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 (98/C 317/06) COM(1998) 461 final - 98/0252(COD)

(Submitted by the Commission on 21 September 1998)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular the first and third sentences of Article 57(2) thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the Economic and Social Committee,

Acting in accordance with the procedure referred to in Article 189b of the Treaty,

Whereas credit institutions within the meaning of Article 1(1)(b) of Council Directive 77/780/EEC (1), as last amended by European Parliament and Council Directive 98/. . ./EC are limited in the scope of their activities;

Whereas, it is necessary to take account of the specific characteristics of these institutions and to provide the appropriate measures necessary to coordinate and harmonise Member States' laws, regulations and administrative provisions relating to the taking up, the pursuit and the prudential supervision of the business of electronic money institutions;

Whereas the approach adopted is appropriate to achieve only the essential harmonisation necessary and sufficient to secure the mutual recognition of authorisation and prudential supervision of electronic money institutions, making possible the granting of a single license recognised throughout the Community and the application of the principle of home Member State prudential supervision;

Whereas within the wider context of rapidly evolving electronic commerce it is desirable to provide a regulatory framework that assists electronic money in delivering its full potential benefits and that avoids hampering technological innovation in particular; whereas, therefore, this Directive introduces a technology-neutral legal framework that harmonises the prudential supervision of electronic money institutions to the extent necessary for ensuring their sound and prudent operation and their financial integrity in particular;

Whereas credit institutions, by virtue of point 5 of the Annex to Council Directive 89/646/EEC (2) as last amended by Directive 92/30/EEC (3), are already allowed to issue and administer means of payment including electronic money and to carry on such activities Community-wide subject to mutual recognition and to the comprehensive prudential supervisory system applying to them in accordance with the European banking Directives;

Whereas the introduction of a separate prudential supervisory regime for electronic money institutions, which although calibrated on the prudential supervisory regime applying to credit institutions and Directives 77/780/EEC and 89/646/EEC in particular, differs from that regime, is justified and desirable because the issuance of electronic money cannot, in view of its specific character as an electronic surrogate for coins and banknotes, be regarded as a deposit-taking activity prohibited pursuant to Article 3 of Directive 89/646/EEC to undertakings other than credit institutions;

Whereas in order to respond to the specific risks associated with the issuance of electronic money this prudential supervisory regime must be more targeted and, accordingly, is less cumbersome than the prudential supervisory regime applying to credit institutions, notably as regards reduced initial capital requirements and the non-application of Directives 89/647/EEC (4), 92/121/EEC (5) and 93/6/EEC (6);

Whereas, however, it is necessary to preserve a level playing field between credit institutions issuing electronic money and electronic money institutions and, thus, to ensure fair competition among a wider range of institutions to the benefit of users; whereas this is achieved since the abovementioned less cumbersome features of the prudential supervisory regime applying to electronic money institutions are balanced by provisions that are more stringent than those applying to credit institutions, notably as regards restrictions of the business activities electronic money institutions may carry on and, particularly, prudent limitations of their investments aimed at ensuring that their financial liabilities related to outstanding electronic money are backed at all times by highly liquid low risk assets;

Whereas with a view to the possibility of operational and other ancillary functions related to the issuance of electronic money being performed by undertakings which are not subject to prudential supervision it is appropriate to afford competent authorities certain powers with respect to these undertakings;

Whereas it is appropriate to afford competent authorities the possibility to waive certain requirements imposed by this Directive for electronic money institutions which operate only within the territories of the respective Member State and whose business activities do not exceed certain thresholds;

Whereas adoption of this Directive constitutes the most appropriate means of attaining the desired objectives; whereas this Directive is limited to the minimum necessary to attain these objectives and does not go beyond what is needed for this purpose;

Whereas the Banking Advisory Committee has been consulted on the adoption of this Directive,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Scope, definitions and restriction of activities

1. This Directive shall apply to electronic money institutions.

2. It shall not apply to the institutions referred to in Article 2(2) of Directive 77/780/EEC.

3. For the purposes of this Directive:

(a) 'electronic money institution` shall mean an undertaking, other than a credit institution as defined in Article 1(1)(a) of Council Directive 77/780/EEC which issues means of payment in the form, of electronic money or which invests the proceeds from such activities without being subject to Council Directive 93/22/EEC (7);

(b) 'electronic money` shall mean monetary value which is

(i) stored electronically on an electronic device such as a chip card or a computer memory;

(ii) accepted as means of payment by undertakings other than the issuing institution;

(iii) generated in order to be put at the disposal of users to serve as an electronic surrogate for coins and banknotes; and

(iv) generated for the purpose of effecting electronic transfers of limited value payments.

4. The business activities of electronic money institutions other than the issuing of electronic money shall be restricted to:

(a) the provision of closely related financial and non-financial services such as the administering of electronic money by the performance of operational and other ancillary functions related to its issuance and the issuing and administering of other means of payment within the meaning of point 5 of the Annex to Directive 89/646/EEC; and

(b) the provision of non-financial services that are delivered through the electronic device.

Electronic money institutions shall not have any holdings in other undertakings except where these undertakings perform operational or other ancillary functions related to electronic money issued or distributed by the institution concerned.

Article 2

Application of banking Directives

1. Save where otherwise expressly provided for, references to credit institutions in Community Regulations, Directives other than Directives 77/780/EEC and 89/646/EEC, recommendations and opinions shall not apply to electronic money institutions.

2. Article 2(5) and (6), Article 3(3)(b), (c) and (d) and (7), Article 4, Article 6, Article 7(2) and (3), Article 8(2), (3) and (4), Article 10 and Article 14 of Directive 77/780/EEC and Article 4, Article 6, Article 10, Article 12, Article 18(2), Article 23 and Article 24 of Directive 89/646/EEC shall not apply. The freedom of establishment and the freedom to provide services according to Articles 18 to 21 of Directive 89/646/EEC shall not apply to electronic money institutions' business activities other than the issuance of electronic money.

3. Council Directives 91/308/EEC (8) and 92/30/EEC (9) shall apply to electronic money institutions.

4. For the purpose of applying Article 3 of Directive 89/646/EEC funds received in exchange for electronic money shall not be regarded as deposits within the meaning of that Article if the underlying contractual arrangements:

(a) clearly establish the specific character of electronic money as an electronic surrogate for coins and banknotes; and

(b) do not provide for the possibility of advancing funds with a view to and in exchange for the receipt of electronic money at a later stage.

Redeemability of electronic money is, in itself, not a sufficient reason for considering the funds advanced by the user to be deposits within the meaning of Article 3 of Directive 89/646/EEC. The contract between the issuer and the user shall define if the stored electronic money is redeemable or not, and, if appropriate, the conditions, the formalities and the time period of redeemability.

Article 3

Initial capital and ongoing own funds requirements

1. Electronic money institutions shall have an initial capital of no less than ECU 500 000. Notwithstanding paragraphs 2 and 3 their own funds shall not fall below that amount.

2. Electronic money institutions shall have at all times own funds equal to or above 2 % of the higher of the current amount or the average of the preceding six-months total amount of their financial liabilities related to outstanding electronic money.

3. Where an electronic money institution has not completed a six-month period of business, including the day it starts up, it shall have own funds equal to or above 2 % of the higher of the current amount or the six-months target total amount of its financial liabilities related to outstanding electronic money. The six-months target total amount of the institution's financial liabilities related to outstanding electronic money shall be evidenced by its business plan subject to any adjustment to that plan having been required by the competent authorities.

Article 4

Limitations of investments

1. Electronic money institutions shall have investments of an amount of no less than their financial liabilities related to outstanding electronic money in the following assets only:

(a) asset items which according to Article 6(1)(a) points 1, 2, 3, 4 and Article 7(1) of Directive 89/647/EEC attract a zero credit risk weighting and which are highly liquid;

(b) sight deposits held with Zone A credit institutions and debt instruments, which are

(i) highly liquid;

(ii) not covered by paragraph 1(a);

(iii) recognised by competent authorities as qualifying items within the meaning of Article 2(12) of Directive 93/6/EEC; and

(iv) issued by undertakings other than undertakings which have a direct or indirect holding in the electronic money institution concerned or which must be included in these undertakings' consolidated accounts or in which the electronic money institution concerned has a direct or indirect holding.

2. Investments referred to in paragraph 1(b) may not exceed 20 times the own funds of the electronic money institution concerned and shall be subject to limitations which are at least as stringent as those applying to credit institutions in accordance with Directive 92/121/EEC.

3. For the purpose of hedging market risks arising from the issuance of electronic money and from the investments referred to in paragraph 1, electronic money institutions may use highly liquid interest-rate and foreign-exchange-related off balance-sheet items in the form of exchange-traded derivative instruments to which Annex II to Directive 89/647/EEC does not apply. The use of derivative instruments according to the first sentence is permissible only if the full elimination of market risks is intended and, to the extent possible, achieved.

4. Member States shall impose appropriate limitations on the market risks electronic money institutions may incur from the investments referred to in paragraph 1.

5. For the purpose of applying paragraph 1 assets shall be valued at the lower of cost or market value.

6. If the value of the assets referred to in paragraph 1 falls below the amount of financial liabilities related to outstanding electronic money the competent authorities shall ensure that the electronic money institution in question takes appropriate measures to remedy that situation promptly. To this end, and for a temporary period only, the competent authorities may allow the institution's financial liabilities related to outstanding electronic money to be backed by assets other than those referred to in paragraph 1 up to an amount not exceeding the lower of 5 % of these liabilities and the institution's total amount of own funds.

Article 5

Verification by competent authorities

Competent authorities shall verify compliance with Articles 3 and 4 not less than twice each year on the basis of data supplied by the electronic money institutions.

Article 6

Sound and prudent operation

1. Electronic money institutions shall have sound and prudent management, sound administrative and accounting procedures and adequate internal control mechanisms. These should respond to the financial and non-financial risks to which the institution is exposed.

2. If an electronic money institution undertakes business activities of the type referred to in Article 1(3)(a) in cooperation with another undertaking which performs operational or other ancillary functions related to these business activities and which, with a view to the risks related to these functions, is subject to no prudential supervision, the contractual arrangements underlying this cooperation shall provide for contractual rights which enable the electronic money institution properly to monitor and contain these risks and immediately and unconditionally to cancel the contractual arrangements underlying the cooperation if the effective exercise of these rights is impaired in practice or upon request of the competent authorities in accordance with paragraph 3, last indent.

3. In order to ensure the effective supervision of an electronic money institution which cooperates with another undertaking in the manner described in paragraph 2, Member States shall provide that their competent authorities may:

(a) require that other undertaking to supply any information which would be relevant for the purpose of supervising the electronic money institution;

(b) carry out, or have carried out by external inspectors, on-the-spot inspections of that other undertaking to verify such information; and

(c) require as appropriate the electronic money institution promptly to remedy any shortcomings and if necessary immediately to cancel the contractual arrangements underlying the cooperation with that other undertaking.

Article 7

Waiver

1. Member States may waive the application of Article 1(4), Article 3(1) and Article 8 of this Directive and the application of Directives 77/780/EEC and 89/646/EEC to an electronic money institution if the totality of the business activities of the type referred to in Article 1(3)(a) it undertakes alone or in cooperation with other electronic money institutions fulfil the following conditions:

(a) it generates a total amount of financial liabilities related to outstanding electronic money that normally does not exceed ECU 10 million and never exceeds ECU 12 million; and

(b) is related to electronic money the underlying contractual arrangements of which provide that the electronic storage device at the disposal of users for the purpose of making payments is subject to a maximum storage amount of no more than ECU 150.

An electronic money institution for which the application of one of the above Articles has been waived shall not benefit from the freedom of establishment and the freedom to provide services as conveyed by Directive 89/647/EEC.

2. For the purpose of applying this Directive to undertakings which seek for a waiver according to paragraph 1 to be approved or for which the waiver has been approved:

(a) 'competent authorities` shall mean those national authorities which are responsible for the supervision of electronic money institutions; and

(b) 'own funds` shall mean own funds as defined in Council Directive 89/299/EEC (10).

Article 8

Grandfathering

1. Electronic money institutions subject to this Directive which have commenced their activity in accordance with the provisions in force in the Member States in which they have their head offices before the entry into force of the provisions adopted in implementation of this Directive shall be presumed to be authorised. The Member States shall oblige such electronic money institutions to submit, within a reasonable period, all relevant information in order to allow the competent authorities to assess whether the institutions comply with the requirements pursuant to this Directive, which measures need to be taken in order to ensure compliance, or whether a withdrawal of authorisation is appropriate.

2. The presumption according to paragraph 1, first sentence shall not apply to electronic money institutions which benefit from a waiver in accordance with Article 7. If such a waiver is subject to prior approval by competent authorities, the presumption shall become void by the time of that approval.

Article 9

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 1999 at the latest. They shall immediately inform the Commission thereof.

When Member States adopt these measures, these shall contain a reference to this Directive or shall be accompanied by such reference at the time of their official publication. The procedure for such reference shall be adopted by Member States.

2. Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by this Directive.

Article 10

This Directive shall enter into force on the 20th day following its publication in the Official Journal of the European Communities.

Article 11

This Directive is addressed to the Member States.

(1) OJ L 322, 17.12.1977, p. 30.

(2) OJ L 386, 30.12.1989, p. 1.

(3) OJ L 110, 28.4.1992, p. 52.

(4) OJ L 386, 30.12.1989, p. 14.

(5) OJ L 29, 5.2.1993, p. 1.

(6) OJ L 141, 11.6.1993, p. 1.

(7) OJ L 141, 11.6.1993, p. 27.

(8) OJ L 166, 28.6.1991, p. 77.

(9) OJ L 110, 28.4.1992, p. 52.

(10) OJ L 124, 5.5.1989, p. 16.