Second Standing Committee on Delegated Legislation
Wednesday 10 April 2002
[Mr. David Chidgey in the Chair]
Financial Services and Markets Act 2000
(Amendment) Order 2002
The Economic Secretary to the Treasury (Ruth Kelly): I beg to move,
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 (S.I., 2002, No. 682).
It is a delight to be here under your chairmanship, Mr. Chidgey. The primary aim of the order is to give effect to the two European directives on electronic money that were adopted in September 2000. One of those directives, No. 2000/28/EC, is largely technical and need not detain us. The meat is in the other, No. 2000/46/EC, which introduces a special prudential supervisory regime for issuers of electronic money, or ''e-money'', as it is better known. The regime creates a special new type of credit institutionan e-money institutionthat will be authorised to issue e-money. Traditional credit institutions, notably banks, will also be able to issue e-money. Like banks, authorised e-money institutions will have what are known as passport rights, which will allow them to provide their services throughout the European Union.
The directive's regime for e-money institutions is based on the existing prudential supervisory regime applicable to banks. In recognition of the more limited need for consumer protection and the fledgling nature of the industry, it is in many respects less complex and thus generally less onerous. Set against that, the directive effectively limits e-money institutions only to issuing e-money. Banks, on the other hand, can undertake other activities as well, such as deposit taking. The regime for e-money institutions is also tailored to deal with specific risks inherent in issuing e-money. For example, strict limits are placed on the investments that an e-money institution can make with its outstanding e-money liabilities. That ensures that all issued e-money is backed-up by highly liquid low-risk assets.
E-money is best thought of as an electronic surrogate for coins and banknotes that is stored on a electronic device such as a chip card or computer memory and that is generally intended to make payments of a limited amount. At present, e-money takes two main forms. First, there are plastic cards on to which e-money can be loaded, which usually take the form of cards with an integrated chip that memorises sums previously paid to the issuer and from which the necessary sums for small purchases are downloaded. In practice, it is an electronic version of a purse containing small change and lower
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denomination bank notes. Secondly, e-money can be stored on a customer's computer or on a central server. Such electronic tokens represent value that can be used to buy goods and servicesover the internet, for example.
The Government take a positive, constructive view of the long-term potential of e-money. It provides a chance to create a modern and effective means of payment that will facilitate electronic commerce and novel ways in which to do business. In implementing the directive into United Kingdom law, we have struck a balance between two factors. On the one hand is the need to make provision for the financial integrity of e-money institutions and the protection of consumers. On the other is the need to ensure that the development of e-money schemes is not hampered by excessive regulation. Generally, our approach has been to implement the directive with a light touch and to provide for a technologically neutral regime. It captures equally card-based e-money schemes in which value is recorded on cards in the hands of consumers and accounted schemes in which the record of value is on a personal computer or central server. In that way, regulation will not unduly burden existing e-money issuers and will also encourage technological innovation and new entrants from the banking sector and elsewhere.
Last year, the Treasury issued a consultation document to seek views on the proposed legislative measures for implementing the e-money directive. Our approach received widespread support from industry and consumer groups that felt it generally represented the best way forward. The Committee may find it helpful if I explain some of the technical aspects. The Government have chosen to implement the directive by making the issuing of e-money a regulated activity under the Financial Services and Markets Act 2000. That gives effect to the principal requirements of the directive. First, it ensures that persons other than those with a waiver who are not authorised to do so under the Act will be prohibited from carrying on the business of issuing e-money. Secondly, it enables the Financial Services Authority to impose on e-money issuers the remaining requirements of the directive, such as the restriction on business activities and the detailed prudential requirements.
The order defines e-money issuance in the same terms as the directive. That means that the FSA will now be responsible for offering firms guidance on the definition. I understand that it will shortly be publishing such guidance.
The directive gives member states the option of permitting their competent authorities to waive the application of some or all of the directive's provisions in relation to certain small or limited e-money issuers. The Government believe that it is important for new entrants to be able to start up and grow without the burden of unnecessary regulation. We also believe that the risks to consumers posed by such schemes are likely to be limited. We have therefore provided fully for such waivers. They will exempt smaller e-money issuers from the detailed requirements imposed on authorised e-money issuers. In that way, we hope to
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foster competition and innovation in the e-money industry and to encourage its development. To that end, I welcome the FSA's decision not to charge firms any fee for waiver applicationsat least during the implementation phase.
However, when an e-money issuer grows to such an extent that it can no longer be considered small or limitedand therefore ceases to meet the conditions for its waiverit will be required to seek authorisation from the FSA. An issuer will also need to seek authorisation if it wants to passport its services into another European Union member state. If successful with their application, such firms will need to meet the prudential and other requirements of the directive. The FSA will charge those firms an appropriate fee.
In accordance with the deadline set by the directive, the new regime for electronic money issuers will come into force on 27 April 2002. Firms already issuing e-money on that date will be ''grandfathered''. In other words, the issuers will be granted a time-limited exclusion. For the first six months after 27 April, they will be treated as not carrying on a regulated activity under the Financial Services and Markets Act. The aim is for existing issuers to use the six-month period to apply for either authorisation or a waiver. Meanwhile, for the duration of the six-month exclusion, issuers will be able to continue their e-money activities without interruption and without needing to comply with any of the requirements of the directive or of the FSA's rules.
The order also makes further miscellaneous amendments to the regulated activities order. The amendments are technical and seek to clarify the issue. They are being made following consultation with the FSA and the industry. I confirm that the provisions of the order are compatible with the convention rights within the meaning of the Human Rights Act 1998. I am pleased to commend the order to the Committee.
Mr. Howard Flight (Arundel and South Downs): I welcome you to the Chair of our proceedings, Mr. Chidgey. I wish to make several specific points about the order. It would be unreasonable to expect the Minister to respond to every technical issue raised, but the industry has collected certain technicalities of which I hope she will take note and perhaps conclude that some revisions to the order needto be made subsequently.
I wish first, however, to ask a few general questions. After our marathon discussions of the Financial Services and Markets Act 2000 in Committee, it was the intention to end the situation whereby the previous legislation had become so outdated by amendments and subsequent regulations as to be almost impossible to understand. I note that the order that we are discussing today results from European Union financial services directives and I should be interested to know how many subsequent orders amending the FSMA the Minister anticipates will result from intended European Union financial services directives. I hope that we shall not end up with a FSMA, as
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happened under the previous financial services legislation, which became so convoluted with amendments that no one understood it.
The Government's explanatory notes are somewhat ambiguous on what assessments they have made about the impact of the order and, especially, the impact of the implementation of the minimum way that is consistent with the directive. It behoves the Government to have done a complete impact assessment of the cost-benefit analysis.
The Government advise that there are benefits in implementing the EU directives for regulating the use of e-money under the Financial Services and Markets Act 2000, but they do not quantify them. What assessment has been made on what the benefits are deemed to be worth?
The assessment refers to a £5,000 fee for applications for authorisation, although that may be only illustrative. Has that proposed fee been discussed with the FSA, and is it justified by the work that would be involved?
Have the Government confirmed with the FSA that the proposed six-month period to achieve authorisation from 27 April, to which the Minister referred, will be sufficient to handle the likely flow of authorisations that will be required? I am aware of a significant backlog in some areas of FSA authorisation and, obviously, any problems would be undesirable.
A further important point may have been raised with other members of the Committee. Will the Minister confirm that premium rate services that are offered to pre-pay mobile phone users do not constitute e-money under the order and the directive? It was pointed out to me that if that is not the case, it would seriously jeopardise pre-pay mobile phones, and it could restrict access to e-commerce via pre-pay phones and add an unnecessary layer of regulation to the cost of premium rate telephone services. I understand that the industry has consulted with the Treasury and the FSA on the issue, but neither has clarified whether the issue has been resolved.
I turn to the order's detailed prescriptions. Article 2(a), which details the definition to be inserted in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, refers to an ''electronic device''. It is not clear whether that includes electronic accounts or cardsdebit or creditalthough paragraph 7 of the explanatory memorandum states that that is the Treasury's view. Will the Government insert a definitive definition of electronic money in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001? The Minister gave a verbal tour de force on what electronic money is, but the order is not specific.
Article 3 of the order would insert article 9A in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. That would provide that cash paid to buy electronic money, which could be used to pay for goods and services and to repay the cash by doing so,
''is not a deposit for the purposes of article 5 if it is immediately exchanged for electronic money.''
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The transposition note indicates that that is the wording in article 2 of the order, but it is unclear whether cash paid when applying for an electronic storage device is covered. It would be clearer to have the wording, ''if it is exchanged for electronic money immediately or as soon as practicable after the electronic device is established''.
Article 4 provides that issuing electronic money is a regulated activity requiring FSA authorisation unless an exemption applies. Article 4 further provides for the FSA's waiver certificates for exemption by inserting new provisions in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. It is necessary to clarify three of those provisions. First, why does paragraph 2(a) in new article 9C provide that credit institutions cannot be waived or exempted even if the waiver conditions are met? Is that required by one of the EU directives?
Secondly, paragraph 10 of the explanatory memorandum states that one of the conditions on which the FSA can grant an exemption by means of a waiver to a qualifying electronic money institution--or ELMI, as we are now to call those new bodiesis if the e-money is accepted as payment only by the parent undertaking subsidiaries of the ELMI, which perform ancillary functions relating to electronic money and the other subsidiaries of the parent. Those other subsidiaries seemingly include subsidiaries of the ELMI that do not perform those ancillary functions.
Paragraph 5(c) of new article 9C, which is to be inserted by article 4, seems to be intended to give effect to that limitation. It concludes that the subsidiaries that perform those ancillary functions, and that cover group companies, exclude all subsidiaries of the ELMI, even if they do not perform those ancillary functions. Non-performing subsidiaries are not included as possible accepters of the e-money. Therefore, there seems to be a mismatch with paragraph 5 of the explanatory memorandum, and I should be grateful if that could be clarifiedor, if necessary, amended.
Paragraph 6(b) of new article 9C is also ambiguous. It is unclear whether both of the conditions with regard to permitted locations and close relationships must apply to all of the 100 persons, or whether they can be combined. I assume that they can be combined, as the exemption applies where some of the 100 persons fall in (i) and the rest fall in (ii) of the paragraph. However, that also needs to be indicated in paragraph 10 of the memorandum.
It might be clearer if paragraph 6(b) were amended by inserting in line 2, after the word ''where'', the words ''those persons fall in either or both of (i) and (ii)'', and if the words ''those persons'' were replaced by ''they'' in both (i) and (ii).
I turn to article 9E. The warning and decision notice protections in the FSMA apply here, but I am unsure whether the deeming provisions in paragraph 3 are sufficient. It seems to me that it is necessary to apply the deeming provisions in part IV permissions as well,
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and after ''authorised person'' in line 3 there should be a reference to a part IV permission, and after ''certified person'' in line 4 the words ''a certificate under article 9C'' should be inserted.
The compensation scheme should apply to small issuers in the same way as it does to ordinary deposits, at least if they are exempted under paragraph (4). The compensation scheme should also apply with regard to the exemption for small issuers under paragraph (4)which, presumably, apply mainly in the case of the provision of e-money facilities to poorer consumers. Paragraph 13 of the explanatory memorandum states that the risks to consumers do not warrant compensation. I am unsure whether that has been justified.
On the overseas persons exemption, it is unclear whether the regulated activity of issuing electronic money requires authorisation only if the issuer is in the UK, and therefore issues the electronic money from a UK branch. It would be helpful if the Minister could clarify thator change the order so that it is clear that article 9(4)(b) of the order, which refers to issuants on a services basis, also applies where the electronic money is issued from outside the UK to a recipient inside the UK. If that is the intent, surely it would be appropriate to provide an exemption in suitable terms