Payment Services Directive A Milestone for the Internal Market?

It could have been, but so far it‘s not!

Introduction: Institutions of Consumer and User Interests BEUC (Bureau Européen des Unions de consommateurs) the European Consumers' Organisation, located in Brussels federation of 40 independent national consumer organisations from the EU, accession and EEA countries FIN-USE Forum FIN-USE shall give advice to the European Commission regarding financial services FIN-USE members include consumer protection and small business experts and academic researchers currently 14 members Verbraucherzentrale Bundesverband Federation of German Consumer Organisations an umbrella for 40 German consumer oriented associations, lobbying and campaigning at national and European level, taking collective legal action on behalf of consumers consumer advice is not provided (the 16 Länder are providing it)

Existing European rules for payment services Recommendation on Payment cards (97/489) Directive on Credit transfers (97/5) ‚Price Regulation‘ (2560/2001)

Commission Proposal of 1.12.2005 Positive Aspects: Objective: building a common legal basis for a coherent and harmonised European payment systems‘ market for all non-cash payments and providing a high level of consumer protection Scope: nearly all forms of payment services included all payments within the EU covered Consumer has the right for the execution to the full amount Execution time: D+1 also ‚one leg‘-transactions (payments from EU to non-EU and from non-EU to EU) Comprehensive catalogue of precontractual information obligations Reasonable burden or proof provision in case of disputed authorisation

Objectives of the Directive Help to reduce the cost of the payment system Integrate and rationalise national payment infrastructures and products Increased consumer choice High level of consumer protection Standardise legal requirements of payments Increase competition

The four elements of the directive Scope and Definitions (Title I) Payment service providers: authorisation, registration, requirements, supervision (Title II) Transparency of conditions for payment services (Title III) Rights and obligations of users and providers of payment services (Title IV)

Developments since Commission Proposal Report of Lead Committee ECON (20.09.06) with own amendments and amendments of IMCO and JURI Council Meetings ongoing under the Finnish Presidency ECOFIN: 28/11/06 Plenary EU-Parliament probably won‘t vote this year (although planned for mid December)

Scope and Definitions (Title I) Commission: Directive shall apply where at least one of the payment service providers is located in the Community negative change by ECON: only if both providers are located in the Community Additional restriction by ECON: Directive shall only apply for payments services in EU-currencies

Negative Scope Commission: Titles III and IV shall not apply for transactions exceeding 50.000 € positively changed by Parliament: Titles III and IV shall apply for all transactions if the user is a consumer Scope must be adjusted to consumer needs Sufficient if the bank of the payer is in the EU For transactions in all currencies

Negative Scope (2) The following cases will not be covered: A consumer travelling loses his payment card (or card is stolen), and abusive use is made of it abroad afterwards A consumer pays with his credit card and his details are missappropriated and used by fraudsters outside the EU territory. A consumer pays online by giving the credit card number and expiry date, and a non-EU hacker gets his details and uses the data. Providers are in a better position than consumers to mutualise the risks, to set up more secure systems and to select their payment corespondent more carefully. For consumers it‘s important to have just one contact and addressee of a claim when something has got wrong, namely their own bank.

Rules for payment institutions (Title II) Special authorisation for payment institutions (conditions other than for authorisation of credit institutions) Derogation from conditions for certain natural or legal persons Requirements to tied agents, outsourced entities or subsidiaries

Allowed activities / Authorisation for payment institutions Our demand payment institutions must fulfil stronger requirements for authorisation and supervision; they must fulfil the same requirements as credit institutions if doing credit business Commission proposal Certain credit services possible without authorisation as a credit institution ECON Stricter solvency requirements than Commission Other measures to ensure the protection of client funds Necessary: appropriate knowledge and ability to perform payment services, as determined by the home Member State of the payment institution positive European Committee of Banking Supervisors (CEBS) shall give guidance on the interpretation of the requirements (Art. 5)

Payment institutions and credit business ECON Art. 10, par. 2a: „Institutions shall not be entitled to grant credit, unless: a) the credit is closely linked to the payments business of the payments institution; and b) the credit is made from the payments institutions own funds …“ Art.10, par. 2b: „Payment institutions may not … offer credit services.“ (positive) Recital 9A: „Where credit is granted in order to facilitate payments business and is of short-term nature, e.g. when issuing credit cards, … it is appropriate to permit it.“ (credit card credit of short-term nature?)

Payment institutions and credit business (2) Art. 4, Nr. 2a: „Payment service means business activities listed in the Annex …“ Annex (5): „Issuing of payment cards which allow the … user to transfer credited funds (debit cards) or funds covered by credit line (credit cards).“ (Isn‘t this a credit service?)

Derogation from conditions for certain natural or legal persons ECON: the total amount accepted by the business concerned does not exceed EUR 5 million in any calendar month or EUR 300 000 on any day (adjusted downwards) natural persons shall be allowed to provide money remittance services vzbv: higher thresholds if allowed at all.

Competent Supervision Authority Commission: Member States shall designate as the competent authorities either public authorities, or bodies recognised by national law or by public authorities expressly empowered for that purpose by national law. Member States should designate the same competent authorities as are empowered by law or regulation to supervise credit institutions, But will not necessarily be the same competent authority as for credit institutions.

Derogation from certain provisions Recital 15a (Council): „It is important to guarantee consumers‘ rights by provisions which cannot be derogated from by contract.“  Maximum harmonisation on a high protection level? Numerous derogations where there are no strict consumer laws but the consumer has to agree in them with the provider Examples: Art. 23d § 2 (charge on information), Art. 30 § 1 (language) 33 § 2 (changes in exchange/interest rate) 34 § 1b (Termination of contract by provider) 41 (Consent) Art. 56 § 3 (charge for revocation)

Example: framework contracts (esp. bank accounts) Transparency of conditions for payment services (Title III) - Information obligations Example: framework contracts (esp. bank accounts) Timing: in good time before the payment service user is bound by any framework contract or offer ECON: in easily understandable words and in a clear and readable (Council: comprehensible) form in an official language of a Member State or in any other language agreed by the parties Information “provide”, “make available” or “available and accessible to the payment service user” Council: “provide” (positive) ECON: only “available and accessible to the consumer” ECON switches the wording

Information Obligations (2) Obligation can be fulfilled by supplying a copy of the draft contract Form ECON: information made available and accessible on paper or on another durable medium (consumer cannot claim any paper), Council: at his request the consumer can receive terms, conditions and information on paper or on another durable medium. List of information reduced Reference exchange/interest rate: changes immediately / no independent source

Changes in contractual conditions vzbv Contracts are to be kept Consumers must be able to react to changes in a adequate way and early enough Consumers must have the right to object Commission Any change in the contractual conditions must only be communicated, not agreed between provider and consumer ECON The consumer has the right to terminate the contract without charge and must be informed about this right before. The consumer has no right to object and keep up the old contract.

Termination of a framework contract Commission Framework contracts may be terminated at any time and free of charge by the payment service user with at least one month’s notice (as vzbv). negative: unconditional right of termination for the service provider vzbv: restricted right of termination for the service provider (e.g. if the consumer has behaved in an absolutely inappropriate manner) Changes ECON (Council) Negative: Only the termination of a framework contract concluded for a period exceeding 12 months or for an indefinite period shall be free of charges for the payment service user after the expiry of 12 months. Council: at least MS can provide more favourable provisions for users.

Rights and obligations of users and providers of payment services (Title IV) Consent: (Commission: explicit authorisation – Council: “in the form agreed between the payer and the payment service provider” Deadlines, e.g. for notifications to be harmonised and long enough (18 months) Use of verification instruments and user liability for losses in respect of unauthorised payment trans-actions Revocability of a payment order Execution time Unique identifiers

Use of verification instruments and user liability for losses in respect of unauthorised payment transactions (Overview) the right of the provider to block the use of a payment verification instrument the burden of proof in case of disputed authorisation the user liability for losses in respect of unauthorised payment transactions

Block of a payment verification instrument vzbv block of a payment verification instrument by provider only with substantial suspicion that the instrument has been or could be used fraudulently or for criminal purposes information of the consumer before blocking unblock the payment verification instrument immediately upon the request of the payment service user free of charge Commission right to block if the spending pattern gives rise to the suspicion of fraudulent use. ECON our demands have been taken up No charge payable by the consumer for the previous blocking of the payment verification instrument when he requests unblocking the payment verification instrument. The consumer may make a request to unblock at any time by a telephone call, free of charge.

The burden of proof in case of disputed authorisation Commission (and vzbv; the Council has deleted the 2nd paragraph) The payment service provider is to provide at least evidence that the payment transaction was authenticated, accurately recorded, entered in the accounts and not affected by a technical breakdown or some other deficiency The consumer shall provide factual information or elements to allow the presumption that he could not have authorised the payment transaction and that he did not act fraudulently or with gross negligence. The use of a payment verification instrument recorded by the payment service provider shall not, of itself, be sufficient to establish either that the payment was authorised by the payment service user or that the payment service user acted fraudulently or with gross negligence Result must be: every side has the burden of proof for its sphere of risk.

The burden of proof in case of disputed authorisation (2) ECON Member States shall require that, where a payment service user denies having authorised a completed payment transaction, the payment service provider is to provide evidence of authorisation. This shall require at least proving that the authentication procedure provided for this payment transaction was complied with, the transaction itself was accurately recorded and entered in the accounts and the transaction's records do not indicate a technical failure during the transaction. In order to protect consumer rights, further details and legislative consequences regarding the burden of proof should be governed by the national civil laws.

User liability for losses in respect of unauthorised payment transactions vzbv no liability if the payment verification instrument is not used physically or without verification via PIN no liability in case of evident abuse no liability for gross negligence after fulfilling the obligation to notify the payment service provider maximum limit of liability in case of negligence before fulfilling the obligation to notify the payment service provider

User liability for losses in respect of unauthorised payment transactions (2) Commission/ECON when acting fraudulently  full liability of the consumer before notifying the payment service provider  full liability of the consumer when acting with gross negligence; in other cases consumer bears the loss, up to a maximum of EUR 150 Member States may reduce that maximum amount further. after notifying the payment service provider  no liability of the consumer (except in case of fraud)

User liability for losses in respect of unauthorised payment transactions (3) Important changes Council Recital 21b: MS may set less stringent rules for consumers in order to maintain existing levels of consumer protection and promote trust in the safe usage of electronic payment instruments. The fact that different instruments involve different risks should be taken into account accordingly…“ (yes!) Evidence and degree of negligence evaluated by national copurts MS may reduce liability Problem: no sufficient distinction between loss/theft and misappropriation

Revocability of a payment order vzbv Right to revoke a payment order until funds are credited to the payee’s payment account National provisions on ineffectiveness of declaration of intention keep in force Commission/ECON payment service user may not revoke a payment order after the time of its acceptance

Execution time Commission (D+1) ECON (D+2) the amount is credited to the payee’s payment account at the latest at the end of the first working day following the point in time of acceptance (also vzbv). Up to 1 January 2010, a payer and his payment service provider may agree on a period no longer than three days. ECON (D+2) negative: The amount is credited to the payment account of the payee's payment service provider at the latest at the end of the second business day following the day of execution (after the acceptance) positive: time for currency conversion is included (as vzbv). Council: different levels according to payment instrument

Unique identifiers vzbv Commission Obligation to compare name and IBAN rejection of the order in case of discrepancies no liability in case of such rejection Commission IBAN as exclusive criteria minimal obligation to check the parameter the payment service provider shall make a bona fide effort to recover the funds involved in the payment transaction. Council: The payment service provider “shall make reasonable efforts to recover the funds”

Finnish Presidency – Status quo Proposals of the Parliament and Finnish Presidency differ so much so that a soon compromise could be difficult Consolidated version (with the same numeration) is absolutely necessary.