Commission staff working document - Impact Assessment accompanying the Draft Proposal for a Directive of the European Parliament and of the Council amending Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions - Summary of the impact assessment {COM(2008)627 final} {SEC(2008)2573}
Date: 2008-10-09
Institutions: European Commission
Subjects: banking, electronic money, financial institution, financial legislation, issuing of currency, management audit

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 9.10.2008 
SEC(2008)2572 

COMMISSION STAFF WORKING DOCUMENT 

Impact Assessment accompanying the 
Draft Proposal for a 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directive 2000/46/EC on the taking up, pursuit of and prudential supervision 
of the business of electronic money institutions 
SUMMARY OF THE IMPACT ASSESSMENT  

{COM(2008)627 final} 
{SEC(2008)2573} 

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1. 

INTRODUCTION 

Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business 
of electronic money institutions  (hereby referred  as 'the EMD')1 was adopted in  response to 
the  emergence  of  new  pre-paid  electronic  payment  products,  and  was  intended  to  create  a 
clear  legal  framework  designed  to  strengthen  the  Internal  Market  and  stimulate  competition 
whilst at the same time ensuring an adequate level of prudential supervision.  

Electronic money is defined by the EMD, as 'monetary value as represented by a claim on the 
issuer which is: (i) stored on an electronic device; (ii) issued on receipt of funds of an amount 
not  less  in  value  than  the  monetary  value  issued;  (iii)  accepted  as  means  of  payment  by 
undertakings other than the issuer'. 

The  EMD  seeks  to  open  the  market  for  the  issuance  of  E-money  through  the  creation  of 
Electronic  Money  Institutions  (EMIs)  regulated  under  a  lighter  prudential  regime  than  that 
required of credit institutions.  

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

On  the  basis  on  the  EMD's  review  clause  (Article 11),  the  Commission  launched,  in 
January 2005, an evaluation exercise. Based on the evaluation study, the Commission adopted 
a Staff working document on the review of the E-Money Directive (EMD) in July 2006. The 
report  concluded  that  there  was  a  need  to  revise  the  current  directive,  some  provisions  of 
which seemed to have hindered the take-up of the e money market. The report also suggested 
awaiting  the  final  adoption  of  the  Payment  Services  Directive  (PSD)  before  taking  further 
action, to permit completion of the complex negotiations on the PSD.  

In  order  to  prepare  the  present  impact  assessment,  multiple  consultative  initiatives  were 
undertaken.  This  included  regular  discussions  with  Member States,  the  ECB,  financial 
institutions,  consumer  organisations,  mobile  operators,  notably  through  the  existing 
consultative committees on retail payments: PSGEG2 and PSMG3 in 2007 and 2008. Next to 
this, a specific meeting with the e-money industry was held on 25 January 2008 and a specific 
bilateral meeting was held with the ECB on 30 April 2008. Finally, an inter-service working 
group  was  established  in  February 2008,  with  participation  of  the  Secretariat-General  and 
Competition DG, Information Society and Media DG, Economic and Financial Affairs DG, to 
discuss the impact assessment.  

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OJ L 275 of 27.10.2000, p. 39. 
The  Payment  Systems  Government  Experts  Group  (PSGEG)  is  a  consultative  body  composed  of 
government experts from Member States of the EEA, typically drawn from national finance ministries 
and  national  central  banks  as  well  as  a  representative  from  the  European  Central  Bank  members  as 
observers, with expertise in the payments area with the objective of providing advice and guidance to 
the Commission. 
The  Payment  Systems  Market  Group  (PSMG)  is  a  consultative  body  composed  of  market  experts, 
typically drawn from banks, corporates, retailers and associations representing interested stakeholders 
such  as  SMEs  and  consumers,  with  expertise  in  the  payments  area  with  the  objective  of  providing 
advice and guidance to the Commission. 

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3. 

PROBLEM DEFINITION 

The problems identified by the evaluation and the consultation process can be grouped in two 
main problem strands. The first problem strand refers to the unclear definition of electronic 
money  and  the  scope  of  the  directive,  leading  to  legal  uncertainty  and  hindering  the 
development of the market. The second refers to the inadequate legal framework. This last 
point  includes  the  prudential  regime,  the  waivers  and  passporting  regime  as  well  as  the 
application  of  anti  money  laundering  rules  to  e-money  services.  This  overall  legal 
inconsistency  will  increase  once  the  Payment  Services  Directive  is  implemented  (by 
November 2009), since some provisions of the latter are incompatible with the EMD. 

These problems have resulted in a limited market uptake for electronic money in Europe, in 
terms  of  volume  of  e-money  issued  and  in  terms  of  number  of  market  participants,  with  e-
money representing EUR 1 billion in comparison with 637 billion of cash in circulation as of 
August 2007. 

3.1. 

The  lack  of  legal  certainty  and  the  scope  of  the  directive  hampers  market 
development 

During  the  review  process,  stakeholders  expressed  concerns  that  the  current  directive  lacks 
legal certainty due to an unclear definition of e-money and scope of the directive. 

3.1.1.  The definition of e-money is unclear 

The definition of 'e-money' requires it to be 'stored on an electronic device'. This definition is 
therefore  considered  technically  limited  to  one  form  of  e-money  (notably  cards  based 
electronic  money)  and  does  not  encompass  the  various  pre-paid  products  available  in  the 
market  (e.g.,  'server-based'  e-money).  The  current  definition  also  raises  questions  in  cases 
where the value stored would be less than the amount actually paid to the issuer, disqualifying 
in principle such products from being defined as e-money.  

3.1.2.  The scope of the EMD prevents new market entrants  

The application of the directive to mobile operators and issuers of electronic vouchers would 
have  a  huge  impact  on  the  number  of  market  participants  and  on  the  amount  of  electronic 
money  in  circulation  as  they  would  be  enabled  to  design  new  services.  According  to  the 
stakeholders  consulted,  the  current  lack  of  clarity  prevents  the  development  of  these  two 
markets.  

3.1.3.  The activities of EMIs are too narrowly defined 

The activities of electronic money institutions are restricted under Article 1(4) of the EMD to 
issuing  electronic  money  and  closely  related  services.  This  provision  differs  from  the  non-
exclusivity  approach  of  the  PSD,  where  a  payment  institution  can  engage  in  non-payment 
services  business  (e.g.  retailing  or  telecom  activities).  Under  the  EMD,  'hybrid  institutions' 
such as telecom operators and retailers have to split up their business in different legal entities 
which can be costly and inefficient. 

3.1.4.  Redeemability 

Article 3  of  the  EMD  states  that  a  bearer  of  electronic  money  may,  during  the  period  of 
validity, ask the issuer to redeem it at par value in coins and bank notes or by a transfer to an 

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account  free  of  charges  other  than  those  strictly  necessary  to  carry  out  that  operation. 
Redeemability  was  inserted  in  the  EMD  for  consumer  protection  reasons,  to  ensure  that 
customers can get at all times their money back. Redeemability appears to pose a problem for 
Mobile  Network  Operators  (MNOs)  and  electronic  vouchers'  issuers.  Mobile  operators  are 
unable to split 'ex ante' customers' prepaid funds for mobile services and electronic money.  

3.2. 

An inconsistent legal framework 

Although  it  is  widely  acknowledged  that  the  EMD  has  provided  non-banks  with  an 
opportunity  to  enter  the  e-money  market-place,  the  review  report  showed  that  high  capital 
requirements,  as  well  as  certain  restrictions  and  requirements  imposed  by  the  EMD,  have 
hindered  the  development  of  the  e-money  market.  The  adoption  of  the  PSD,  which  is 
currently  being  transposed  into  national  legislation,  will  increase  the  complexity  and  the 
inconsistency  of  the  overall  legal  framework  and  eventually  lead  to  an  absence  of  level 
playing field between payment institutions and EMIs. 

3.2.1.  The prudential regime 

Prudential  requirements  have  as  objective  to  ensure  sound  and  prudent  operations  of 
electronic money institutions. The review process provided evidence that certain requirements 
are disproportionate to the risks posed by EMIs. This evidence is reinforced if the cumulative 
effects of the overall regime are considered. The problems on the prudential regime include: 

•  current  initial  capital  requirement  of  EUR 1 million  is  deemed  by  a  number  of 
stakeholders to be too high and disproportionate with regard to the risk of the service. This 
high initial capital is an obstacle for smaller firms wishing to apply for an EMI license. 

•  The  2 %  own  funds  requirement  does  not  in  itself  appear  to  have  given  rise  to  major 
difficulties for authorised EMIs, although its combination with other aspects of the EMD 
(e.g.  initial  capital,  limitation  of  investments,  restriction  of  activities)  have  led  to 
complaints that the overall regime is excessive. 

•  The limitations of investment, under which EMIs are required to have investments which 
at least match their financial liabilities related to outstanding electronic money. Bank and 
credit card receivables are excluded from the list of eligible investments. Evidence showed 
that  current  limitations  of  investments  leads  for  growing  companies  to  more  stringent 
capital  requirements  then  those  for  credit  institutions  under  the  capital  requirements 
directive.  

3.2.2. 

Inconsistent implementation of some provisions 

3.2.2.1.  Inconsistent application of waivers 

Under  the  EMD,  Member States  are  allowed  to  waive  some  or  all  of  the  authorisation 
requirements for small EMIs in order to facilitate market entry and innovation by new players 
without  subjecting  them  to  the  full  rigours  of  the  authorisation  framework.  This  option  has 
been applied inconsistently between Member States and four of them have not implemented 
the  waiver  at  all.  The  current  situation  might lead to competitive distortions within national 
borders.  

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3.2.2.2.  Passporting 

The passporting regime allows EMIs to go cross border and conduct the same business in host 
Member States  as  they  are  entitled  to  conduct  in  their  home  Member State  under  the  EMI 
licence,  without  additional  hindrances.  However,  Article 2  of  the  EMD  refers  to  certain 
articles  in  the  CRD  providing  for  the  authorisation  of  branches  in  other  Member States  and 
setting  out  the  scope  of  permitted  activities.  According  to  some  stakeholders,  additional 
requirements imposed in some Member States increase the complexity and eventually hinder 
EMIs to set up branches in other Member States.  

3.2.2.3.  Anti-Money Laundering Rules 

The  EMD  contains  no  specific  provisions  covering  anti-money  laundering.  However, 
Directive 2005/60/EC on anti money laundering(AML) does introduces a simplified customer 
due  diligence  regime  which  applies  to  e-money,  From  a  consumer's  point  of  view,  these 
'Know Your Customer' (KYC) requirements prove to be cumbersome and impractical. From a 
business  point  of  view,  these  requirements,  and  the  costs  associated  with  addressing  them, 
might pose a significant challenge to the business case for this type of services. 

4. 

THE OBJECTIVES 

The general objective of the review of the EMD is to promote the emergence of a true single 
market for electronic money services in Europe. Contribute to the design and implementation 
of  new,  innovative  and  secure  electronic  money  services.  Provide  market  access  to  new 
players and real and effective competition between all market participants, thereby generating 
significant benefits to the wider European economy.  

In  order  to  achieve  this  general  objective,  two  operational  objectives  were  defined:  a 
clarification  of  the  definition  and  scope  of  electronic  money  services  and  electronic  money 
institutions and the assurance of consistency with the PSD, creating a true level playing field 
for  all  market  participants.  This  would  lead  in  the  medium  term  to  the  achievement  of  the 
specific objectives which aim to enhance legal certainty for all service providers, to create a 
harmonised legal framework and to promote the development of new and innovative services.  

5. 

THE POLICY OPTIONS AND THE POLICY INSTRUMENTS 

A  wide  range  of  solutions  have  been  considered  to  address  the  problems  affecting  e-money 
services  and  meet  the  objectives  that  have  been  defined.  The  two  main  problems,  as 
mentioned in chapter three are caused by issues related to: 

1. 

2. 

The definition of e-money and scope of the EMD (first problem strand) 

The  inadequacy  of  the  legal  framework  (namely:  prudential  regime,  waivers  and 
anti-money laundering rules). 

Based on an initial screening of the different policy options against the policy objectives the 
policy options have been grouped in concrete packages which are a selection of initiatives that 
can be taken. The following packages were evaluated:  

•  Package 1: Keep the EMD as it is ('do nothing' approach) 

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This is the so-called 'baseline scenario'. In this option there would be no legislative proposal  

•  Package 2: Issue a guidance note on the scope and definition of electronic money 

Under this non-legally binding option a guidance note would be issued to clarify the current 
definition and scope of electronic money institutions. 

•  Package 3: Align with PSD, applying the prudential regime of Payment Institutions to 

EMIs 

This  option  would  mean  the  design  a  legal  framework  which  is  consistent  with  the  PSD 
applying  the  prudential  requirements  of  Payment  Institutions  to  EMI.  This  could  be 
implemented by amending the EMD or the PSD. 

•  Package 4: Align with the PSD, with specific prudential regime for EMIs  

Package 4  is  almost  the  same  as  Package 3  except  from  the  specific  prudential  regime  for 
EMIs. This could be implemented by amending the EMD or the PSD 

•  Package 5: Repeal the EMD directive 

Under this package, the EMD directive would be repealed.  

6. 

IMPACT OF THE PACKAGES 

Based  on  the  evaluation  of  the  packages,  we  consider  that  an  alignment  with  the  PSD,  as 
suggested in Package 3 and Package 4, is the most appropriate way forward. Both packages 
are  expected  to  have  a  positive  impact  on  the  uptake  of  the  e-money  market  in  terms  of  e-
money in circulation (a potential increase up to EUR 10 billion) and in number of institutions 
(up to 120 EMIs) 

The  main  advantages  of  Package  4  are  the  availability  of  a  specific  prudential  regime 
commensurate with the risks posed by electronic money institutions and the maintenance of 
the  existing  reporting  requirements  for  EMIs  to  ensure  market  monitoring  and  compliance 
with the prudential requirements. The disadvantage is a higher administrative burden, which 
remains however proportionate to its objective.  

Package 3,  applying  the  prudential  requirements  of  payment  institutions  would  have  the 
advantage  that  it  would  lower  the  administrative  burden  as  no  reporting  would  be  required. 
The main disadvantage is that this complicates market monitoring. In addition its prudential 
regime is indirectly linked to the risks of electronic money institutions by means of payment 
volume as electronic money is used to execute payment transactions. 

Package 1,  'do  nothing'  or  Package 2,  'guidance  note'  would  maintain  the  complexity  of  the 
legal framework after the transposition of the PSD in 2009 and would hinder further market 
development.  Package 5,  'repeal  of  the  directive'  would  simplify  the  legal  framework, 
however creating legal uncertainty and hindering  the  development  of  new  electronic  money 
services.  

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7. 

EVALUATION AND MONITORING 

A first intermediate evaluation could be performed on the moment of the first review of the 
PSD, three years after its transposition. Second, no later then five years after implementation, 
the Commission services will present an evaluation report on the legislative initiative.  

Thus, the forthcoming legislation will be subject to a complete evaluation in order to assess, 
among  other  things,  how  effective  and  efficient  it  has  been  in  terms  of  achieving  the 
objectives  presented  in  this  impact  assessment  and  to  decide  whether  new  measures  or 
amendments are needed. The Commission will also consider the integration of the Directive 
into the payment services directive.  

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