EXPLANATORY MEMORANDUM
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002
Introduction
1. This Instrument is made in exercise of the powers conferred on the Treasury by sections 22(1) and (5) and 428(3) of, and paragraph 25 of Schedule 2 to, the Financial Services and Markets Act 2000 ("FSMA"). This is subject to the special affirmative resolution procedure set out in paragraph 26 of Schedule 2 to FSMA.
Background
2. To date, the activity of issuing electronic money ("e-money") has not been subject to a formal system of regulation and supervision. The Electronic Money Directive mandates the establishment of a new prudential supervisory regime for electronic money institutions ("ELMIs")¹ . The main objectives of the Directive are: (a) to create a regulatory framework to ensure the stability and soundness of ELMIs, so as to increase business and consumer confidence in this new and developing means of payment; (b) to eliminate legal uncertainty created by the lack of harmonisation in this field; and (c) to facilitate access by ELMIs from one European Economic Area ("EEA") Member State into another.
Policy objectives
3. This Order amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("RAO"). It gives effect to the Electronic Money Directive and makes further, miscellaneous amendments to the RAO.
Part II - Electronic Money
4. Part II of the Order provides for the issuing of e-money to be a regulated activity under FSMA. This gives effect to the principal requirements of the Directive. Firstly, it ensures that persons not authorised to carry on the business of issuing e-money under FSMA (other than those with a waiver) will be prohibited from doing so. Secondly, the Financial Services Authority (FSA) are able to impose the remaining requirements of the Directive, such as the restriction on the business activities of ELMIs to the issuance of e-money and the provision of closely related services. The FSA are able to do this primarily by making rules under section 138 of FSMA.
The definition of electronic money
5. Article 2 inserts a definition of "electronic money" into the RAO. This effectively copies out the Directive's definition, with the exception that e-money issued at a discount will be brought within the scope of regulation. The Treasury believes the Directive intended this. The FSA is also given the power to make rules prohibiting the issue of e-money at a discount. Article 3 provides that a sum is not a "deposit" for the purposes of the RAO if it is immediately exchanged for e-money.
6. E-money is therefore defined in the Order as monetary value, as represented by a claim on the issuer, which is stored on an electronic device, issued on receipt of funds and is accepted as means of payment by undertakings other than the issuer. The FSA will be responsible for interpreting this definition of e-money and for producing guidelines on how it will be applied in practice.
7. The Treasury believes the Directive's definition includes both e-money schemes in which value is stored on a card that is used by the bearer to make purchases, and account-based e-money schemes where value is stored in an electronic account that the user can access remotely.
Waivers
8. Articles 4 to 6 insert provisions into the RAO relating to the regulated activity of issuing e-money. They include provisions excluding from the scope of that activity certain ELMIs whose operations are on a limited scale, and to whom the FSA has issued a waiver certificate.
9. The FSA is given the power to grant waivers on a case-by-case basis to all ELMIs who wish to be waived that appear to it to meet the relevant conditions. These 'relevant conditions' broadly follow the criteria set out in the Directive, though some of the terms have been elaborated upon in order to improve understanding of their meaning. An additional criterion has also been added to place an absolute limit on the size an ELMI can become before being required to seek authorisation from the FSA and, if successful, to meet the prudential and other requirements of the Directive.
10. This Order provides that a waiver may be granted to an ELMI when the amount that can be stored on the electronic storage device used by customers of that issuer is limited to a maximum of not more than ?150 and if at least one of following three criteria are met:
- the total financial liabilities related to the e-money activities do not normally exceed ?5 million and never exceeds ?6 million;
- the e-money is accepted only by: the parent undertaking of the ELMI; subsidiaries which perform operational or other ancillary functions; or other subsidiaries of the parent; and the total financial liabilities related to the e-money activities do not exceed ?10 million;
- not more than one hundred undertakings accept the e-money and they are either located within a limited geographical area or have a close financial or business relationship with the ELMI; and the total financial liabilities related to the e-money activities do not exceed ?10 million.
11. A waived firm will not be treated as carrying on a regulated activity under FSMA, so will not be subject to most of the requirements of the Directive - including the need for their e-money to be redeemable. Equally, waived firms will not be able to exercise passport rights in other EEA Member States. In order to verify the continued existence of the conditions for the waiver, waived firms are obliged to report periodically to the FSA on their activities and the FSA is given powers to obtain information from them.
12. The procedures for firms to apply to the FSA for a waiver follow closely those for applying for permission under Part IV of FSMA. In addition, the FSA is given the power to revoke a waiver on its own initiative if it considers that the conditions for the waiver have been breached or if a waived firm fails to comply with the FSA's rules regarding the provision of information. A waived firm can also apply voluntarily for its waiver to be revoked (conditional on the granting of an authorisation, if necessary).
Financial Services Compensation Scheme
13. The Treasury believes that the risks to consumers involved in e-money do not warrant the application of a compensation scheme at this time. Provision is therefore made to exclude the issuing of e-money from the Financial Services Compensation Scheme (Part XV of FSMA).
Supplemental and transitional provisions
14. Articles 7 and 8 make supplemental amendments to provide that the issuing of e-money is not an exempt activity for the purposes of Part XX of FSMA (provision of financial services by members of the professions); and to provide that persons seeking permission under FSMA to carry on the regulated activity of issuing e-money must comply with the threshold condition in paragraph 1(2) of Schedule 6 to FSMA.
15. Article 9 makes transitional provisions relating to persons who were issuing e-money immediately before 27 April 2002. These issuers are granted a time-limited exclusion, whereby they will be treated as not carrying on a regulated activity under FSMA for six months (i.e. until 27 October 2002). These arrangements will apply equally to those firms that are already authorised under FSMA (because they are carrying on other regulated activities) and those that are not. The arrangements will apply to firms with their head office in the UK or in another EEA Member State.
16. After 27 October, UK e-money issuers will not be able to continue issuing e-money in the UK (or other EEA Member States) unless they have been granted permission under Part IV of FSMA (or their existing permission has been varied to include the activity of issuing e-money). Similarly, EEA e-money issuers will not have permission to carry on that activity under FSMA after 27 October unless they have been duly authorised in their home state. The exception to this is that unauthorised UK firms that were already issuing e-money as at 27 April, and who applied to the FSA for permission before 27 June, will be allowed to operate after 27 October, if the final decision on their application is still pending at that date.
17. Article 10 makes provision about anticipatory consultation on rules to be made under the new powers conferred by articles 9G(1) & 9H of the RAO.
Timetable for implementation
18. The new regime will come into force on 27 April 2002. Before then, the FSA is given the power, from 11 April, to make the necessary rules under FSMA (as applied and amended by this Order).
Part III - Miscellaneous Amendments of the Regulated Activities Order
19. Article 11 makes additions to the list, in article 4(4) of the RAO, of those exclusions that must be disregarded for the purposes of giving proper effect to the Investment Services Directive (93/22/EEC).
20. Article 12 makes a clarificatory amendment to article 9 of the RAO, which provides an exclusion from the activity of accepting deposits for sums received in consideration for the issue of debt securities. This reflects the policy intention that any security repayable upon notice of less than one year should be treated as commercial paper (and thus as a deposit).
21. Article 13 provides for article 45 of the RAO to apply to instructions relating to contractually based investments as well as those relating to securities. It also replaces references to the Uncertificated Securities Regulations 1995 with references to the corresponding 2001 Regulations.
Regulatory Impact
22. This Order extends the scope of regulation in that it specifies the activity of issuing e-money as a regulated activity under FSMA. This meets the Government's obligation under European Community law to implement the Directive into UK law. The Treasury's general approach has been to implement the Directive with as light a touch as is consistent with it.
23. The Economic Secretary to the Treasury is satisfied that the benefits of this Order justify the costs. A Regulatory Impact Assessment accompanies this Order and can be found on the Electronic Money Directive index page.
ECHR Compatibility
24. The Economic Secretary to the Treasury is satisfied that the provisions of this Order are compatible with the European Convention on Human Rights.
Applicability to Wales
25. This Order applies to the whole of the UK.
Declaration
26. The Economic Secretary to the Treasury has approved this Memorandum.
HM Treasury
14 March 2002