1. E-money regulatory update Smartcard Networking Forum 11 April 2006

2. By way of introduction….. Definition of electronic money FSAs Regulatory Objectives Principles of Good Regulation Our basis for regulating e-money What is going on in Brussels……... ………even as we speak

3. Definition of e-money Electronic money is monetary value as represented by a claim on the issuer which is: Stored on an electronic device Issued on receipt of funds Accepted as a means of payment by persons other than the issuer

4. FSAs Regulatory Objectives Market Confidence Public Awareness Consumer Protection Reduction of Financial Crime

5. Principles of Good Regulation Efficient and economic use of our resources Senior management responsibility Regulatory burdens should be proportionate to desired benefits of regulation Facilitating innovation International character of financial services and maintaining competitive position of UK Minimising adverse effect of regulation on competition Facilitating competition between regulated firms

6. Our basis for regulating e-money European e-money directive (2000/46/EC) Incorporated into UK law in the FSMA Regulated Activities Amendment Order 2002 (SI 2002/682) FSA electronic money sourcebook (http://fsahandbook.info/FSA/html/hand book/ELM)http://fsahandbook.info/FSA/html/hand book/ELM

7. Whats going on in Brussels……. Review of the e-money directive (should have been completed by 27/04/2005) Survey by independent consultants of e-money across the EU since regulation A general (but inarticulate) desire to ease the regulatory burdens A growing feeling that the e-money directive should be kept separate from the forthcoming Payment Services Directive

8. Review of e-money directive This should have been completed by April 2005 Was delayed pending resolution of the prepaid mobile issue Public consultation exercise Meanwhile consultants were engaged to review the working of the e-money directive across the EU Commissions recommendations are due this Summer

9. The evidence uncovered Market has not developed as expected Only 7 ELMI licences throughout EEA Of which 4 are in the UK E-money in circulation = 225 million Of which 190 million may be in UK Lack of solid business case the principal reason But regulatory burdens may contribute

10. Directives target was wrong? Directive inspired by plastic cards But server based e-money has proved more resilient Other business models must be considered Contactless cards, transport cards, pre-paid debit, electronic vouchers & travellers cheques; mobile phone products

11. Success of the waiver This has been most marked in the UK 34 waivers granted (72 in EEA) But some MS have not implemented a waiver regime In any event the post waiver threshold to full Authorisation is a huge barrier to entry

12. Lack of a level playing field? This does not yet exist as between: Full ELMIs Waived firms Banks Business models not catered for by the directive (mobile phone PRS)

13. EMDs objectives not yet met Arguments about scope Some evidence that technological advances have been inhibited No level playing field Directive requirements disproportionate to actual level of risk Very little take-up of cross-EU passporting

14. Amendments to definition? Confirm electronic device includes servers Delete words of an amount not less in value than the monetary value issued Ban issue at a discount in a specific article Clarify position of mobile network operators as e-money issuers

15. Capital intensive? Full e-money issuers (ELMIs) must have minimum capital of 1 million and Maintain capital at 2% of outstanding e- money liabilities This is believed to be one of the biggest barriers to market entry Commission believes there may be a case to lower threshold

16. Limitation of investments Significantly limits ELMIs ability to earn a return on their floats Competitive disadvantage with banks Excludes bank and credit card receivables, thereby creating a funding gap Commission believe this gap should be closed and list of permitted investments should be reviewed

17. Restriction on activities ELMIs restricted to e-money issue and closely related services This amounts to belt and braces given the cumulative prudential requirements Significant constraint especially for firms where e-money issue is non-core Commission therefore propose to de- restrict activities of ELMIs

18. Waivers Application of waiver is optional Some MS have not implemented So some markets less attractive Not passportable Need for incentives for waivered firms to move to full authorisation Therefore must be viewed in context of relaxing entry requirements for full ELMIs

19. Financial Crime and e-money As defences against crime are strengthened in traditional firms……. ……criminal activity may be displaced towards new firms Smartcards are vulnerable to a risk of money laundering So the law requires AML defences to be built See Joint Money Laundering Steering Group guidance (www.jmlsg.org.uk)www.jmlsg.org.uk

20. Financial crime and e-money EMD contained no AML measures But 2 MLD does 3MLD specifically addresses e-money Must be national law by 15/12/2007 Customer identification and due diligence procedures Know Your Customer (how he operates his account) Suspicious activity monitoring and reporting

21. Financial Crime and e-money Low average value of e-money transactions Therefore full ID and record keeping requirements could render such systems uneconomic 3MLD (2005/60/EC) introduces simplified CDD for e-money Similar derogation being considered for proposed Wire Transfers Regulation

22. Passporting European banking law allows a financial institution authorised in one MS to passport to other MS without let or hindrance Limited take up so far by ELMIs At present it is easy to offer services on line but not to set up branches under a passport Review will remove this anomaly

23. Timing Commissions proposals for review of e- money directive to be published later this Summer Must then go to Council of Ministers and European Parliament Deadline for implementing into domestic law unlikely to be before end 2008/early 2009 But this is just guesswork on my part

24. Thank you for listening Dominic Peachey 25 The North Colonnade Canary Wharf LONDON E14 5HS Telephone: 020-7066 0488 Fax: 020-7066 0489 E-mail: dominic.peachey@fsa.gov.ukdominic.peachey@fsa.gov.uk