- EMIs - A Shift to a Lighter Regulatory Regime
- July 8, 2011 | Author: Richard Bernard
- Law Firm: Zammit & Associates - Advocates - Swatar Office
Recent amendments to the Financial Institutions Act (Chapter 376 of the Laws of Malta) (the “Act”) have effectively brought the regulation of EMIs in Malta, previously regulated under the Banking Act (Chapter 371 of the Laws of Malta), within the remit of the same Financial Institutions Act. The change has undoubtedly led to a much more attractive regime for operators looking to set up an EMI in Malta.
Essentially, the amendment of the Act has shifted the categorisation of the Electronic Money Institution (EMI) from that of a Credit Institution to a Financial Institution. The regulatory and financial implications of this legislative reorganisation are indeed as far-reaching as they appear prima facie and can be summarised in the following salient points which are set out in further detail below:
Reduction of initial capital requirement from €1m to €350,000;
Extension of definition of “electronic money”;
Extension of scope of activities carried on by EMIs;
Safeguarding requirements and redemption rules designed to bolster consumer protection;
Reduction in regulatory fees to 10% of their previous level.
The rigidity of the status attributed to the EMI prior to the introduction of aforementioned amendments was the cause of significant frustration to operators in the financial services sector and has been mooted as the motivation behind the lack of interest in EMIs in Malta, with not a single licence having been issued in Malta under the previous regime.
Consequently, it was widely advocated that the relative legislation needed to be reviewed and aligned more closely with the risks faced by EMIs, not least due to the fact that the issuance of electronic money does not constitute a deposit-taking activity pursuant to Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, in view of its specific character as an electronic surrogate for coins and banknotes, which is to be used for making payments, usually of limited amount and not as a means of saving.
Ultimately it was an initiative on a European level, in the form of Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of EMIs amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (hereinafter referred to as the “Directive”) that led the Maltese legislator to implement an amendment to the Financial Institutions Act, which came into force with effect from 30th April 2011.
Consistent with the general thrust of the Directive, which promotes a move towards a lighter and more flexible regime for EMIs, the Malta Financial Services Authority (the “Authority”) opted to bring the regulation of such institutions under the Act rather than through implementation of a new law or keeping it under the Banking Act; a move which further demonstrates the Authority’s forward-looking initiative to achieve legislative uniformity in consolidating a range of activities carried out by financial institutions under the same modern and coherent legal framework. The same approach was adopted by the Authority in respect of the implementation of Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC and 2006/48/EC and repealing Directive 97/5/EC (also referred to as the Payment Services Directive) which was transposed in the Act over the course of 2010.
The Act, as amended, defines an “EMI” as “a financial institution that has been licensed in accordance with this Act and authorised to issue electronic money or that holds an equivalent authorisation in another country in terms of the Electronic Money Directive to issue electronic money”.
In turn, “electronic money” is defined as “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions ¿ and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money”.
The said definition mirrors that contained in the Directive and, as such, lends a degree of clarity and technical neutrality in that it covers all situations where a payment service provider issues a pre-paid stored value in exchange for funds, which can be used for payment purposes because it is accepted by third person/s as payment. Furthermore, the definition of electronic money now includes magnetically stored monetary value, which also covers payment cards and computer hard drives. As such, the enhanced definition covers electronic money whether it is held on a payment device in the electronic money holder’s possession or stored remotely at a server and managed by the electronic money holder through a specific account for electronic money and could also cover payment by mobile phone.
The legislator’s intention in this respect is clear and well-founded. The importance of a ‘wide’ definition is perhaps best demonstrated by reference to its alternative. A restrictive definition would be unlikely to cover all the electronic money products available in today’s market and also those product/s which could be developed in the future, thereby risking the hindrance of what is arguably this generation’s most notable achievement and a key legacy for future generations, technological innovation.
The amendment also implements a substantially less onerous regime for initial and ongoing capital intended to facilitate entry into the market whilst ensuring an appropriate level of consumer protection together with the sound and prudent operation of EMIs. Accordingly, the initial capital requirement for authorised EMIs has been reduced from €1,000,000 to €350,000. On a related and similarly significant issue, as part of this change in regime, the regulatory and licensing fees imposed on EMIs have been reduced to approximately 10% of their previous level. These changes are illustrated below:
Application and Processing Fee payable upon submission of application
Licensing Fee payable upon issue of licence
Annual supervision fee
Not less than €21,250 and not more than €500,000
Not less than €2,500 and not more than €50,000In line with the spirit of the Directive which advocates the removal of barriers to market entry and the facilitation of the taking up and pursuit of the business of electronic money issuance, the implementation of the amendments have eased the restriction on electronic money issuers from undertaking other business activities , thereby eliminating a substantial obstacle for new entrants into the market, such as mobile phone companies/ mobile network operators, which under the previous legal framework would have been required to set up a subsidiary with the sole purpose of managing the electronic money function. The fact that payment services are regulated by the Act avoids the burden of having duplication of compliance procedures and related fees and expenses.In terms of the relative safeguarding requirements, EMIs are required to safeguard funds which have been received in exchange for duly issued electronic money which must (i) be deposited in a segregated bank account in a credit institution; (ii) invested in secure, liquid low-risk assets; or (iii) be covered by an insurance policy or comparable guarantee from an insurance company or credit institution, payable in the event that the financial institution is unable to meet its financial obligations.To the benefit of practitioners and prospective licensee/s alike, the Authority has (by virtue of the Financial Institutions Rules issued by the Authority as duly authorised under the Act) taken the opportunity to define the parameters of “secure, low-risk assets” which include, inter alia, certain debt securities for which the specific risk capital charge is no higher than 1.6% and units in an undertaking for collective investment in transferrable securities (UCITS) which invests solely in the said secure, low-risk assets.In terms of the preamble to the Directive, electronic money needs to be redeemable to preserve the confidence of the electronic money holder. Accordingly, the Act provides that an EMI must ensure that, at any moment, upon request by the electronic money holder, it is in a position to redeem the monetary value of the electronic money held, at par value and without delay. When redemption is requested before the termination of the contract, the electronic money holder may request redemption of the e-money in whole or in part.Derogation from the general rule that redemption should be granted free of charge is allowable only when certain conditions subsist and any fee imposed by the EMI must be proportionate and cost-based.Once the relative Malta licence is obtained, the EMI, to the exclusion of a small electronic money issuer (as defined hereunder), would benefit from the right to passport such licence into the EU Member State countries by following some basic procedures of notification. This would enable the EMI to provide its services (i.e. to issue electronic money) within the relevant Member State/s and/or EEA State/s either through the establishment of a branch or remotely, under the freedom to provide services.ShortcomingsAs expected, the Act (as amended) empowers the Authority to grant authorisation to an applicant for registration/ recognition as a ‘small electronic money issuer’ thereby waiving the application of all or part of the provisions relating to general prudential requirements, initial capital, own funds and safeguarding requirements, as set out in the Act and in any Financial Institutions Rules applicable to financial institutions authorised to issue electronic money subject to, inter alia, the caveat that the applicant’s total business activities must not generate average outstanding electronic money in excess of €2,000,000.In this respect, it is widely felt that in view of the fact that the Directive allows member states to establish the said threshold of generated average outstanding electronic money at a maximum of €5,000,000 this provision would effectively be significantly less restrictive if it catered for an increased upper limit. Whilst the Directive does provide that each member state may apply this rule at its discretion within the said limit, it has been suggested that the requirements of the Act may be too onerous for a start-up business which generates average outstanding electronic money in excess of €2,000,000 but less than €5,000,000. This threshold was originally proposed as €1,000,000 and was subsequently increased to the current €2,000,000 following submissions to this effect in the course of the relative consultation procedure.As a general observation, any such applicant for registration as a ‘small electronic money issuer’ must submit the applicable statutory application forms together with the same detailed supporting information and documentation as is required in connection with a full Financial Institutions licence application. Coupled with our understanding that the Authority will apply the full “fit and proper” test (as is applied in respect of an applicant for a full licence) prior to issuing any authorisation to an applicant for registration/ recognition as a small electronic money issuer, the raison d’etre of the ‘waiver’ facility would appear to be called into question, at least insofar as the licence application requirements are concerned. It is our view that the very nature of a small electronic money issuer calls for a simplified application procedure. Accordingly, the Authority’s position on this matter could be interpreted as a general reluctance to issue such waivers.Pursuant to point (6) of the preamble to the Directive, an exemption is allowed in respect of monetary value that is used to make payment transactions executed by means of any telecommunication, digital or IT device, where the goods or services purchased are delivered to and are to be used through a telecommunication, digital or IT device, provided that the telecommunication, digital or IT device or IT operator does not act only as an intermediary between the holder of electronic money and/or the payment service user and the supplier of the goods and services. This exemption would appear not to apply to situations where a customer uses his pre-paid mobile phone subscription to make payment to a third party, which payment is then deducted from the credit on the mobile telephony card. It is understood that this exemption would refer, for example, to the purchase of a ring tone or a mobile phone application, but does not envisage the purchase of mobile credit being used as credit in, say, a shop. Whilst this method of payment is not yet implemented in Malta, it is certainly gaining ground outside Malta. If such methods of payment are not exempted from the requirement of being licensed as EMIs, mobile telephony operators are not likely to offer this method of electronic payment any time in the future, thereby limiting consumer choice, option and flexibility.The application of the licensing requirement to the use of pre-paid mobile telephony cards creates a problem due to the necessary redeemability of electronic money. In the telecommunications industry, unused credit on pre-paid telephony cards is generally not refundable to subscribers. Enforcing this rule upon mobile network operators would mean an overhaul in the operation of the mobile network operators, as well as a strain on their liquidity reserves. An additional issue in applying the Directive to mobile network operators is the resulting divergence between the rules applicable to pre-paid subscribers and those applicable to post-paid subscribers. Therefore subscribers to essentially the same services would effectively fall to be regulated in different ways: with regulations relating to electronic money being applicable to transactions performed by prepaid subscribers, and telecommunications laws and the contract of service regulating the same transaction performed by post-paid subscribers.A specific exemption at EU level would have been a welcome gesture of support to global technological advances in mobile commerce (also known as ‘m-Commerce’).ConclusionWhilst it appears that the Maltese legislator’s stance has remained somewhat more conservative than that taken by the Directive and indeed other EU Member States, as is true with the rules pertaining to small electronic money issuers outlined above, it is clear that the amendments to the Act have significantly contributed to the creation of a modern and coherent legal framework designed to (i) enable the creation of new, innovative and secure electronic money services; (ii) provide market access to new companies; and (iii) foster real and effective competition between market participants.Clearly, the amendments discussed above together with a sound regulatory regime, low corporate tax and the recently introduced 15% flat rate of income tax in respect of employment income derived by Highly Qualified Persons not domiciled in Malta and working with licensed or recognised financial companies for income up to €5 million, and an outright tax exemption for any income in excess of €5 million per annum continue to bolster Malta’s position as a European financial services hub with a potentially leading role to play in the EMI sector.In addition to issuing electronic money, electronic money institutions are entitled, subject to the Authority’s prior written authorisation, to engage in any of the following activities:(a) the provision of certain payment services;(b) the granting of certain credit related to payment services;(c) the provision of operational services and closely related ancillary services in respect of the issuing of electronic money or to the provision of payment services referred to in point (a) above;(d) the operation of payment systems;(e) business activities other than the issuance of electronic money, having regard to the applicable law regulating such activities.In addition to issuing electronic money, electronic money institutions are entitled, subject to the Authority’s prior written authorisation, to engage in any of the following activities:(a) the provision of certain payment services;(b) the granting of certain credit related to payment services;(c) the provision of operational services and closely related ancillary services in respect of the issuing of electronic money or to the provision of payment services referred to in point (a) above;(d) the operation of payment systems;