|Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002
The Chairman: Order. If another Member leaves the Room, we shall no longer be quorate.
Mr. Flight: On the subject of persons overseas, if it is the intent to include orders that come from without as well as within the UK, surely it would be appropriate to provide an exemption in suitable terms in article 72 of the Financial Services and Market Acts 2000 (Regulated Activities) Order 2001. There is no overseas persons' exemption from accepting deposits because that can only be authorised if the depositors accept it in the UK, typically at a UK branch. That does not seem to be a good reason for not applying the exemption to issuers outside the UK, but I understand that at present that is not the case.
With regard to accepting deposits, paragraph 20 of the explanatory memorandum is not entirely consistent with the provisions of article 12 of the order, to which it applies. Paragraph 20 states that the amendment made by article 12 will ensure that
By way of example, the security that will be terminable on one month's notice does not have a maturity of less than one year as at the date of issue. Even if it is correct to refer to the security as having a
Column Number: 9maturity equal to the notice period after which it is given, it cannot have that maturity before the notice is given. Surely that must be tested as at the date of issue of that security. It might be clearer to explain or amend the existing article 9(3) by inserting after ''date of issue'' the words ''or can be redeemable at any time on less than 12 months' notice without any default by the issuer''. If the last part of proposed new article 9(3) is correct and the explanatory memorandum is wrong, new article 9(3) should state ''at any time before the first anniversary of the date of issue.''
I apologise that some of the latter points are highly technical, but this is a technical subject. I put them on record for entirely non-partisan consideration in order to make sure that we get the order right in this crucial area of financial and commercial activity.
Ruth Kelly: I welcome the spirit in which the hon. Member for Arundel and South Downs (Mr. Flight) has contributed to the Committee, and for the constructive way in which he has made his comments.
It will perhaps be useful and benefit the Committee if I place on record the uses to which e-money might be put, and describe the potential for its development. That will put in context how we framed the directive and how we have translated it into UK law. E-money comes in a variety of forms. Some are like electronic cash; others are more like pre-paid debit cards. Even a particular brand of e-money can take a range of forms. At present, the most common come either on a smartcard for use in the physical world, or in an electronic wallet based on a personal computer or web server for use in the virtual, electronic world. In future, mobile phones could act both as physical smartcard services and as virtual electronic money. I shall discuss later the hon. Gentleman's points about the definition and mobile phones.
To date, the success of e-money schemes has been mixed. In the United Kingdom, commercial trials of card-based e-money have been undertaken by Mondex in Swindon and Visa Cash in Leeds. Limited trials have also been undertaken in self-contained communities such as universities. As elsewhere, trials to date have failed to demonstrate a convincing case for a national scheme.
E-money faces a three-way, chicken-and-egg problem. Customers do not want cards until many retailers accept them, and retailers do not want them until many customers have them. An added complication is that customers must somehow be able to load the cards with cash. E-money therefore requires a three-way infrastructure of smartcards, point-of-sale terminals and loading terminals such as specially adapted automated teller machines.
Critical mass is, therefore, important. E-money schemes have had more success in other countries. For example, there has been widespread roll-out of schemes in Belgium, Finland and Hong Kong, which are based on smartcards, mobile telephony and transport ticketing with additional facilities,
Column Number: 10respectively. However, even in those countries, success has yet to be proven, and transaction volumes are mostly still very low.
Another reason for the low levels of use is that e-cash faces strong competition from physical cash at lower values, and from debit and credit cards at higher values. Physical cash is likely to remain a strong competitor as long as consumers do not directly bear the costs associated with its production and handling. Nevertheless, firms are trying to develop strong incentives for consumers to use e-cash. E-money is best suited to transactions in which physical cash is awkward to use. Examples include those involving parking meters and vending machines that need exact change, or when eliminating the costs of cash collection would produce significant savings. However, the cost of the technology involved is not insignificant, which makes it difficult to establish a viable commercial case.
Any future success is likely to come from multi-application smartcards, which combine an e-purse with other applications such as a debit or credit card, a transport season ticket or even smartcards for digital television set top boxes. Several mass transit scheme operators in the UK have expressed an interest in the development of e-money, as has an operator of interactive digital television services.
Another area that might provide a market for e-money is the virtual world, where physical cash cannot be used. Again, however, e-money faces strong competition from debit and credit cards, which have already established global brands and infrastructure.
The Cruickshank report of March 2000 concluded that it would be at least five to 10 years before the use of e-money is extended throughout the UK. The lesson for regulation is that the market is still emerging. If e-money is to find its critical application, it will be important to regulate with a light touch and to allow innovation to blossom. Once critical mass has been achieved and e-money has a firm foundation, we can re-examine the shape of regulation and consider questions such as access to compensation schemes, to which I shall return later.
The hon. Gentleman made many specific points about the detail and implementation of the directive. He also asked whether many amending orders to the original FSMA were likely to be introduced. We shall have to continue to amend the FSMA as European Union directives emerge or if we want to extend the scope of regulation. This is the first time that e-money has been included in regulations. In other circumstances, such as the introduction of the e-commerce directive or those that involve insurance intermediaries, regulation will again be necessary, but that may not happen for some time. We cannot have one static order that does not change. Parliament must have the right to change the scope of regulation. That is a basic democratic principle, and I look forward to future debates in Committee with the hon. Gentleman.
The hon. Gentleman also asked about the benefits of regulation as opposed to the risks involved for consumers. I hope that my introductory remarks set e-money in some sort of a context. It is important to
Column Number: 11allow e-money to develop under as light a regulatory touch as possible while taking into account the need for prudential regulation of large-scale issuers. Such issuers may not exist at present but they will in the future, as e-money develops its potential.
Not only are current e-money schemes fairly small but the amount of e-money that consumers are likely to hold is limited. The directive noted that e-money is largely used for lower value payments, so the losses that a consumer may suffer in the event of an electronic money issuer's failure are, correspondingly, likely to be lower. In the light of such issues, we considered whether it would be appropriate to introduce a compensation scheme alongside e-money regulation.
At the current stage of the market's development, in which e-money issuance is not widespread, it would be disproportionate to introduce such a scheme. The vast majority of respondents to the consultation, particularly those in the industry, felt strongly that introducing the compensation scheme for e-money would be inappropriate at this time. I agree that, given the level and nature of the risks involved in issuing e-money at present, it would be hard to argue for such a schemeof course, we must keep it under reviewand that is why the order specifically disapplies the compensation scheme for e-money issuers.
There are other ways in which consumers can be protected. For instance, the arguments for and against the application of the ombudsman scheme to e-money are finely balanced. The FSA will have to take a view on that in due course. It will carry out a full cost-benefit analysis and consult all interested parties before deciding whether to apply the ombudsman scheme to e-money. I look forward to receiving the results of that analysis in due course.
The hon. Gentleman asked what precisely was included in the definition of electronic device. It includes cards and accounts. However, we do not want to change in any way the wording of the directive, but will leave it to the FSA to provide guidance that will allow people to interpret the definition appropriately.
The hon. Gentleman raised concerns that have been expressed by mobile phone companies about whether certain pre-pay services are caught by the definition of e-money. The question is whether pre-paid mobile phone cards can be accepted as a means of payment by persons other than the issuer. It is critical to determine whether that is the case when interpreting the
Column Number: 12definition of e-money. A particular case in point is premium rate services, whereby third parties are paid for services provided, albeit by the mobile phone operator rather than directly by the customer who uses the services. The FSA is currently considering whether such pre-pay services constitute e-money and hopes to give its formal view soon. I am sure that mobile phone operators are waiting for that with bated breath.
On article 9C(2)I apologise for not dealing with the hon. Gentleman's questions in the order in which he raised themtraditional credit institutions cannot benefit from a waiver. That is a requirement under the terms of the directive. I hope that that clarifies the point. On paragraph (6)(b) of new article 9C, the waiver condition is met only where all the undertakings accepting the e-money fall under either sub-paragraph (i) or (ii). It is not possible for some of them to fall under one sub-paragraph and some under the other. The undertaking must operate in a limited local area or as part of a close business relationship with the issuer for a waiver to be available.
On article 9(4)(b), which relates to e-money issued on a cross-border basis, the hon. Gentleman asked whether that included e-money issued in the United Kingdom from another member state. It does, if the issuing of e-money amounts to
The hon. Gentleman asked about the definition of commercial paper in article 12. The intention is that if a debt security is repayable on notice of less than a year, including repayment on demand, it is treated as commercial paper and it is a deposit. We are satisfied that the drafting achieves that.
I think that I have dealt with most of the hon. Gentleman's technical questions. If there are others, I shall respond to him directly in writing.
Mr. Flight: A simple question concerns the £5,000 fee. Is that the proposed fee level? It was referred to in the explanatory notes as administrative. If that is so, is it justified?
Ruth Kelly: I shall respond in writing to the hon. Gentleman on that point.
Question put and agreed to.
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Chidgey, Mr. David (Chairman)
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