COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT concerning a New Legal Framework for Payments in the Internal Market (Consultative Document)

Executive Summary

Regulation 2560/2001/EC on cross-border payments in euro has contributed to a considerable reduction in the price for cross-border payments in the Internal Market and has provided an incentive for the payment industry to modernise their EU-wide payment infrastructures.

This has been an important step in the process of achieving a Single Payment Area for non-cash payments in the Internal Market, which does not exist despite of the introduction of the euro. However, further progress needs to be made, as technical and legal barriers still prevent EU citizens, companies and payment services providers from reaping the full benefits of a truly integrated area for non-cash payments. The Internal Market for goods and services cannot function properly without cheap, efficient and secure payment services.

The existing legal framework for payments is to a large extent based on national rules which leads to a fragmentation in the Internal Market. This is detrimental to the deployment of EU-wide infrastructures by payment service providers. Community legislation on payments services, mostly applicable to cross-border payments, also needs to be reviewed and consolidated.

The removal of the technical and legal barriers should ensure efficient payment services, competition on equal terms, adequate protection of payment service users, security of payments, and should guarantee legal certainty for all parties concerned in the payment process.

The Communication's aim is to consult all interested parties on the general objectives and principles that should govern the modernisation and simplification of the regulatory framework applying to retail payment services in the Internal Market. This consultation should lead to the Commission presenting appropriate proposals for a New Legal Framework for Payments.

The Communication is accompanied by 21 Annexes raising various specific legal and technical issues concerning the efficient functioning of the Single Payment Area.

Comments on the issues raised in this Communication are welcome before 31 January 2004 and may be sent to: European Commission, Directorate General Internal Market, C107 01/04, B - 1049 Brussels. E-mail address: e-mail: markt-f4@cec.eu.int.

OUTLINE

1. INTRODUCTION 4

2. PAYMENT SERVICES AND INTERNAL MARKET 4

3. THE REASONS FOR THE COMMISSION'S INITIATIVE 6

3.1. Need for a general overhaul of the present legal framework 6

3.2. Lisbon Summit objectives and Financial Services Action Plan 7

3.3. Internal Market arguments 7

3.3.1. Removing legal barriers and uncertainty 7

3.3.2. More efficiency in a larger market 7

3.3.3. Enlargement 8

3.4. Simplifying and improving of implementation of EU-legislation 8

3.5. Implementing new money laundering requirements in the payments area 9

3.6. Taking account of new technological and market developments 9

4. THE GUIDING PRINCIPLES FOR A FUTURE PROPOSAL FOR A NEW LEGAL FRAMEWORK FOR PAYMENTS IN THE INTERNAL MARKET 10

4.1. Efficiency as a permanent objective 10

4.2. Security as a "conditio sine qua non" 11

4.3. Competition: access to markets and level playing field 12

4.4. Customer protection at a high level 13

4.5. Legal provisions need to be technically neutral 14

4.6. Recasting of payment legislation must add value 15

4.7. The nature of a future legal instrument 15

5. SCOPE OF PAYMENTS COVERED BY THE NEW LEGAL FRAMEWORK FOR PAYMENTS 16

6. COOPERATION WITH THE EUROPEAN CENTRAL BANK 17

7. THE NEED TO INVOLVE ALL STAKEHOLDERS 17

8. Next Steps 18

LIST OF ANNEXES

1. INTRODUCTION

This Communication deals with the legal framework to be proposed in order to establish a Single Payment Area which - despite of the introduction of the euro - still does not exist. This is an important element for the integration of the retail markets in general and retail financial services markets in particular. The Regulation [1] (2560/2001) on the cross-border payments in euro has contributed to reducing considerably the price for payment transactions in the Internal Market and pushed the creation or adaptation of the underlying EU-wide payment infrastructures. This process should be accompanied by the necessary legal framework in recasting and completing the existing legal acts. This is the reason for this Communication.

[1] OJ L 344, 28.12.2001, p. 13.

This Commission Communication invites the general public for comments on the various issues raised in the main text and the Annexes with regard to forthcoming legislation on retail payment services in the Internal Market, henceforth termed the "New Legal Framework". Issues to be addressed concern essential and coherent information requirements to customers, legal rights and obligations of users and providers of payment services, legal certainty in the transaction process, etc. These questions are particularly important for users, both consumers and businesses, for banks acting as payment service providers and the payment card industry.

The issues addressed in the Annexes certainly have for different market participants or under the Internal Market objectives a different importance. However, it is difficult to quantify them and/or to establish a ranking. Most legislative proposals or subjects qualify with variant degree under different objectives as e.g. payment market efficiency, legal or technical security, payment service user protection or Internal Market Integration. The present text reflects the outcome of an extensive public consultation [2] which started in spring 2002. During the public consultation, oral and written comments were received from a broad variety of respondents (national ministries, central banks, consumer associations, individual banks and banking federations, the payment card industry, telecom companies and associations etc.).

[2] A possible legal framework for the Single Payment Area in the Internal Market - Working Document (MARKT/208/2001); Summary Document (MRKT/4007/2002); Discussion Document (MARKT/F-4/4002/2003).

This Communication takes account of the comments and suggestions already received. However, in order to validate or correct the Commission's analysis on the different legal issues, it is not sufficient in the forthcoming comments on this consultation to express only preferences for a "way forward" but to deliver strong arguments. It is important to get information about the economic benefits of the various legislative proposals and to avoid over-regulation.

2. PAYMENT SERVICES AND INTERNAL MARKET

Modern economies based on the principle of division of labour are characterised by efficient payment markets. Payment systems and instruments constitute the invisible financial veil of the real economy. Payment transactions perfect the exchange of claims and liabilities; they are the corollary of the purchase of goods and services, of countless individual decisions on savings and investments or the simple service of sending money.

Payment services are provided by many operators. The smooth functioning of the huge number of daily transactions [3] leads the public to underestimate their economic performance and added value delivered nearly seamlessly at any moment. Sound payment systems and providers contribute to the trust in the currency and to financial stability. In all national economies, the payment service activity employs a considerable number of persons.

[3] The total number of non-cash payments in the EU in 2001 was 52billions. This corresponds to 143 million transactions per day and meant 138 non-cash payment transactions per inhabitant during one year. Source: European Central Bank - Blue Book.

The economies of all Member States are equipped with efficient payment systems and instruments. Payments at national level are delivered quickly, securely and at low cost. However, in the EU there is still, to a large extent, fragmentation between national payment markets on the one hand, and cross-border payment markets on the other hand. This is inconsistent with the Internal Market principle [Article 14(2) of the Treaty], since it gives rise to a border effect.

Much has been achieved in recent years to overcome this situation. Most importantly this includes the introduction of the euro, the establishment of TARGET [4] by the System of European Central Banks and the adoption of the Regulation 2560/2001/EC on cross-border payments in euro. All three initiatives have considerably improved the way payments are made in the Internal Market and brought benefits for the EU citizens and the economy in general:

[4] Trans-European Automated Real-Time Gross Settlement Express Transfer.

Citizens throughout Euroland use the same euro coins and notes. There is no longer a need to be familiar with and to buy other currencies when travelling. There are no longer foreign exchange charges. No extra conversion calculations need be made when paying for goods and services: there is immediate price comparability. People have already forgotten the former burden and cost; the advantages are taken for granted. For euro cash payments there is a single payment area: Euroland has basically become a domestic cash market [5].

[5] See Annex 17.

For large value payments in Euroland, since 1999, TARGET has provided similar efficient and expedient services as at national level for inter-bank and commercial cross-border payments.

The Regulation determines that the price for a cross-border payment in euro up to 12.500 euro [6] in the Internal Market should be the same as for the corresponding payment within a Member State. This price equality principle throughout the EU is already operational for electronic payments since 1.7.2002 and since 1.7.2003 for credit transfers. The former border effect of considerable price differences has been eliminated [7]. The market for non-cash payments in euro from the payment service user's point of view has to be considered as a domestic market.

[6] Up to 50.000 euro from 1.1.2006; the principle applies as well for SEK.

[7] E.g. since 1.7.2002 for card payments and ATM transactions.

Efforts were also undertaken by European banks [8] but their impact on the retail payment markets in Euroland was, until now, rather limited and isolated. The EU payments industry was not sufficiently prepared for the rapid adoption and implementation of the Regulation: the effect of the principle of price equality had - at that time - not found its reflection in the appropriate payment infrastructure which would enable the cross-border payment services to be provided at equal cost.

[8] E.g. Euro Banking Association's (EBA) systems EURO1 and STEP1.

However, the payment industry has accepted the principle and immediately initialised considerable common efforts. A European Payment Council was established in June 2002. It decided on a wide-ranging work programme for a Single Euro Payment Area with suggestions for considerable changes on how to organise payment services in the European Union. These plans include, in particular, the decision to establish, as a priority a new infrastructure [9] for credit transfers in euro at very low transaction cost and an expedient execution time of three days maximum. Many further actions are envisaged to realise Single Euro Payment Area. Other market players (card companies, etc.) are also actively improving their services and newcomers (e.g. telecommunication operators) are preparing alternative and specialized methods for a more efficient EU payment market.

[9] EBA's STEP2 made its first transactions on 28.4.2003.

3. THE REASONS FOR THE COMMISSION'S INITIATIVE

3.1. Need for a general overhaul of the present legal framework

There is general acceptance that the Internal Market for payments in euro has to be considered as a domestic payment market. However, looking at the legal environment of this Single Payment Area, the situation is unsatisfactory. Although there is an "Acquis Communautaire" on EU payments legislation, which allows the Internal Market to be considered as one single jurisdiction, the present legal framework - for the reason stated below - seems to require a fundamental overhaul for payments in the Internal Market.

In accordance with the Commission's policy of "Better Regulation", this Communication lays down the present "state of play" based on long preliminary discussions and preparations for a New Legal Framework for payments in the Internal Market. The Commission's services immediately started after the adoption of the Regulation 2560/2001/EC an intensive review of the present EU payment legislation with all parties concerned in order to address present legal deficiencies, the need to take account of market and technological developments, the Internal Market dimension and other policy objectives. This Communication is a further consultative document aimed at gathering views and comments. The reactions are important for the Commission in order to know all relevant arguments and assessments before proposing the most appropriate provisions for a New Legal Framework.

3.2. Lisbon Summit objectives and Financial Services Action Plan

The proposal for a New Legal Framework for payments in the Internal Market has become part of the Commission's Financial Services Action Plan (FSAP) [10] as a key measure and consequence of the recent adoption of Regulation 2560/2001/EC. This initiative focuses its efforts, through an appropriate legal environment, to improve customer convenience and protection and to underpin the efforts of the payment industry for an efficient and safe payment market. It contributes to financial stability and the proper functioning of the economy in the EU. Modern payment infrastructures are contributive to the objectives of the Lisbon Summit conclusions for making Europe the world's most competitive, knowledge-based economy by 2010.

[10] See 6th Progress Report of the Financial Services Action Plan (FSAP), which is available on the following address: http://europa.eu.int/comm/internal_market/ en/finances/actionplan/.

3.3. Internal Market arguments

3.3.1. Removing legal barriers and uncertainty

The liberalisation of capital has facilitated cross-border money transfers within the EU but the Internal Market, in particular for retail payments, is still not as efficient as at national level. Differences also exist between national legislations and conventions with regard to payment services in the Internal Market. The New Legal Framework should remove, where necessary, these legal barriers to a Single Payment Area, especially if they create an obstacle to the proper functioning of EU-wide payment infrastructures and systems as, for instance, the rules relating to the revocation of a payment order differ depending on where the order was placed in the Internal Market. Interoperability, the use of common technical standards and harmonisation of the essential legal rules are paramount.

Legal uncertainty is an element hindering payment service providers and users from transacting without reticence or at all. This is, for example, the case for direct debit transactions, which do not yet exist at EU-level (see Annex 16). This is particularly the case for regular, recurring payments (e.g. standing order for a foreign newspaper or a public utility for a summer house in another Member State) for which 'domiciliation' is not possible. If the users, e.g. consumers and SMEs, should reap the full benefit from the Internal Market, cross-border payment services have to be as efficient as those at national level.

The New Legal Framework should therefore deliver in this respect and enhance customer confidence and welfare in a Single Payment Area in the Internal Market.

3.3.2. More efficiency in a larger market

Some present Community acts on payments apply only to cross-border payments others to all payments. EU integration has sufficiently progressed and the Internal Market should also include an integrated payment market. The intention of the payment industry is to create a Single Euro Payment Area. Consequently, the existing legislation should be reviewed in this respect and, as far as necessary, the New Legal Framework should cover all payments, national and cross-border, with the same legal provisions. The New Legal Framework should considerably simplify the necessary EU legislation compared to the present situation, for instance, in the case of the existing rules on cross-border credit transfers (see notably suggestions under Annex 14). This will be in the interest of the payment service providers and users alike. The realisation of New Legal Framework and Single Payment Area will also create the potential for improved payment efficiency (see Annex 15), since this should result in a consolidation of the payment infrastructure with a much higher number of transactions than in each individual Member State. Economies of scale can result in lower transaction costs, thereby counterbalancing the present strain put by the Regulation's price equality principle or even allowing for still lower prices.

3.3.3. Enlargement

Although the New Legal Framework will not be in place at the time of the accession of the new Member States, the enlargement is an additional reason why the discussion on the legal framework is necessary. The transposition of the "Acquis communautaire" into payment legislation has added, through the transposition procedure in these candidate countries, new national legislation to the already existing diversity of national rules in the 15 Member States. Such national diversity creates legal differences which may easily become obstacles to the proper functioning of the Internal Market. The question should be addressed as to whether directly binding EU rules could be more appropriate (see section 3.5 below).

3.4. Simplifying and improving of implementation of EU-legislation

The present EU legal provisions on payments are contained in different types of EU legal instruments: a Regulation (2560/2001/EC) introducing the equality of charges for cross-border intra-EU payments in euro and corresponding national payments, which is directly legally binding without transposition into national law; a Directive (97/5/EC) [11] facilitating cross-border credit transfers in establishing some customers' protection requirements, which had to be transposed into national law to become applicable; a Recommendation (97/489/EC) [12] providing for the protection of customers using electronic payment instruments, such as payment cards, which - although not a legally binding instrument - was supposed to be fully implemented and applied in the EU. The co-existence of the three key legal acts is confusing [13] since several provisions overlap. Certain rules of the Directive have become obsolete after the adoption of the Regulation [14]. A recent Commission Report [15] on the Directive demonstrated shortcomings. A Study [16] on the Recommendation 97/489/EC revealed insufficient transposition into national legislation. The Recommendation already announced the intention of the Commission to propose binding legislation. In conclusion, a "recasting" of the existing legal framework for payments appears necessary.

[11] OJ L43 of 14.2.1997, p. 25.

[12] OJ L208 of 2.8.1997, p. 52.

[13] E.g. all three legal acts contain measures with regard to the information to be provided. This is confusing for both the payment industry and the consumers: the payment services users have no easily understandable set of requirements. The payment service providers are equally in a situation where they have to refer to various legal texts with similar requirements but expressed in different terms, without knowing whether the information they provide is sufficient under EU and national law.

[14] See e.g. Annex 14.

[15] Report from the Commission to the European Parliament and to the Council on the application of Directive 97/5/EC of the European Parliament and of the Council of 27 January 1997 on cross-border credit transfers (COM/2002/0663 final).

[16] The Study on the implementation of Recommendation 97/489/EC concerning transactions carried out by electronic payment instruments and in particular the relationship between holder and issuer (May 2001) is available on the following address: http://europa.eu.int/comm/internal_market/ payments/.

3.5. Implementing new money laundering requirements in the payments area

The Financial Action Task Force (FATF) [17] adopted on the 14th of February 2003 interpretative notes on two Special Recommendations on Terrorist Financing (Special Recommendation VI on "money transmitters" and Special Recommendation VII on "originator information")), which both deal with payment issues. The Commission is supportive to integrating these requirements into Community law and the New Legal Framework is the appropriate place to legislate. The payment industry claims fully EU harmonised rules on these aspects: this is considered to be important in order to ensure a level playing field (equal conditions for payment service providers, access, cost of compliance etc.) and for reasons of efficiency ("identical originator information requirements to allow straight-through-processing (STP). The question as whether this is best achieved through an EU Regulation needs to be addressed (see section 4.6 below and Annexes 1 and 8).

[17] See FATF homepage: www.oecd.org/fatf.

3.6. Taking account of new technological and market developments

The landscape for payments is in a state of radical upheaval due to the general technological and market developments. It is important to examine whether existing payment legislation is still sufficient and appropriate to deliver the framework for the market and its participants.

Payment service users consider that some payment transactions - notably in the present technological environment - should be offered at a marginal low price and in near real time. Under these conditions, cash payments - still mostly offered freely to the individual person by mutualising the cost to society - are likely to be increasingly replaced by modern non-cash payment means. Many citizens appreciate the convenience of these modern instruments if they provide appropriate security and protect their interest. This holds in particular in the context of e-commerce and distance selling modes, but applies also in point-of-sale and other face-to-face payment situations. Many new media services are increasingly offered against the payment of very small amounts (micro-payments). Vendors of these goods and services require automated, secure payment processing methods to keep their administrative tasks to a minimum and with assurance for the irrevocability of the payment. The Commission is strongly interested in proposing the essential - necessary and sufficient - legal provisions for payment service users in the Internal Market, taking into account these developments. Such provisions should basically deal with security, information and legal certainty requirements.

Payment service providers are mostly aware that some traditional payment instruments and systems are no longer economically adequate, effective, user-convenient and fast enough. The transaction nature of the payment service is increasingly coming to the forefront of management considerations on efficiency and profitability. Immense investments - notably in information technology - have been made by the banks at national level. The need to benefit from economies of scale through high payment transaction volumes has triggered new forms of co-operation and consolidation of payment infrastructures. Interoperability has called for common technical standards and conventions beyond the national level, notably in order to realise Single Euro Payment Area.

In addition, technological developments, cost considerations and compliance with customer convenience has brought about a profound review of the existing payment instruments. A clear shift to alternatives and the emergence of new payment methods compared to classic credit transfers or cheques is taking place (e.g. direct debit, cards, internet- , e- or m-payments). These developments are often being supported by business proposals of many new players in the payments market in response to topical new or alternative payment needs as e.g. micro-payments in the internet or m-payments. The "mushrooming" of newcomers in the payment market has been accompanied by their often quick disappearance because of the lack of critical payment transaction mass. This Communication invites comments and ideas in order to improve the legal environment for existing and potential payment service providers (see in particular Annex 1) Issues to be addressed cover market access and pursuit of business conditions.

4. THE GUIDING PRINCIPLES FOR A FUTURE PROPOSAL FOR A NEW LEGAL FRAMEWORK FOR PAYMENTS IN THE INTERNAL MARKET

Further to this consultation, when drafting a formal proposal for a New Legal Framework, the Commission intends to observe some guiding principles which are considered particularly relevant in the context of EU payment legislation. The most important principles are dealt with in this chapter.

Attention is drawn also to the Annexes which, in several cases, already contain formulated legal text elements as "possible ways forward" in drafting a forthcoming legal proposal of the Commission. However, it should be noted that no decision has been taken to definitively propose legal rules in these cases nor any formulation of the text. It is important to receive comments on the implications of such provisions. This Communication also addresses, in a piecemeal way, those forthcoming legal issues which have been identified until now. The final Commission proposal for the New Legal Framework for payments in the Internal Market will carry the present "acquis communautaire" provisions, as far as necessary, in a comprehensive legal text.

4.1. Efficiency as a permanent objective

In a recent report [18] of the Committee of Payment and Settlement Systems it is stated: "Retail payments systems and instruments are significant contributors to the broader effectiveness and stability of the financial system, in particular to consumer confidence and to the functioning of commerce" and "Public confidence in the currency could be endangered if retail payment systems were inefficient, impractical for users and unsafe". Efficient payment instruments and methods are essential to all relevant parties in a commercial relationship, in particular for the consumers and the retail trading sector.

[18] Bank for International Settlement, Committee of Payment and Settlement Systems, Policy issues for central banks in retail payments, Basel, March 2003.

For exactly these reasons efficiency of payment systems and instruments should be a concern and guiding principle for the EU legislator when proposing and deciding on a New Legal Framework for payments in the Internal Market. This is not only an essential objective, but a very practical requirement in order to meet the general expectations of payment service users, notably with regard to the security, price and execution time of payments.

Payment service providers undertake considerable efforts to permanently improve their business proposals, accentuated by competitive pressures and innovation. The Single Euro Payment Area work-programme of the European Payment Council is a clear move in this direction with regard to euro payments in the Internal Market. Card companies, telecommunication operators and others are also committed to come up with new offers.

The main contribution for the New Legal Framework is an examination of the present legal environment for payments in order to identify legal or regulatory barriers hindering improvements in the efficiency of payment markets, systems, service providers and instruments. Such legal impediments for payment efficiency can exist as a result of disproportionate legal requirements on market access (see Annex 1) or for the deployment of a payment instrument or innovative techniques, in legal provisions creating insufficient legal certainty or in unnecessary reporting obligations etc. The New Legal Framework is supposed to address these questions. This Communication invites all interested parties to provide comments to the Commission.

4.2. Security as a "conditio sine qua non"

Without a high level of security of payment systems and instruments, there will be no trust on the payment service user's side and therefore little use of unsafe payment methods. However, there is no such thing as a totally secure payment means; even cash can be lost, stolen or counterfeited.

The development of more and more sophisticated payment systems/instruments renders their security assessment increasingly technically complex. For the sake of profitable payment business and maintaining at the same time trust in their products, payment service providers are strongly self-interested to keep payment services as safe and uncompromised as possible. There is, however, a trade-off between the degree of security and the cost for the protection against misuse, mostly in the form of fraud and counterfeiting. Payment service providers and fraudsters were, in recent years, involved in a permanent race in this area, with the result that security solutions moved generally to a very high level of protection.

The Commission considers it a high priority to enhance payment security and to contribute to the fight against payment fraud (e.g. payment card fraud, fraud on e-banking). Although the implementation of the most economically feasible security infrastructure for payment services is a task and a responsibility primarily belonging to the payment industry, the New Legal Framework should address the issue of legal security of the payment environment. This includes the security evaluation of payment systems and instruments, the legal safeguards in the case of non-, defective- or unauthorised execution of payment transactions or of non-access to payment services as e.g. in a breakdown of the payment network. The legal requirements for digital certification of payments, but also measures to combat fraud, counterfeiting and terrorism financing in the context of payments, are questions to be examined. EU legislation already requires Member States to criminalise fraud and counterfeiting of non-cash means of payments. [19] Other legislative and non-legislative measures are under examination in the context of the three-annual Fraud Prevention Action Plan [20] and the implementation of the FATF Special Recommendations (see section 2.5). The Commission is, in the context of the New Legal Framework, interested to receive views on the desirability of additional legislative security measures and the costs and benefits involved.

[19] See Council Framework Decision (2001/413/JHA).

[20] See Communication on Preventing Fraud and Counterfeiting on non-cash means of payments [COM(2001) 11 final].

4.3. Competition: access to markets and level playing field

The implementation of competition policy in the anti-trust area will be enhanced from May 2004 when Regulation 1/2003/EC will apply and EU rules will be applied uniformly and directly in all Member States. The aim of increased competition is to allow markets to deliver benefits for users. Payment markets are characterised by a large number of payment service providers and users. Most payments operations have to rely on interoperable infrastructures in order to be executed. In addition, the payment service is a transaction business which is inherently susceptible to economies of scale: the cost of a payment transaction decreases with the increasing volume; the fewer the commonly used infrastructures, the higher the economies of scale. Creating and operating infrastructures for these purposes often implies agreements between competitors. Agreements in the financial sector are subject to the same EU competition rules as for other sectors. They can be permitted under certain conditions (for example where the results could not be obtained on a stand-alone basis) but are kept under scrutiny (for example to ensure that new competitors are not prevented from entering a market or that agreements do not result in a de facto pricing policy). There is no need for the New Legal Framework to go into detail on these but such agreements will continue to be subject to normal monitoring and if necessary, investigation.

Low cost operation of payment services can notably be achieved by automatisation and straight-through-processing. This presupposes, however, a high degree of standardisation and agreements on common standards. The introduction of such standards should generally be led by the industry on a voluntary basis. However, a balance must be struck in the public interest between the extent standards are needed to achieve the critical mass for straight-through-processing and interoperability and the possible adverse effects of the creation of standards which might possibly restrict innovation, for instance by creating an incentive to harmonise pricing and/or dissuading new entrants to enter payments markets. The Commission is, in principle, reticent to become involved in the standardisation of payment processing but strongly interested that progress is achieved.

An important aspect of competition in the payment sector is that of open access to infrastructures in an environment which is evolving under the impulse of technological changes and market forces.

In most Member States the exercise of payment service activities is conditional to the possession of a banking or e-money licence but not in all. This differentiation of market access conditions between Member States is detrimental to the functioning of the Internal Market: it is very difficult for payment service providers who operate legally in countries without a licence requirement to gain access to the markets of Member States which insist, for prudential reasons, on a licence. Although under the new Special Recommendation VI of the FATF [in order to combat terrorist financing and money laundering] each payment service provider must in future be registered or licensed, the question of a single EU passport for payment service providers with a simple registration in one Member State remains. Several such money transmitters and other newcomers (e.g. telecommunication operators) have complained that meeting the requirements under a banking licence - designed for the full range of banking activities - is too expensive and burdensome for simple payment service providers and is disproportionate given the reduced risks of such an activity. This raises the general question as to whether competition in the payment market might not be enhanced as a result of a reassessment of the level of access conditions and other - notably reporting - requirements for payment services only. The Commission services are in particular examining this question with regard to mobile operators and are interested in receiving comments. Any decision in this area should, however, respect the level-playing field: same activity, same risks, same requirements.

4.4. Customer [21] protection at a high level

[21] By customer is meant consumers and other persons, such as retailers and SMEs, using payment services.

Consumer protection is an important aim behind any legislation on payment markets, providers and instruments. The payment industry too is interested in offering viable business models and payment products that payment service users want. In the Internal Market, consumer confidence in payment transactions is in particular relevant since there is often a cross-border dimension and since confidence is essential when using the potential of e-commerce within the larger EU-market. Article 153 of the Treaty therefore requires a high level of consumer protection, which is a guiding principle for the New Legal Framework. However, the costs for such protection need to be assessed since they will ultimately be borne by the customer in one or the other way. In addition one has to take account of the opportunity costs associated with the perceived lack of confidence in some payment means.

There are a whole range of customer protection issues to be addressed in this context and most of them are dealt with in detail in the Annexes. They are all extremely important and can be summarised by the following list:

Focused, coherent and user-friendly information requirements prior and post execution of a payment transaction. Many provisions already exist in present EU payment legislation in this respect which need to be reviewed. One of the most difficult tasks is to strike the right balance with regard to the content and volume ofinformation so that the payment service user reading it, is able to understand and to be aware of his rights and obligations.

Legal safeguards protecting the customer in cases of non-, defective- or unauthorised payment transactions. This is directly linked to the issue of payment security, but questions of burden of proof and the extent of liabilities need to be raised.

Legal safeguards need also to be considered in the distance commerce environment, the emerging use of direct debit payment systems or in cases of non-access to electronic payment systems, etc.

Possibility to have alternative dispute resolution in cases of complaints. Directive 97/5/EC already provided for such systems in cross-border cases and the FIN-NET cooperation network has been established. The New Legal Framework should generalise these possibilities for quick redress for all payments in the Internal Market.

EU citizens expect to make or receive payments relying on simple, familiar payment legislation. The payment service users are basically interested in making expedient and safe payments at low cost. Transparency and convenience are essential. This is also the case for the retail trading sector acting as payment service users.

The Commission's services have also studied proposals to require payment account number portability as in the field of telecommunications. Based on the experience in the Netherlands and UK, but also having regard to the recent compulsory introduction of the common International Bank Account Number (IBAN) as a consequence of Regulation 2560/2001/EC, this idea would result in high costs and be counterproductive. On the other hand, it appears that customers from time to time complain about excessive prices for transferring or closing a payment account. The Commission invites comments as to whether and how the New Legal Framework could regulate this latter problem.

Finally, the Commission's services are discussing with the stakeholders a project called "Card Stop Europe", which aims to provide a simple (if possible 3-digit) single phone number in order to block quickly EU-wide lost or stolen payment cards, with the payment industry and other interested parties. This is one of the suggestions in the Fraud Prevention Action Plan. The main problem is whether such a project could be realised on a cooperative basis between those companies providing such a service at national level, or whether regulation is necessary.

A high level of consumer protection is also one of the objectives of the EU legislation on data protection [22]. It is necessary to balance the interest of data protection with other needs, such as the prevention, investigation and prosecution of payment fraud cases.

[22] See Recital 10 of Directive 95/46/EC on the European Parliament and the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and the free movement of such data, OJ L 281, 23/11/1995 p. 0031-0050.

4.5. Legal provisions need to be technically neutral

Particular attention should be given in the forthcoming legal provisions to guaranteeing a level playing field for payment service providers, to ensure technical neutrality with regard to the different payment instruments, to avoid unnecessary payment product harmonisation and not to inhibit innovation. The legal framework should, generally, not "favour" one instrument over another. Competitive advantages based on investments in new technology should be a result of market choice - not a result of legal provisions.

4.6. Recasting of payment legislation must add value

The recasting of EU payment legislation for the Internal Market needs to be done with care and in accordance with the Commission's principles of "Governance [23]" and "Better Regulation [24]". Wide-ranging, overarching payment legislation could be counter-productive, creating unnecessary complexity and disproportionate compliance costs that, generally, will inevitably be passed onto the payment service users individually or together.

[23] See Communication on Action Plan "Simplifying and improving the regulatory environment (COM/2002/0278 final).

[24] See Communication on European Governance: Better lawmaking (COM/2002/0275 final).

Any legislation must add value in terms of financial stability, payment market efficiency (including the Internal Market dimension), payment security and payment service users' convenience. Although it is rather difficult to establish fully conclusive and objective cost/benefit assessments, the overall welfare objectives need to be observed.

4.7. The nature of a future legal instrument

Another question concerns how to proceed. The EU legislator can adopt regulations and directives and the Commission can adopt recommendations. The Commission can also promote co-regulation [25] and encourage self-regulation [26] by market participants. For each issue, the appropriate legal instrument should be selected in the light of the criteria mentioned in section 4.5. The question of one or several legal instruments needs to be addressed (e.g. a regulation complemented by some non-binding rules in the form of recommendations). EU legislation could, in addition, be adopted by the Council and European Parliament or by the European Central Bank within its Treaty powers.

[25] Co-regulation is defined as a mechanism whereby a Community legislative act entrusts the attainment of the objectives defined by the legislative authority to parties which are recognised in the field (e.g. economic operators, the social partners, non-governmental organisations or European associations).

[26] Self-regulation is defined as the possibility for economic operators, the social partners, non-governmental organisations or associations to adopt amongst themselves and for themselves common guidelines at European level (codes of practice, sectoral agreements, etc.).

When the choice in favour of an EU legal instrument has been made, it should be recalled that the Stockholm European Council invited the Commission "to consider the more frequent use of Regulations where this would both be legally possible and would help to speed up the legislative process". The question for the New Legal Framework is whether the payment market, the payment service providers and users are often not better off with a directly legally binding EU regulation as an outcome of the recasting. [27] The payment industry, for example, invited the Commission to implement the FATF Special Recommendation VII by a regulation for reasons explained under section 3.5. Payment service providers must have a strong interest in knowing conclusively the comprehensive list of essential (necessary and sufficient) legal requirements in order to comply and act under conditions of legal certainty (e.g. on information requirements which must be given to their customers). This also establishes a level playing field but should not prevent any service provider to offer more on a voluntary basis.

[27] In any case, according to EU rules, an EU legal instrument can only be modified by an instrument of the same or higher order. (e.g. a directive by a new directive or by a regulation).

Likewise, as Eurobarometer surveys [28] demonstrate, consumers in Europe are very much in favour of clear, comprehensible and essential rules at a high level on their rights and obligations at EU level. UK research concludes, in addition, that e.g. the information to be given to consumers on financial services should be focussed and limited, so that it is read at all. An EU regulation could contribute considerably to solving these problems of legal clarity and simplicity because - since there would be no transposition into 25 national legislations - the risk of diverging national legal texts would be eliminated. Notably payment services users, a retail financial service already widely used cross-border, have a preference in knowing and having the same protection wherever they make a payment transaction in the Internal Market.

[28] See, for instance, Eurobarometer survey 175 "Views on Business-to-Consumers Cross-border Trade" on their homepage: http://europa.eu.int/comm/public_opinion/ .

5. SCOPE OF PAYMENTS COVERED BY THE NEW LEGAL FRAMEWORK FOR PAYMENTS

The New Legal Framework should in principle apply to all domestic retail payment instruments which are important for the Single Payment Area. Domestic payments in the Internal Market refers to both "national" and "cross-border" transactions, excluding those destined to or arriving from third countries. The focus should be on payment instruments which are provided and used as alternatives to legal tender, i.e. notes and coins. They comprise basically credit transfers, direct debits, card payments and various payments made via electronic means in both circumstances, face-to-face or remote. Specific purpose payment instruments, which only have a limited usability, such a petrol cards etc. may not need to be addressed at EU-level. If these specific purpose payment instruments were to develop and fulfil the criteria of a general-purpose payment instrument, they would obviously fall under the relevant provisions of the planned legal instrument.

Cheques are left outside the scope of the New Legal Framework [29] since they are principally used at national level in most Member States. Their processing is relatively costly and their use increasingly discouraged. The argument is even stronger for cross-border payments by cheque, for which the prices are high, due to traditional handling methods. There is no prospect that this will change.

[29] See Article 3 of Regulation 2560/2001/EC.

Very specific instruments, such as bills of exchange, money market instruments and commercial papers, the main purpose of which is generally not to pay, are also excluded from the scope.

The rules to be established in the New Legal Framework should be neutral - as far as possible -with regard to the different payment instruments. Innovation and new means of payment which compete with those covered should also be integrated. The advent of new payment services using electronic means or communication techniques is likely, as there remains a need for micro-payments, interoperable e-purses in euro etc.

Payment services covered under the New Legal Framework should be those provided as a business activity to the public by natural or legal persons (payment service providers). The rules of the New Legal Framework apply to individual and bulk payments. For individual payments, the possibility should remain of agreeing on a contractual basis, specific bilateral arrangements between the payment service provider and user. The individual transaction may be denominated in one of the EU currencies and should not exceed the equivalent of 50.000 euro. However, there may be a need for exceptions or special rules for non-euro currencies.

6. COOPERATION WITH THE EUROPEAN CENTRAL BANK

The preparation and consultation of the New Legal Framework has always been carried out - as far as possible - through discussions and close cooperation with the European Central Bank (ECB). Both, the ECB and the Commission, have for many years been committed to improving the functioning of Single Payment Area. While the focus of the ECB is more on Euroland and the euro large-value and retail payment area, the Commission's attention is focussed on the Internal Market. Both share the common objective that European retail payment systems and services should provide the same service level as they already provide at national level or as already exists for large value payments since the introduction of the euro.

The Treaty confers powers to both the Community and the ECB [30] to regulate (retail) payments, subject to the division of powers in the Treaty. The privilege of the ECB lies clearly in the area of payment oversight and more technical rules with regard to safety and efficiency of payment processing. The Commission's role, in taking initiatives and making legislative proposals for payment markets, is more in the area of general framework rules in particular relating to the protection of payment service users. In the context of the New Legal Framework, it is the intention to continue the close cooperation and to review this question bilaterally in the light of the outcome of the consultations.

[30] See Article 22 of the Statute of the ESCB and the ECB. In addition, in accordance with Article 105(4) of the Treaty and Article 4 of the Statute of the ESCB and the ECB, the ECB has always to be consulted on any proposed Community act in its field of competence.

7. THE NEED TO INVOLVE ALL STAKEHOLDERS

The considerable efforts undertaken under the New Legal Framework and in particular by the European payment industry (Single Euro Payment Area etc.) will only result in a satisfactory outcome if all parties concerned contribute.

Contributions start with the comments regarding this Communication and will continue through participation in the forthcoming discussions and initiatives. Already now, it is of the utmost importance that e.g. the payment industry provides and the payment originators use IBAN [31] and BIC [32] as requested in Regulation 2560/2001/EC. Payment service providers and users are not just the banks and their normal private banking clients. The payment service users comprise notably all initiators of bulk and often recurring payments as they exist in public services (e.g. utilities, tax authorities, e-government services) but also in private companies issuing mass payments.

[31] International Bank Account Number.

[32] Bank Identifier Code (SWIFT code).

Active involvement of all stakeholders pays off in more efficient payment systems in the Internal Market of the future.

8. Next Steps

The Communication serves to the preparation of the New Legal Framework for Payments in the Internal Market. The main text and the Annexes address a whole range of issues on which the Commission seeks views. Reaction is sought before 31 January 2004 and should be sent to:

European Commission

Directorate General Internal Market

Unit MARKT/F-4

C107 01/04

B - 1049 Brussels

Tel. +32.2.295.47.49

Fax +32.2.295.07.50

e-mail: markt-f4@cec.eu.int

ANNEXES

TO COMMISSION COMMUNICATION CONCERNING A

NEW LEGAL FRAMEWORK

FOR PAYMENTS IN THE INTERNAL MARKET

LIST OF ANNEXES

>TABLE POSITION>

Annex 1: RIGHT TO PROVIDE PAYMENT SERVICE TO THE PUBLIC

* What is the problem/issue?

Who can provide payment services in the European Union? Today the rules are very different from one Member State to another [33]. Due to such differences, there is no clarity, neither on the freedom to provide payment service nor on a single passport system with mutual recognition for payment services in the Internal Market, except for those undertakings which provide these services with a credit institution or an electronic money institution license.

[33] Undertakings providing payment services are subject to very different legal requirements from one Member State to another. In many Member States payment services provided as a business activity have traditionally been restricted to undertakings with a credit institution licence. In relation to recent market developments, the situation appears to be very different from one country to another. The same activity undertaken by a Payment Service Provider may need a licence as a credit institution in country A, an e-money licence in country B, a special license in country C and is considered as an unregulated activity in country D. A table of rules related to the right to provide payment services (MARKT/4007/2003 - Final Draft) is found on DG MARKT homepage http://europa.eu.int/comm/intern_market/ payments/ .

Because of rapid technological development, some uncertainty exists in the market as to whether or not a provided payment service would fall under the existing Community legislation and thereby benefit from a passport (e.g. telecommunication operators' pre-paid services). In addition to this legal uncertainty, there are also the newcomers in the market, who provide or would like to provide payment services but regard the existing legal framework as inappropriate and too burdensome for their activity.

The text presented below does not constitute a literal interpretation of the existing Community legislation, such as the definition of e-money or deposit taking activity. However, some guiding principles and ideas for possible solutions are included in order to promote an open discussion on the best way forward. In particular, two kinds of payment categories are raised in this respect: money remittance services and "special" purpose payment services, such as pre-paid and post-paid small value accounts used for third party payment services [34].

[34] Third party payment services are in this context considered as the fact to collect payment for a third party.

The issue of money remittance needs to be addressed at EU-level as no common approach exists for this kind of payment activity [35]. A licensing regime, valid for the entire EU territory, may therefore be needed. Also the FATF Special Recommendation VI on alternative remittance [36] stipulates that jurisdictions should require licensing or registration for money remittance services. According to this recommendation, such an activity without a license or registration has to be subject to sanctions.

[35] See above-mentioned table (MARKT/4007/2003).

[36] See FATF homepage www.oecd.org/fatf.

Presently there are few undertakings which would provide e-money as defined in the E-Money Directive [37]: a prepaid payment system where the monetary value issued circulates as a real bearer instrument from holder A to holder B to holder C and so forth. The objective of the E-Money Directive was to cover monetary value circulating as an electronic surrogate for coins and notes between separate individuals, either in an open communication network, such as Internet, or from one electronic device to another in face-to-face transactions. The development of such schemes has not taken place as had been expected before the adoption of the Directive. This has been a result of technical and economic feasibility problems. In addition, schemes which are more or less close to real e-money systems are today mainly operated by undertakings which hold a credit institution license.

[37] Directive 2000/46/EC of the European Parliament and of the Council on the taking up, pursuit and prudential supervision of the business of electronic money institutions (the Directive) was adopted on 18 September 2000. According to Article 10 of the Directive, Member States were required to take the implementation measures no later than 27 April 2002. Only 7 licences until now have been granted (UK 1, NL 3, DK 3), some of them to bank subsidiaries.

However, payment services do exist, which may be regarded as not being covered by the E-Money Directive and which could have a potential to become EU-wide schemes in fulfilling some payment needs, such as micro payments in the internet or in wireless communication services. Some payment products on the market, such as mobile operator accounts and virtual accounts (e.g. PayPal), are closer to credit transfers in a centralised account system than real bearer instruments.

New players, interested in providing small value payments (e.g. micro payments) for some specific purposes, consider the existing prudential rules as too burdensome and not appropriate for their activity. They argue that these rules were established either for a much wider range of risks (credit institution activity) or for payment services which could become surrogates for notes and coins (e-money activity).

Given the existence of a wide range of new payment services and the needs in the market, the Commission considers it important to analyse what would be the right legal framework for these services. This analysis should be based on the prudential risks involved, which need to be further elaborated in this context. Three possible solutions are set out below in order to receive views from all interested parties on the best way forward. Any solution should be based at least on the following three principles:

- all payment services should be covered by appropriate consumer protection rules;

- the prudential requirements should be proportionate to the risks involved;

- the level-playing-field principle should be respected i.e: same activity, same risks, same rules; and

- all payment services should fulfil the relevant conditions relating to the smooth functioning of payment systems.

* Possible way forward

The first solution would be to apply the Internal Market principle of mutual recognition to all kinds of payment activities in the EU. According to the Treaty rules (Art. 49) on the freedom to provide services in the Internal Market, a legally exercised activity in one Member State can ipso facto be legally exercised in other Member States, except if the general interest justifies the contrary. For example, if the Commission takes no initiative for the licensing of money remittance, each Member State will keep or create its own regime: State A considers that this activity needs a banking license, State B only a simple registration. A company registered in State B may have the right to provide this service also in State A, and it may be questioned whether State A may oppose to this. Any restriction on the freedom to provide services has to be appropriate, necessary and proportionate. A proportionality test may result in establishing that - under the Internal Market principles - a Payment Service Provider who wishes to undertake cross-border money transmission would be able to do so.

In order to underpin the importance of the mutual recognition principle, the Commission, in its recent Communication [38] on the Internal Market Strategy, has announced a new Directive on services for an effective implementation of that principle.

[38] COM(2003) 238 final dated 07/05/2003 p 12.

However, to apply the mutual recognition principle on the basis of the general provisions of the Treaty without establishing harmonised minimum requirements for payment services might bear the risk of disputes before the European Court of Justice. .Mutual recognition might be easier to achieve by establishing an EU-Passport regime based on minimum licensing or registration requirements, for payment services.

A second solution would therefore be to introduce a third specific category of licensing for payment activities. The idea would be to establish a hierarchy of risks among Payment Service Providers: some activities with a fully-fledged credit institution license (funds from the public not exclusively used for payment activities), an e-money institution license (e-money used as an alternative to coins and notes) and a payment institution license (funds from the public exclusively for payment services/transmission).

In such a way a special license or registration for "payment-services-only" could be created without the same level of prudential rules as required by the Credit Institution Directive or the E-money Directive, as there is no evidence that the simple payment transmission activity would require such extensive prudential regulation. Some oversight by central bank and/or supervision by competent authority may, however, be needed. Such activity should, of course, respect any relevant consumer protection and anti-money-laundering rules.

This new license should, in addition to the credit institution and the e-money institution license, create a mutual recognition regime for the Single Payment Area. It could cover one or more situations such as: money transmission services, prepaid and stored value accounts used for third party payments and not covered by the e-money regime and other third party payments services e.g. based on billing.

A third solution would be to adapt the E-Money Directive to the market changes, which were not foreseen at the time of its adoption. One way to do this would be to transform the Directive into a framework directive ("Payment Institutions Directive") regulating the prudential aspects of all payment services which are provided on the basis of customers' money. This could be done in a similar way to that suggested in the second solution, by establishing different categories of payment services. The aim should be to regulate the requirements for payment services within two legal instruments at EU-level, thereby guaranteeing an appropriate prudential regime and giving legal certainty to these undertakings.

It would also in this case be possible to allow exemptions for certain very specific payment services, such as limited purpose payment instruments or payments which are an integral part of another service (e.g. Premium Rate Services [39]). For these very specific payment instruments without tangible risks, some or all provisions could be waived, if necessary. These possible exemptions should be applicable at EU-level and not only at national level, which is the case with the existing E-Money Directive, as no barriers for payment services should be established in the Internal Market. For instance, a public transport company, which has been granted a waiver for a limited purpose payment instrument in one Member State, should have the right to provide this service also at a station located in another Member State.

[39] Premium Rate Services are those where the charge for the call or text message is higher than the standard rate, and part of the revenue for the call is passed to a third party.

If the transforming of the E-Money Directive into a general "Payment Institutions Directive" with necessary modifications were to be regarded as premature at this stage, the Commission may wait for the outcome of the review of the Directive during 2005 [40] before proposing any amendments. The drawback of such a postponement is that this would not remove all the existing legal uncertainties for markets participants.

[40] Article 11 of the E-money Directive requires the Commission to present a report (by 27 April 2005) to the European Parliament and the Council on the application of the directive.

The Commission services welcome views on the importance of further harmonisation of the conditions relating to the right to provide payment services to the public. Views on possible effects on customer protection and market efficiency (competition) are particularly sought. Annex 2: INFORMATION REQUIREMENTS

* What is the issue/problem?

Awareness is a crucial element of consumer protection. The Payment Service User needs to have clear information about the payment service which he wants to use, and/or which has been provided to him. Transparency is a pre-requisite in order to be able to compare different offers on the market, to decide on the conclusion of the contract with full knowledge of its terms and conditions, and to be in a better position to understand the service provided. The Payment Service Users should have the same high level of essential (necessary and sufficient) information wherever they buy or use their payment service in the Internal Market.

Furthermore, transparency enhances competition in payment services. Harmonised essential information requirements at EU-level would facilitate the supply of payment services across the Internal Market and reduce the burden for Payment Services Providers to apply diverging national rules and thereby increase competition by creating a level-playing field.

Current information requirements for payment services are spread over different Community texts with a non-uniform content. Because of the non-binding nature of the Recommendation 97/489/EC, not all its information requirements are implemented by the Member States.

* Possible ways forward

Many interested parties have, during the preliminary consultation, expressed broad support for harmonised information requirements for payment services in the Internal Market. In this respect, the quality and not the quantity of the information was regarded as the crucial factor. According to some views, the diversity of products (instruments and services) throughout the Internal Market has to be taken into account. Some of the respondents therefore concluded that the new information requirements should focus on general principles. Some respondents from the banking industry regarded self-regulation, such as a Code of Conduct, as the appropriate means to achieve this at EU-level. Others preferred binding legislation.

The Commission is sceptic that self-regulation would be the appropriate way forward in order to harmonise information requirements in the Internal Market, as this would require the commitment from all players - numerous banks and non-banks - providing payment services. Therefore the Commission services regard binding rules at EU level as more suitable to realise a Single Payment Area. Even the use of a directly applicable instrument, e.g. a Regulation, in order to guarantee the same level of essential protection all over the Internal Market could be considered. The determination of an exhaustive list of essential information requirements would be helpful for the Payment Service Provider and the Payment Service User likewise in terms of legal certainty and transparency. This approach would not prevent an individual Payment Service Provider to give additional information at his discretion or if requested.

In addition, the Commission is of the opinion that the general provisions should, in principal, cover all retail payment services provided to the public and falling under the scope of the new legal act. However, some specific provisions applicable only to certain payment services, such as credit transfers or micro payments, may need to be considered.

A very first draft of provisions, applicable to all payment services, could read as follows:

"1. In good time before the Payment Service User is bound by any contract or offer, the Payment Service Provider shall communicate to the Payment Service User on paper or in another durable medium available and accessible to the PSU all the contractual terms and conditions (hereinafter "the conditions").

2. The conditions shall be set out in writing, including where appropriate by electronic means, in easily understandable words and in a clear and readable form.

3. Any modification of the conditions shall be provided in the same way as indicated in paragraph 1 and 2 and not less than one month in advance of the date of its application. The Payment Service User is deemed to have accepted the modifications of the conditions if he has not terminated the payment service contract up to the date of application.

4. The conditions shall include at least:

(a) a description of the payment service, including where appropriate the technical requirements with respect to the Payment Service User's communication equipment authorised for use, and the way in which it can be used, including the financial limits applied, if any;

(b) a description of the Payment Service Provider's and Payment Service User's respective obligations and liabilities relating to the provision and use of the payment service; they shall include, where appropriate, a description of the reasonable steps that the Payment Service User shall take to keep safe a payment instrument and the means (such as a personal identification number or other code) which enable it to be used;

(c) where relevant, the period within which the Payment Service User's payment account will be debited or credited, including; the execution time and the value date, or, where the Payment Service User has no payment account with the Payment Service Provider, the period within which he/she will be invoiced. The start of that period must be clearly indicated;

(d) the types of all charges payable by the Payment Service User . In particular, this shall include, where relevant, details of the following charges:

- the amount of any initial and annual fees,

- any commission fees and charges, including the manner of its calculation, payable by the Payment Service User to the Payment Service Provider for particular types of transactions,

- any interest rate, including the manner of its calculation, which may be applied;

(e) where relevant, the reference exchange rate used for converting foreign currency transactions, including the relevant date for determining such a rate.

(f) the period of time during which a given payment order can be contested [revoked, rejected] by the Payment Service User and all practical instructions for exercising this claim;

(g) an indication of the redress and complaints procedures available to the Payment Service User and the method of gaining access to them;

(h) any contractual clause on of the law applicable to the contract and/or the competent court; and

(i) in which language or languages the Payment Service Provider, with the agreement with the Payment Service User, undertakes to communicate during the duration of the payment service contract.

5. Subsequent to a transaction, the Payment Service Provider shall provide the Payment Service User, in the same way as indicated in paragraph 1 and 2, unless the latter expressly foregoes this, with at least the following information:

(a) a reference enabling the Payment Service User to identify the transaction, including, where appropriate, the information relating to the beneficiary;

(b) the amount of the transaction debited or credited on the Payment Service User payment account;

(c) the amount of any fees and charges applied for particular types of transactions;

(d) where relevant the execution time and value date applied; and

(d) where relevant the exchange rate used for converting foreign currency transactions."

The Commission services would welcome views on the impact of the above described draft provisions. Views on the possible effects on customer protection and market efficiency are particularly sought.

Annex 3: NON-RESIDENT ACCOUNTS

* What is the issue / problem?

EU citizens complain about different treatment between resident and non-resident accounts within the Internal Market. In particular, citizens have difficulty in understanding different pricing policies, even after the introduction of the euro, given the basic principle of non-discrimination in the Treaty.

Differences between resident and non-resident accounts are made (1) with regard to the opening of accounts, (2) with regard to the running of accounts and (3) with regard to payments from and to accounts.

However, not all Member States have specific legislative or administrative provisions which prescribe a different treatment between non-resident and resident accounts, as there are no specific rules [41]. Others still maintain specific reporting requirements with regard to non-resident accounts for statistical reasons and also for reasons of taxation. These differences in legislation are often used by banks as justification for different prices.

[41] Further information can be found in document "National rules related to non-resident accounts" (MARKT/4006/2003 - Final Draft) - http://europa.eu.int/comm/internal_market/ payments/.

The fact that not all Member States need to provide for a different legal regime for resident and non-resident accounts raises the question as to whether there might be a possibility to remove as many differences as possible within the Internal Market.

* Possible Ways forward

Not all of the above-mentioned problems can be solved within the New Legal Framework for payments, which will have to concentrate on payment-related issues. It is not the intention of this initiative to abolish possible obstacles with regard to the opening of resident accounts.

There may be a need to maintain specific rules for non-resident accounts as such, for example which may be necessary in order to take account of the agreements on the taxation of savings at the ECOFIN this spring. According to this agreement, banks will be obliged to report annually the interest earned by non-residents. Given this decision on withholding tax, it seems less likely that non-resident accounts as such will disappear within the EU.

However, this agreement should have no impact on reporting requirements for payments from and to non-resident accounts and serve as a justification for different prices. The latter should be abolished as far as possible. Regulation 2560/2001 already provides the legal basis. Under the principle of price equality for national and cross-border payments and taking into account that payments from and to non-resident accounts are treated like cross-border payments, the Commission sees no justification for banks within the Internal Market to treat euro-payments from and to non-resident payment accounts up the 12.500 euro differently to those from and to resident payment accounts.

However, the banking sector still regards some existing and new reporting requirements for payment transactions as too burdensome. Whether and how far remaining reporting requirements discriminate European citizens because of their nationality and/or residence and whether those rules impair the proper functioning of payment systems will be examined. Contributors to the Communication may therefore describe in detail, which existing reporting requirements they regard as inappropriate or too burdensome. Comments on other perceived obstacles in the context of the management of non-resident accounts and their impact on payment services within the EU are also welcomed.

Annex 4: VALUE DATES

* What is the issue / problem?

The value date is the reference date for the calculation of positive or negative interest related to a payment [42] Value dates are generally applied by banks in the context of a wide range of payment orders (credit transfers, cash withdrawals, etc...), as a result of which an account is debited or credited. The value date then determines the reference date for the calculation of interest and, indirectly, the effective availability of the funds. In this way, value dates are used as a complex pricing tool which could include elements of pricing of the payment service and / or remuneration of the money on the account.

[42] There are different definitions in national legislation. All establish a link between value dates and interests.

The banking community considers that value dates are one element in the bank-customer relationship which should be left to contractual freedom or self-regulation. It is not the objective of this exercise to interfere into issues of the price policy of market players. However, in the ambit of the New Legal Framework for Payments, this request for self-regulation or contractual freedom for value dates has to be assessed with a view to ensuring the efficiency of payments in the Internal Market.

It would be in the interest of both, banks and their clients, to operate in full transparency as regards the use of value dates. Clients could benefit from a more transparent charging system, whereas banks could take advantage from harmonised rules in the Internal Market, for the sake of the proper functioning of infrastructures (e.g. CREDEURO), straight-through-processing and legal certainty.

Legal context

The use of value dates is currently unregulated at EU level, both for national and cross-border payments, with the exception of transparency requirements for cross-border credit transfers in Directive 97/5/EC and for electronic payments in Recommendation 97/489/EC. In some countries (Belgium, Germany, Austria and France), the use of value dates is regulated by national law or case-law, which establishes, most of the time, that value dates should coincide with the transaction or booking date. As regards predominant market practice, there are differences between Member States and payment instruments, but again, for the majority of payments, value dates coincide with transaction or booking dates. This could indicate that the adoption of such practice as the norm for payment transactions would probably not entail major difficulties for most banks. The New Legal Framework, which will apply to all payments throughout the EU, could be used in order to harmonise existing practices and establish a level playing field.

Efficiency of payment systems

When, in the past, most payments were not processed instantly, the use of value dates could be justified for technical reasons. Nowadays, this is generally not the case. Most operations are processed electronically.

The use of value dates may not also be compatible with the objective of improving the efficiency of cross-border payment systems and providing legal certainty as regards the execution time:

* Post value-dating of payments may lead to increasing the de facto execution time, whereas the objective of the single market for payments is to limit the execution time to the minimum required. Such use of value dates may even lead to exceeding the limit established by Directive 97/5/EC. This may be rather exceptional, but not unrealistic as studies have demonstrated. In addition, the beneficiary of the transfer is only informed about the value date of the amount that has been credited to his account a posteriori, while the originator of the transfer receives no notification, which hinders legal certainty as regards the exact execution time.

* Taking into account that there is an intention to further reduce the maximum execution time of cross-border credit transfers in the ambit of Single Euro Payment Area, the question becomes even more acute. CREDEURO, set-up with the objective of reducing the maximum execution time to 3 days (2 days for the sending bank and one day for the receiving bank), would allow little room for the use of value dates, i.e. where value dates were different from the actual booking date.

* Another risk of manipulating value dates in a cross-border context is the pre-dating of the money transferred to the beneficiary's account. In the report on the application of Directive 97/5/EC, this practice has been reported in cases where the maximum execution time was exceeded. This constitutes an illegal circumvention of the obligation established by Directive 97/5/EC as regards execution time.

Transparency

The cost of a payment should be set in a transparent way and allow comparability. Only when transparency and comparability are ensured can the market function effectively. Even if value dates are specified in advance, customers are often unaware of the way they function and do not fully understand its pricing mechanism. This additional price element is not always clearly understood by customers, as the impact of value dates on pricing is difficult to assess. The problem is therefore that value dates introduce an additional non-transparent layer in the structure of tariffs, and as a consequence, render price comparisons difficult. The use of value dates can thus be assimilated to a "hidden tariff". Customers are therefore suspicious as regards the use of value dates, and banks themselves could benefit from increased transparency in their relationship and their standing with customers.

The Commission services would welcome views on the impact of the draft provisions described below. Views on the possible effects on market efficiency are sought in particular.

* Possible ways forward

Although contractual freedom and self-regulation are in general the preferred options, there are a number of arguments which indicate that the use of value dates which are different from the transaction or booking date could be considered to be incompatible with the requirements of price transparency, sound competition, the efficiency of cross-border payments and consumer protection.

The Commission therefore considers two alternatives:

maintain a system of self-regulation but at least regulate transparency in the use of value dates for payments;

or

regulate, in a harmonised manner, the use of value dates in the context of payments. In this case, legal provisions applicable to all payments could read:

Article on the definition of value date

"The value date is the reference date used by the payment service provider for his customer for the calculation of negative or positive interest."

Article on the use of value dates

The value date related to a payment transaction shall not be different from [the date at which the money flow of the payment order at the relevant payment service provider takes place][the booking/transaction date].

Annex 5: PORTABILITY OF BANK ACCOUNT NUMBERS

* What is the issue/problem

In the field of telecommunications, the principle of the portability of telephone numbers has been introduced into Community legislation: the customer can change the telephone operator, while keeping the same number. This measure is regarded as an essential element to enhance competition: the obligation to change the telephone number when changing the telephone service provider was a considerable barrier. The Commission raised the idea of introducing such an initiative in the field of bank/payment accounts during the pre-consultation on this Communication.

The preliminary answers to this consultation concentrated on two aspects: the usefulness and the practicability of portability of accounts.

As regard usefulness, it was underlined that the fact of being able to keep the same payment account number was much less useful than in the Telecom sector. In most cases, it is the Payment Service User who decides to give his number to an institution for a once-off or a recurring payment transaction. The portability could be useful only in the latter case.

As regard practicality, studies carried out in some Member States (UK, NL) where this question of portability has been analysed have shown that the just recently introduced [43] EU-wide IBAN and BIC numbering system cannot work with such a system without incurring excessive costs, provoking problems for efficient straight through processing.

[43] Regulation 2560/2001/EC.

* Possible ways forward

As a result of the preliminary consultation, the Commission does not intend to introduce legal measures aiming at creating portability of banking account numbers. The balance between the practical problems which would need to be solved and the advantages which would arise for the Payment Service User does not justify a portability solution. In addition, they are unlikely to bear the costs of such an operation.

Nevertheless the BIC+IBAN numbering system appears to be a very complicated system and may need to be simplified in the long-run. Therefore the Commission advises the banking industry to launch studies in order to create, in the long run, a more simplified numbering system for credit transfers in the Internal Market.

Many respondents have indicated that greater competition can be achieved through measures aimed at facilitating customer mobility (see Annex 6).

Annex 6: CUSTOMER MOBILITY

* What is the issue / problem?

In the vast majority of cases, a payment is based on a bank account and can only be executed from the bank account. The use of various means of payments is a service which is offered in many cases in connection with the management of a bank account.

In a competitive economy, it is important that the customer is informed of the price for each means of payment in order for him to be in a position to choose. However, sometimes payment service users prefer or need to change the provider. Customers are generally not very mobile because changing a customer-bank-relationship can be a complex operation in case there is the need to inform a whole series of third parties and to re-establish automatic payment orders. In addition, the Commission received from time to time complaints about excessive costs for closing or transferring a payment account.

During the preliminary consultation on the New Legal Framework, many parties stressed the need to improve customer mobility. Proposals made on how to achieve this objective were, however, diverse.

* Possible way forward

It is probably necessary to study in more depth the reasons which are at the origin of the hurdles that a customer encounters when changing a banking/payment relationship. One of these obstacles may be the information which needs to be given to the customer's various debtors/creditors.

It is possible to imagine that all the administrative issues related to the move of an account are executed by a third party. For example, in the Netherlands, the clearing system (Interpay) has a pre-eminent role in the transmission of information from the old account to the new one. Another possibility is that cooperation between banks should allow a smooth transition. It is the option chosen by the British Bankers' Association which stipulates in its code: "7.2 If you decide to move your current account to another financial institution, we will provide them with information on your standing orders and direct debits within five working days (Reducing to three working days from 1 August 2003) of receiving their request to do so".

As regards the administrative issues (e.g. sending of information on the clients' standing orders to the new bank), the Commission considers that improvements in mobility should be introduced by industry through self-regulation. This process will be monitored and the issue may be raised, if needed, by the Commission.

Nevertheless consumer representatives have underlined that the main hurdle is the amount of fees for closing an account. Some examples have been given of so-called "administrative fees" up to 80 euro only for the services relating to the closing of an account. Can such a barrier to mobility and to competition be justified? Such amounts are excessive and not related to the administrative cost, but are established as a brake to mobility.

As regards fees for closing an account, the Commission considers that excessive fees are a barrier to mobility. To close an account is a normal event in a lifecycle of an account. At least full transparency on these fees should be provided to the customer at the time of the opening of an account. Less preferable solutions would be to disallow any closing fees or to set a reasonable upper limit for these fees. The Commission services invite, however, all interested parties to come up with concrete suggestions which would facilitate customer mobility in payment services.

Annex 7: THE EVALUATION OF THE SECURITY OF PAYMENT INSTRUMENTS AND COMPONENTS

* What is the issue/problem?

At present, payment instruments and components (chip cards, terminals, etc) are certified by the competent authorities before being put onto EU national markets. They are tested with procedures established by the national certification bodies but which are not harmonised at EU level (methodology; type and number of attacks, etc). The result of different testing procedures is that:

* Full comparability is not achieved between similar items (e.g. two different terminals) tested in different Member States. It is thus difficult for the banks, the merchants and the consumers to know to what extent a product is more secure than another. This situation has an impact on buyers' decisions and does not foster users' confidence.

* Certification in one Member State does not mean automatically recognition in the others, as Member States may require different or additional security requirements. In this case, the country with the "stricter" requirements will not recognise a certification carried out in another. This situation is not an incentive to interoperability and is not in line with one of the basis principles of the Internal Market.

* Certification that needs to be undertaken in many countries takes longer and is substantially more expensive. If mutual recognition were to apply in full, the overall certification costs might be reduced and the savings made by the manufacturers could be reflected in the price of the components, with lower costs for banks, merchants and consumers.

Attempts to find objective ways to evaluate the security of payment instruments have been made, namely with moves towards the establishment of standardised security requirements (CC/PP methodology) [44]. There seems to be broad support for the introduction of this methodology, but in practice it is not being implemented expediently.

[44] The most relevant example are the Common Criteria/Protection Profiles (now ISO standard IS 15408). In this process, the Common Criteria (CCs) are combined with the Protection Profiles (PPs), which are security objectives related to specific categories of instruments (e.g. smart cards). In the PPs, the security features are evaluated against all the threats that a product and its environment face. Assurances about the security level are given by acknowledged certification bodies, which generally operate under the oversight of an evaluation authority. The certification bodies provide a common evaluation scheme based on common accreditation criteria and testing methodology. PPs on smart cards and other components are being developed in the European Union and in the United States under initiatives of the payment industry and government agencies.

* Possible ways forward

Concerning the evaluation of the security of payment instruments and components, there is general support for the introduction of the CC/PP methodology in the EU. However, during the consultations in preparation for the present Communication a consensus was expressed against the need for legal provisions to support its introduction. According to the payment industry, legal provisions might increase the costs of payments and jeopardise future developments and innovation. Work on standardised security requirements would better be left to market participants [45]. On the other hand, if legislation were to prove necessary, respondents considered a Recommendation from the Council and European Parliament or from the Eurosystem as a better alternative than EU legislation. Governments and Central Banks encourage a structured and co-ordinated approach for security evaluation that might avoid high costs and time-consuming procedures. They underline that security issues may be addressed through their oversight role on payment systems and means of payments, which should cover the evaluation and certification of products and systems.

[45] One relevant industry initiative is, for instance, the project called CAPTIN (IST-2000-31034) supported by the IST Programme of DG INFSO. The project is aimed at creating an open communication standard for the on-line interactions between terminals and acquiring (or even issuing) server systems.

Security evaluation is essential in order to maintain confidence in payments and it is necessary to remove obstacles to the mutual recognition of security evaluations of payment instruments and components in the Internal Market. Therefore the Commission needs to examine in more detail the question of mutual recognition, also in the light of the work already undertaken in the mutual recognition of products. To achieve this objective, the Commission may act as a catalyst in order to clarify the issues at stake, and may reconsider its stance altogether if a harmonised methodology to evaluate security, reduce manufacturing costs and significantly enhance consumers' and merchants' confidence in payment instruments is not implemented within a reasonable timeframe by the combined efforts of market participants and other regulators.

The Commission services invite, therefore, views on the importance of this issue. Especially descriptions on any existing problems relating to the mutual recognition are welcomed.

Annex 8: INFORMATION ON THE ORIGINATOR OF A PAYMENT (SRVII of FATF)

* What is the issue / problem?

The FATF [46] adopted 8 Special Recommendations on combating terrorism financing in October 2001, in addition to the existing 40 general Recommendations on money laundering. One of these recommendations (SRVII) introduces obligations for financial institutions and money remitters regarding information about the identity of the originator accompanying the transfer. The aim of SRVII is to prevent terrorists and other criminals from having unfettered access to money transfers to move their funds and to detect such misuse when it occurs. An Interpretative Note [47] on SRVII was published in February 2003, according to which all jurisdictions have a two year period to implement the recommendation.

[46] Financial Action Task Force on Money Laundering.

[47] See Interpretative Note to Special Recommendation VII: Wire Transfers (http://www1.oecd.org/fatf/ TerFinance_en.htm).

The transposition of SRVII into binding legislation in the EU could be done in several ways. The main issues to consider in this respect are the following:

(1) Should SRVII be transposed by EU legislation or by national legislation?

(2) Scope: which type of payment transactions should be covered?

(3) Which information regime should apply: minimum information (see paragraph 1 of the draft article) or full information (see paragraph 2 of the draft article)?

(4) Need for derogations from the full information regime in the case of "batch" transfers?

(5) Need for exemptions\thresholds?

* Possible ways forward

The Commission proposes to transpose SRVII directly through binding Community legislation, as this would ensure uniform rules throughout the Internal Market. Uniform rules are necessary in order to guarantee the smooth functioning of credit transfers within an efficient payment infrastructure in the EU. A directly applicable legal instrument, such as a Regulation, would therefore be preferable in this respect. The European banking industry has for this reason requested that this issue should be addressed at EU-level.

The Commission is of the view that:

- all credit transfers and money remittance services should to be covered in line with the Interpretative Note

- person-to-person payments executed by means other than traditional credit transfers, such as those offered by card schemes, should also be covered, as they may be regarded as "new means of credit transfers"

With regard to the information which should accompany a transfer, the Interpretative Note provides different rules for so-called "domestic transfers" (inside one jurisdiction) and "international / cross-border transfers" (between two jurisdictions). If each Member-State in the EU were to be considered as one jurisdiction in this context, different rules would be applicable to "cross-border transfers" (between two Member States) and so-called "domestic" transfers (within one Member State). This would be against the above stated objective of the smooth functioning of credit transfers in the Internal Market. This would also ignore the considerable "acquis communautaire" of payment legislation or the objectives of the New Legal Framework for Payments. The Commission is therefore of the opinion that the EU should be regarded as one jurisdiction in respect of the transposition of SRVII. Consequently, considering the EU as a single jurisdiction, the Commission proposes to apply the notion of "domestic transfers" in the sense of SRVII to intra-EU transfers and the notion of "international transfers" to transfers between the EU and third countries.

Another option could be to consider the EU as a jurisdiction, but to apply the full information regime also to intra-EU transfers. The Commission nevertheless sees no justification for such an approach, which would put an unnecessary burden on payment service providers, taking into account the close cooperation already established between judicial bodies in the EU. However, a decision on the minimum information regime would not prevent the use of the full information regime in individual cases.

According to SRVII, batch transfers between the EU and other jurisdictions should be treated as "domestic transfers", instead of "international transfers", and should therefore be subject to the minimum information regime. However, it would be difficult in practice to apply minimum information regime to batch transfers between the EU and third countries, as it is hardly feasible that full originator information is provided in three days to the beneficiary's institution or appropriate authorities in a different jurisdiction outside the EU. Due to these problems the Commission considers that "batch transfers" should not be treated differently from "non-batch transfers". This would not be in contradiction with SRVII, as it would only imply that the more stringent regime would also be applicable to "batch transfers" originated from the EU to another jurisdiction.

The Interpretative Note allows for the possibility of a "de minimis threshold" (not higher than $3.000) for the payment services falling under SRVII. It is up to each jurisdiction to apply a threshold or not. A mandatory threshold would have the disadvantage of introducing different treatment between two categories of credit transfers, below and above the threshold, which might be detrimental to the efficient functioning of payment systems. Another possibility would be to have an optional threshold, which the payment industry could freely choose whether or not to apply, subject to interoperability and straight-through processing in the Single Payment Area not being impaired. A threshold may be justified for small value payments, such as micro payments.

Based on the above reasoning, the Commission considers that SRVII could be transposed into binding EU-legislation in the following way:

Article on originator information accompanying credit transfers [48] and transfers sent by money remitters

[48] "Any transaction carried out on behalf of an originator person (both natural and legal) through a payment service provider by electronic means with a view to making an amount of money available to a beneficiary person at another payment service provider".

(1) "Credit transfers executed within the EU, except those indicated in paragraph 2, shall always be accompanied by the originator's account number or a unique identifier allowing the transaction to be traced back to the originator.

If requested, the originator payment service provider shall make available to the beneficiary payment service provider [and appropriate authorities], within three business days of receiving the request, full originator information as referred to in paragraph 2.

(2) All other credit transfers and transfers made by money remitters shall always be accompanied by:

- the name of the originator,

- its account number, or in the absence of such a number, a unique identifier allowing the transaction to be traced back to the originator

- the address of the originator, or alternatively t