to the text to clarify the period for which "grandfathering" applies and which obliges competent authorities to ensure that "grandfathered" institutions comply with the requirements of the directive.

Article 11 of the Council common position introduces a new article which provides for a "review" clause whereby the Commission will review the application of the Directive in particular as regards protection measures for bearers of electronic money; capital requirements; the use of the waiver; and the possible need to prohibit interest being paid on funds received in exchange for electronic money.

1998/0253 (COD)

3.3 The common position in relation to the European Parliament's amendments in first reading and to the Commission's proposal for a European Parliament and Council Directive amending Directive 77/780/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions.

3.3.1 Recitals

Recital 5 of the Council common position inserts a new recital in line with new article 13a extending the redeemability requirements to banks. This is in line with amendment 24 proposed by Parliament.

3.3.2 Articles

Article 1(2) of the Council common position inserts a new article 13a which applies the redeemability of electronic money requirement equally to banks. This is in line with amendment 25 proposed by Parliament.

4. Conclusion

The Commission takes the view that the Council's common position is fully acceptable. It not only incorporates many of the amendments of the European Parliament but also complements the Commission's proposal by helpful clarifications and additional provisions reflecting the need for an appropriate supervisory framework for this new and innovative business.