Friday, February 11, 2005

Last post: our evaluation of the e-money directive

This is the last post on this weblog of 1.1a2, the non-bank association of e-money issuers in the Netherlands. Our members have not lived to see the end of a long regulatory debate and the association does no longer exist. All that remains is our response to the consultation on the applicability of e-money rules for mobile operators. We have asked it to be confidential until the time of the evaluation of the Directive had come. And that time is near.
Not later than 27 April 2005 the Commission shall present a report to the European Parliament and the Council on the application of this Directive, ..

You may download our evaluation/response here or read it below:

European Commission
Directorate General Internal Market
Unit MARKT/F-2
B Ė 1049 Brussels

May 27, 2004

In reply to the Consultation Paper on the Application of the E-money Directive to mobile operators, we would like to put forward the considerations below. These must be considered confidential and are not intended for publication as a part of this consultation procedure. We would however not object to publication of these comments as a part of the evaluation procedure of the e-money directive.

1. In the past three years our association has tried its best to contribute in an open and transparent way to the Dutch and European policy discussions on electronic money. We produced two discussion papers on the issues of Electronic Money and Electronic Money Institutions (November 2002) and the Electronic Money Directive (November 2003). We identified the level playing field problems that have occurred and are still existing in the market place of e-money issuers. The solution that we proposed in November 2002 was to allow the mobile operators some time for compliance with e-money regulation so that as of a certain date (January 2004 for example), all players would be supervised similarly

2. In time, we have come to notice that the big players in the market place have not made any serious effort to contemplate the compliance-issues for e-money but focused on avoiding regulation instead. Informally they informed our association that they were confident that, through their lobby efforts, they would be able to avoid e-money regulation. This has indeed proven to be the case, both on the Dutch national level and on the European level. As a result, in terms of compliance, an uneven playing field has emerged. This has destroyed the business case of the smaller players and has earned the mobile operators a continued stream of income on unregulated premium rate services and billing services to third organisations.

3. In the time period where both local and European regulators and supervisors were postponing their formal compliance duties, the market possibilities for e-money players that are not mobile operators or credit-institutions by origin, have become limited. In other words, the market/regulatory window of opportunity does not exist any more. Investors withdrew their money from new e-money companies as soon as it became clear that the local regulator would -contrary to the legal advice/opinion of experts consulted- not enforce e-money legislation for large mobile operators. The consequence was innovation stifled: a number of new players who had the potential to compete on both price and functionality with the market incumbents (both banks and mobile operators) had to withdraw from the market.

4. Our association would suggest that the Commission re-asses its own role in the light of the developments that have become apparent in the electronic money market. We have seen that rules and legislation that are clear from the outset have in practice not been enforced due to:
- insufficient pro-active and knowledgeable behaviour by most regulators/supervisors,
- the existence of a regulatory capture situation on both a national and European level,
where large players in the industry in practice get more regulatory/legal space than smaller companies.

5. Having witnessed these developments close by, we would recommend the Commission to stop the current regulatory capture situation with mobile industry. In other words: stop seeking compromise positions for an industry which is fundamentally unwilling to comply. The past two years since the publication of our position paper could have been easily used to create a migration regime for mobile industry. Instead we are now farther away from a level playing field then before. And the Commission is now essentially teaching the market that it pays off to ignore EU-rules and avoid regulation in spite of parliamentary decision making on the subject matter at hand.

6. We would like to note that the mobile industry charges fees for cross-border third party payments which are different than those domestic (something not allowed under regulation 2560), does not abide with rules as to money laundering/customer identification nor to those on transparent contract conditions for customers that hold a payment instrument (Recommendation of 1997). Furthermore the mobile payment industry is far away from implementing the FATF Recommendations (whereas Special Recommendation VI on alternative remittance systems is applicable as of February 2006). We wonder if the EU Commission is also planning to provide exemptions to these rules for the mobile industry? Or would the argument then suddenly be that the mobile industry billing services do not constitute payment/remittance services at all?

7. The Commission will not be surprised when we explain that the member base of our association has steadily weakened over the years. Given that the window of opportunity in the market has been eliminated and the funding resources have left the new Dutch players, our association will unfortunately not live to see the end of the compliance debate. Therefore, last month the decision has been taken to liquidate the association and to advise our members to join the other e-money association in the Netherlands: the Nederlandse Vereniging voor Instellingen van Elektronisch Geld (NVIEG). We trust that the NVIEG will continue the debate where we left it off.

Simon Lelieveldt

Wednesday, February 02, 2005

E-money is not e-money yet guidance is not a legal opinion

Dg Internal market received around 60 replies on a consultation on the issue whether or not mobile operators' prepaid funds, from which payment can be made to third parties constitute e-money under the e-money directive or not. The result of this is however not so much a legal interpretation but an opinion of the Commission which is not to be viewed as a legal interpretation. Nevertheless this non-binding non-legal statement is called a guidance. And this guidance can be downloaded here.

Some highlights:
* Following the extensive consultation process that the Commission has undertaken, it is appropriate that the Commission services draw some conclusions and make these public. However, it is not intended to provide a binding interpretation of the treatment of mobile phone operators.

* The BAC concluded in December 2003 that e-money is now being issued under some circumstances by mobile phone operators to their pre-paid customers when those customers purchase some third party services and pay for them using their pre-paid store of value.

* Although there is a school of thought that suggests that no e-money is created when pre-paid customers use their store of value with mobile operators to purchase third party services, other
commentators agree that e-money is created when the monetary value stored on a pre-paid card is accepted as payment by a third party merchant in line with Article 1.3(b)(iii) of the Directive. The Commission services support this view

* The Commission services therefore suggest that when Member State authorities conduct an analysis of whether a mobile operator or other Ďhybridí institution is engaged in the issuance of e-money, they consider the form of direct payment relationship between a mobile customer and a third party vendor. This payment relationship may be established when either:
a) there is a direct transfer of e-value (as far as the Commission services understand, this may be technically feasible for mobile handsets); or
b) the mobile operator acts as a facilitator (or intermediary) in the payment mechanism in such a way that customer and merchant would also have a direct debtor-creditor relationship.

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