CONSULTATION PAPER NO THE SINGLE EURO PAYMENTS AREA MEETING THE ADMITTANCE CRITERIA

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1 CONSULTATION PAPER NO THE SINGLE EURO PAYMENTS AREA MEETING THE ADMITTANCE CRITERIA Options for meeting the SEPA admittance criteria concerned with the regulation and supervision of payment services ISSUED MAY 2010

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3 CONSULTATION PAPER The Jersey Financial Services Commission (the Commission ) invites comments on this consultation paper. Heather Bestwick at Jersey Finance Limited ( Jersey Finance ) is co-ordinating an industry response that will incorporate any matters raised by local businesses. Comments should reach Jersey Finance by 20 August Responses should be sent to: Heather Bestwick Technical Director Jersey Finance Limited 4 th Floor, Sir Walter Raleigh House, Esplanade, St Helier, Jersey JE2 3QB Telephone: +44 (0) Facsimile: +44 (0) heather.bestwick@jerseyfinance.je Alternatively, responses may be sent directly to Andrew Le Brun at the Commission by 20 August If you require any assistance, clarification or wish to discuss any aspect of the proposal prior to formulating a response, it is of course appropriate to contact the Commission. The Commission contact is: Andrew Le Brun Director, International & Policy Jersey Financial Services Commission PO Box Castle Street St Helier Jersey JE4 8TP Telephone: +44 (0) Facsimile: +44 (0) a.lebrun@jerseyfsc.org It is the policy of the Commission to make the content of all responses available for public inspection unless specifically requested otherwise. Copies of all responses will be made available to the Chief Minister s Department. SEPA MEETING THE ADMITTANCE CRITERIA 3 of 66

4 Glossary of terms CMD EEA e-money EPC EU framework contract means the Chief Minister s Department means the European Economic Area (which consists of the 27 EU Member States plus Iceland, Liechtenstein and Norway) means electronic money means the European Payments Council means the European Union means a payment service contract which governs the future execution of individual and successive payment transactions and which may contain the obligation and conditions for setting up a payment account FSJL means the Financial Services (Jersey) Law 1998 FSMA JBA Jersey Finance Member State(s) MSB payee payer payment account payment institution payment instrument payment order payment service provider (or provider ) payment services payment service user (or user ) means the United Kingdom s Financial Services and Markets Act 2000 means the Jersey Bankers Association means Jersey Finance Limited means a Member State or Member States of the EU means money service business means a natural or legal person who is the intended recipient of funds which have been the subject of a payment transaction means a natural or legal person who holds a payment account and allows a payment order from that payment account, or, where there is no payment account, a natural or legal person who gives a payment order means an account held in the name of one or more payment service users which is used for the execution of payment transactions means a payment service provider authorised pursuant to Title II of the PSD (and excludes banks and e-money issuers) means any personalised device(s) and/or set of procedures agreed between the payment service user and the payment service provider and used by the payment service user to initiate a payment order means any instruction by a payer or payee to his payment service provider requesting the execution of a payment transaction means a business that provides payment services means activities that fall within the scope of the PSD (see Appendix E of this consultation paper) means a natural or legal person making use of a payment service in the capacity of a payer or payee, or both 4 of 66 ISSUED MAY 2010

5 payment transaction PSD SEPA SEPA Legal Working Group the Commission means an act, initiated by the payer or payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and payee means European Union Directive 2007/64/EC on payment services means the Single Euro Payments Area means the group described in section 2.1 means the Jersey Financial Services Commission the Commission Law means the Financial Services Commission (Jersey) Law 1998 the EC Law means the European Communities Legislation (Implementation) (Jersey) Law 1996 the Jersey Regulations means the Regulations proposed in section 6.6 the States the UK Payments Area the UK Regulations third country UK means the States of Jersey means an area consisting of the United Kingdom, Jersey, the Bailiwick of Guernsey and the Isle of Man means The Payment Services Regulations 2009 of the United Kingdom means a country outside the EEA, e.g. Jersey means the United Kingdom SEPA MEETING THE ADMITTANCE CRITERIA 5 of 66

6 Contents Glossary of terms EXECUTIVE SUMMARY Application for membership of the SEPA Overview of the SEPA What is proposed and why? What is happening in Guernsey and the Isle of Man? Who would be affected? CONSULTATION Basis for consultation Responding to the consultation Next steps THE COMMISSION Overview Commission s functions Guiding principles THE PAYMENT SERVICES DIRECTIVE Introduction Definitions Title II Payment institutions Title III Transparency of conditions and information requirements Title IV Rights and obligations MEETING PSD EQUIVALENCE IN JERSEY: SCOPING ISSUES Introduction Title II - prudential regulation Titles III and IV conduct of business Currency scope Geographical scope Payment services scope E-money issuers MEETING PSD EQUIVALENCE IN JERSEY: IMPLEMENTATION OPTIONS Introduction Title II prudential regulation Other options for implementing Title II Titles III and IV conduct of business Option 1 use existing framework Option 2 follow the UK model Option 3: rely on Rulebook provisions Other options COST BENEFIT ANALYSIS Implementing Title II Implementing Titles III and IV of 66 ISSUED MAY 2010

7 8 SUMMARY OF QUESTIONS...46 APPENDIX A...49 List of representative bodies and other organisations who have been sent this consultation paper...49 APPENDIX B...50 The SEPA admittance criteria set by the EPC...50 APPENDIX C...52 Chief Minister s letter...52 APPENDIX D...62 The SEPA payment instruments...62 APPENDIX E...65 Summary of payment services within the scope of the PSD...65 SEPA MEETING THE ADMITTANCE CRITERIA 7 of 66

8 1 EXECUTIVE SUMMARY 1.1 Application for membership of the SEPA The Chief Minister s Department (the CMD ) is giving active consideration to the legislative, regulatory and other measures that it believes would be required in order to support a successful application to the European Payments Council (the EPC ) for Jersey s membership of the Single Euro Payments Area (the SEPA ) Membership of the SEPA will be conditional upon an assessment by the EPC - the decision-making and coordination body for the SEPA - that the Island has met the criteria set for the admittance of third countries into the SEPA. These criteria are shown in Appendix B, and are likely to be updated during the first half of It is understood that the primary rationale underlying the criteria is the EPC s desire to ensure that the admittance of a payment service provider (e.g. a bank) from a third-country into the SEPA is competition neutral, i.e. the third-country payment service provider does not obtain any competitive advantage over those in European Economic Area ( EEA ) Member States The CMD s view is that Jersey is likely to be placed at a competitive disadvantage if it does not obtain admittance to the SEPA. The basis for this view is set out in a letter from the Chief Minister to the Commission, which is shown in Appendix C. An annex to that letter also summarises the basis upon which the CMD believes that an application for membership could be successful - based on the criteria for admittance that have already been set This purpose of this consultation paper is set out at paragraph below. For the avoidance of doubt, this consultation paper does not consider the merits of the Island seeking jurisdictional membership of the SEPA. Nor does it consider the process that is followed when a payment service provider in a SEPA jurisdiction applies to the EPC to participate in the SEPA Credit Transfer Scheme or the SEPA Direct Debit Scheme (see 1.2.4). If a formal application by the Island - for jurisdictional membership of the SEPA - were to be successful, payment service providers that wished to utilise those SEPA schemes would need to make individual application to the EPC to do so. They would, amongst other things, have to agree to be contractually bound by the SEPA Rulebooks governing those schemes. 1.2 Overview of the SEPA The SEPA is the term used to describe a block of countries, the payment service providers in which may use two payment instruments that have been developed by the EPC The EPC is the decision-making and coordination body for the development of SEPA payment instruments. Its Plenary consists of 74 members representing banks and banking associations operating in the SEPA countries or jurisdictions Currently, the geographical scope of the SEPA encompasses 32 countries: 8 of 66 ISSUED MAY 2010

9 the 27 Member States of the European Union (the EU ); Iceland, Liechtenstein and Norway (the three EEA countries that are not EU Member States); Switzerland; and Monaco Where a payment service provider resides in a jurisdiction that is in the SEPA, it may apply to the EPC to participate in the two standardised SEPA payment instruments that have been developed covering credit transfers in euro (the SEPA Credit Transfer Scheme) and direct debits in euro (the SEPA Direct Debit Scheme). Further details on these instruments can be found in Appendix D of this consultation paper Development of these payment instruments is part of an EU-wide initiative that is designed to enable individuals and businesses to make and receive payments in euro - within national boundaries and cross-border (within the SEPA) - under the same basic conditions, rights and obligations The key aim of this initiative is to improve the efficiency of cross-border payments and turn the fragmented national markets for euro payments into a single domestic one that reduces the cost of moving euro funds across Europe. The initiative includes the development of common standards, procedures and infrastructure to enable economies of scale Migration to SEPA payment instruments has, however, been slow. For example, according to the latest figures from the European Central Bank, euro credit transfers using the SEPA Credit Transfer Scheme represent less than 5% of the total of credit transfers in euro in the euro area. This is despite the fact that SEPA Credit Transfers have been available since January At this rate, it would appear that it will be some time before SEPA reaches a critical mass whereby SEPA payment instruments are routinely favoured over other existing payment instruments (such as SWIFT transfers). However, political pressure is increasing for SEPA migration to be accelerated. Further information on this can be found in Appendix D Membership of the SEPA is not to be confused with membership of the euro area, which is an economic and monetary union of 16 EU Member States that have adopted the euro currency as their sole legal tender. 1.3 What is proposed and why? The purpose of this consultation paper is to consult on how the Island should meet one particular aspect of the admittance criteria set for the admittance of third countries into the SEPA (see Appendix B - criteria (b)(i), (ii), and (iii)) This consultation paper sets out proposals to regulate and supervise the provision of payment services in or from within Jersey by payment service providers. Payment services include services such as credit transfers, direct debits, credit card payments and ATM cash withdrawals. In the EU, the primary piece of SEPA MEETING THE ADMITTANCE CRITERIA 9 of 66

10 legislation governing the regulation and supervision of payment service providers is the Payment Services Directive (the PSD ) Whilst the meeting of the particular criteria referred to in is not expected to require the implementation in Jersey of provisions that are substantially equivalent to Title II of the PSD, there may be a case for doing so anyway. This is explored further in section 5.2. However, meeting the criteria would involve the implementation in Jersey of provisions that are substantially equivalent to Titles III and IV of the PSD, through legislation or equally binding practice. Whilst there is an overlap between the scope of the PSD and the SEPA, the PSD s scope is much wider than that of the SEPA. The PSD affects all payment service providers whereas the SEPA only impacts on those payment service providers that use a payment instrument that complies with the SEPA Credit Transfer or SEPA Direct Debit Schemes. In addition, the SEPA only covers payments in euro: the PSD covers payments in euro or the currency of any EEA country that has not adopted the euro as its domestic currency (e.g. sterling) Title II of the PSD requires the establishment of a licensing regime for payment service providers that are not banks or electronic-money ( e-money ) issuers. Titles III and IV establish conduct of business requirements for the provision of information to customers and dealing with the rights and obligations of all payment service providers and customers. Further information on these Titles is given in Chapter Chapter 5 considers certain aspects of what the scope of the implementation of Titles II, III and IV of the PSD should be. Fundamentally, these scoping issues arise as a result of considering whether Jersey should seek to do just the minimum necessary to achieve jurisdictional admittance into the SEPA or go beyond that minimum, for example, for reasons of efficiency, fairness or consumer protection The scoping issues considered in Chapter 5 are summarised in the table on the next page: of 66 ISSUED MAY 2010

11 SCOPING OPTIONS MINIMUM SCOPE MAXIMUM SCOPE Title II Prudential regulation (a regime for payment institutions i.e. payment service providers which are not banks or e-money issuers) Payment services scope Do not cover any payment services (i.e. no implementation of Title II) Cover payment services provided using a SEPA payment instrument Cover payment services provided using any payment instrument (i.e. SEPA or non-sepa) Cover all payment services (see Appendix E) Titles III and IV Conduct of business regulation Currency scope Apply Titles III and IV to payment transactions in euro Apply Titles III and IV to payment transactions made in the currency of any EEA country Apply Titles III and IV to payment transactions made in the currency of any SEPA country Geographical scope Apply Titles III and IV where the payment service providers of both payee and payer are in Jersey Apply Titles III and IV where the payment service providers of both payee and payer are in the UK Payments Area 2 or the EEA Apply Titles III and IV where the payment service providers of both payee and payer are in a SEPA country Payment services scope Apply Titles III and IV to payment services provided using a SEPA payment instrument Apply Titles III and IV to payment services provided using any payment instrument (i.e. SEPA or non-sepa) Apply Titles III and IV to all payment services (see Appendix E) 2 Means an area consisting of the United Kingdom, Jersey, the Bailiwick of Guernsey and the Isle of Man. SEPA MEETING THE ADMITTANCE CRITERIA 11 of 66

12 1.3.7 Chapter 6 considers how Titles II, III and IV of the PSD could be implemented If Jersey were to implement Title II, two options are identified in Chapter 6. The first option is to implement through the addition of a new class of business to the Financial Services (Jersey) Law 1998 (the FSJL ). This is explained in The second option is to introduce standalone legislation. This is explained in Three options are put forward for implementing Titles III and IV of the PSD. These are set out in sections 6.4 to Option 1: The intention behind Option 1 is to use, to the greatest extent possible, the regulatory framework that is already in place in Jersey, and to minimise the need for new legislation to be adopted Option 2: The intention behind Option 2 is to introduce standalone legislation and follow, as far as is possible, the approach taken in United Kingdom ( UK ) legislation to implement the PSD Option 3: The intention behind Option 3 is to demonstrate substantial equivalence to the PSD - without need for legislation, instead relying on contractual arrangements between payment service providers and the EPC (i.e. equally binding practice ) One significant aspect of Title IV of the PSD is not considered in this consultation paper. This is Article 83 which requires EEA countries to ensure that there are adequate and effective out-of-court complaint and redress procedures for the settlement of disputes between payment service users and their payment service providers Note that none of the proposals in this consultation paper would alter Jersey s anti-money laundering/countering the financing of terrorism provisions that apply in Jersey to persons that provide payment services by way of business. 1.4 What is happening in Guernsey and the Isle of Man? It is understood that the authorities in the Isle of Man have recently taken a firm decision to seek jurisdictional admittance into the SEPA. The authorities in Guernsey are presently considering the issue, although the Commission s expectation is that a similar decision is likely given the pan-island nature of many payment service providers (in particular, banks ) operations. 1.5 Who would be affected? All providers of payment services in or from within Jersey might be affected by the proposals. These will include: banks; money service businesses ( MSBs ) that provide payment services (e.g. money transmission services). 12 of 66 ISSUED MAY 2010

13 1.5.2 E-money issuers might also be affected by these proposals but are not directly considered in this consultation paper because the Commission recently consulted on options for the future regulation of e-money issuers in Jersey. The Commission s Consultation Paper No. 12 of 2009 refers (available from the Commission s website). The attention of e-money issuers is particularly drawn to section 5.7 herein For the avoidance of doubt, independent ATM providers (acting on behalf of one or more card issuers) which offer cash dispensing facilities to users would fall outside of the scope of these proposals (unless they provide one of the payment services referred to in Appendix E) Users of payment services also stand to benefit from the introduction of conduct of business rules. For example, these rules set out the liabilities of payment service providers and users in the case of unauthorised transactions, and set out the period of time in which a payment order must be executed (currently three days). SEPA MEETING THE ADMITTANCE CRITERIA 13 of 66

14 2 CONSULTATION 2.1 Basis for consultation The Commission has issued this consultation paper at the request of the CMD and in accordance with Article 8(3) of the Financial Services Commission (Jersey) Law 1998 (the Commission Law ), as amended, under which the Commission may, in connection with the carrying out of its functions -.consult and seek the advice of such persons or bodies whether inside or outside Jersey as it considers appropriate. Respondents views to this consultation paper will inform the advice that the Commission will provide to the CMD (pursuant to the Commission s statutory function to advise government see ) In preparing this consultation paper, the Commission has been assisted by the recently established SEPA Legal Working Group. The role of this group is to consider the merits of, and support as appropriate, the adoption of legislation, amendments to regulatory requirements, or provisions for contractual requirements that may be necessary for Jersey to meet the legal aspects of the criteria for the admittance of third countries into the SEPA The SEPA Legal Working Group consists of representatives from the CMD, the Commission, the Jersey Bankers Association ( JBA ), the Law Society of Jersey and Jersey Finance. The group is chaired by a representative from the CMD. The JBA provides the secretariat. 2.2 Responding to the consultation The Commission invites comments in writing from interested parties on the implementation options set out in this consultation paper. Where comments are made by an industry body or association, that body or association should also provide a summary of the type of individuals and/or institutions that it represents To assist in analysing responses to the consultation paper, respondents are asked to: 2.3 Next steps prioritise comments and to indicate their relative importance; and respond as specifically as possible and, where they refer to costs, to quantify those costs The next steps to be taken will largely depend upon which option for implementation of Titles III and IV is selected Options 1 and 2 would (to varying extents) involve the Commission instructing the Law Draftsman to prepare draft legislation and the Commission preparing relevant Codes of Practice. Once prepared, the draft legislation and Codes of Practice would be subject to public consultation. 14 of 66 ISSUED MAY 2010

15 2.3.3 Option 3 would not require any proactive action to be taken by the Island s authorities The outcome of this consultation will be discussed with the relevant authorities in Guernsey and the Isle of Man with a view to avoiding disparate approaches to PSD implementation It is likely that this consultation paper will be followed by others considering how the Island should meet other aspects of the SEPA admittance criteria To ensure that a consistent regulatory approach for the regulation of e-money issuers that are payment service providers (as defined in the PSD) is adopted, the responses to this consultation paper will be considered in conjunction with the responses to the Commission s Consultation Paper No on the future regulation of e-money issuers in Jersey. A copy of that consultation paper is available from the Commission s website. The attention of e-money issuers is particularly drawn to section 5.7 herein. SEPA MEETING THE ADMITTANCE CRITERIA 15 of 66

16 3 THE COMMISSION 3.1 Overview The Commission is a statutory body corporate established under the Commission Law. It is responsible for the supervision and development of financial services provided in or from within Jersey. 3.2 Commission s functions The Commission Law prescribes that the Commission shall be responsible for: the supervision and development of financial services provided in or from within Jersey; providing the States, any Minister or any other public body with reports, advice, assistance and information in relation to any matter connected with financial services; preparing and submitting to the Minister for Economic Development recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure; such functions in relation to financial services or such incidental or ancillary matters as are required or authorised by or under any enactment, or as the States may, by Regulations, transfer; and such other functions as are conferred on the Commission by any other Law or enactment. 3.3 Guiding principles The Commission s guiding principles require it to have particular regard to: the reduction of risk to the public of financial loss due to dishonesty, incompetence, malpractice, or the financial unsoundness of persons carrying on the business of financial services in or from within Jersey; the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters; the best economic interests of Jersey; and the need to counter financial crime in both Jersey and elsewhere. 16 of 66 ISSUED MAY 2010

17 4 THE PAYMENT SERVICES DIRECTIVE 4.1 Introduction The EU adopted the PSD in December It had to be implemented into the national legislation of the 30 EEA countries by 1 November The PSD provides statutory support for the SEPA Appendix E summarises, in tabular form, what activities - when carried out as a regular occupation or business activity - would be classed as payment services within the scope of the PSD The PSD is divided into sections, known as Titles. A summary of what each of those Titles cover is set out in sections 4.3, 4.4 and 4.5, respectively. The full text of the PSD may be found in the Official Journal of the EU Definitions Sections 4.3, 4.4 and 4.5 will use the following expressions that are defined in the PSD: framework contract means a payment service contract which governs the future execution of individual and successive payment transactions and which may contain the obligation and conditions for setting up a payment account; payee means a natural or legal person who is the intended recipient of funds which have been the subject of a payment transaction; payer means a natural or legal person who holds a payment account and allows a payment order from that payment account, or, where there is no payment account, a natural or legal person who gives a payment order; payment account means an account held in the name of one or more payment service users which is used for the execution of payment transactions; payment institution means a payment service provider authorised pursuant to Title II of the PSD; payment instrument means any personalised device(s) and/or set of procedures agreed between the payment service user and the payment service provider and used by the payment service user to initiate a payment order; payment order means any instruction by a payer or payee to his 3 See SEPA MEETING THE ADMITTANCE CRITERIA 17 of 66

18 payment service provider requesting the execution of a payment transaction; payment service provider (or provider ) means a business that provides payment services; payment services means activities that fall within the scope of the PSD (see Appendix E); payment service user (or user ) means a natural or legal person making use of a payment service in the capacity of a payer or payee, or both (see below); and payment transaction means an act, initiated by the payer or payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and payee. 4.3 Title II Payment institutions The purpose of Title II is to introduce a prudential authorisation regime for payment service providers that are not banks or e-money issuers (both of which are already prudentially supervised pursuant to existing EU directives). The PSD calls such providers authorised under Title II, payment institutions. Rules for payment institutions For firms that would need a licence to operate as a payment institution, Title II establishes rules on a number of matters. These include setting requirements on the following key matters. Application Article 5 contains a comprehensive checklist of information that firms must provide in their application for authorisation. This includes evidence that the firm meets the initial capital requirements and that management is of good repute and possesses appropriate knowledge and experience and that there will be satisfactory measures in place to protect payment service users funds. Capital and own funds Articles 6 to 8 set capital requirements for payment institutions. The amount of initial capital that is required varies according to the type of activity that the firm intends to carry on. These Articles also set ongoing own funds requirements. Safeguarding Article 9 stipulates the methods by which payment institutions must safeguard user funds from other business activities undertaken by the payment institution, such that they are insulated in the event of the insolvency of the payment institution. 18 of 66 ISSUED MAY 2010

19 Accounting and audit Article 15 stipulates the accounting practices expected of payment institutions, and the separation of information on the payments business from other business activities the firm may undertake. A payment institution must also submit its annual accounts to its regulator. Activities Article 16 provides a list of activities that a payment institution is allowed to undertake in addition to payment services. Use of agents and outsourcing Article 17 requires payment institutions to communicate information to their regulator regarding their use of agents, or any intention to outsource any operational functions of their payments business. The regulator is obliged to maintain a register of agents. Liability Article 18 states that payment institutions are fully liable for acts of their employees, agents, branches or entities to which activities are outsourced. Record keeping Article 19 requires payment institutions to keep all appropriate records for at least five years. Small firms waiver Article 26 of the PSD provides Member States with the option of waiving the application of all or part of the Title II prudential requirements for firms that: are legal or natural persons; and execute less than 3 million worth of payment transactions per month; and do not wish to passport their services into other Member States; and can prove that none of the persons responsible for managing the business has been convicted of offences relating to money laundering or terrorist financing, or other financial crimes. The regulator s procedures and responsibilities Title II also establishes the expected supervisory procedures and responsibilities for the regulators of payment institutions. These include: Authorisation Article 10 details the terms under which a regulator should grant or SEPA MEETING THE ADMITTANCE CRITERIA 19 of 66

20 refuse authorisation. Communication of decision on application Article 11 sets down the timeframe and manner in which the regulator must inform an applicant of its decision to grant or refuse a licence to act as a payment institution. Withdrawal of authorisation Article 12 sets out the reasons why a regulator may withdraw a payment institution s authorisation. It also stipulates how such a decision must be communicated. Registration Article 13 stipulates that Member States must establish a public register of authorised payment institutions, their agents and branches, and those small firms that have been waived from the full authorisation requirements (see 4.3.3). Ongoing supervision Article 21 specifies the steps that a regulator may, and in certain cases should, take to ensure payment institutions compliance with Title II. Exchange of information Article 24 sets out the obligation of regulators in different Member States to co-operate with each other. 4.4 Title III Transparency of conditions and information requirements Title III (along with Title IV) sets conduct of business requirements on all businesses that provide payment services. These are referred to in the PSD as payment service providers. The definition of payment service providers includes payment institutions authorised under Title II of the PSD and others that provide payment services, such as banks and e-money issuers but which are licensed under different legislation The transparency and information rules in Title III distinguish between single payment transactions and ongoing framework contracts i.e. a contract that provides for ongoing payment transactions. 20 of 66 ISSUED MAY 2010

21 Rules applying to both single transactions and framework contracts The rules that apply to both single transactions and framework contracts are set out below: Charging Article 32 stipulates that providers may not charge users for the information that Title III requires providers to supply them with. However, providers and users may agree on charges for the supply of extra or more frequent information than that statutorily required under the PSD. Where such charges are imposed, they must be appropriate and in line with actual cost. Burden of proof Article 33 includes an option for Member States to place the burden of proof on the provider regarding compliance with the requirements set by Title III for the provision of information to users. Low value payment instruments Article 34 offers an option to providers offering low value payment instruments 4 to provide users with information on only the main characteristics of the payment service. Currency conversion Article 49 stipulates that, where a currency conversion service is offered prior to initiation of a transaction, the party offering the service shall disclose all charges, in addition to the exchange rate to be used. Additional charges Article 50 provides that where, for the use of a given instrument, the payee, a payment service provider or third party requests a charge or offers a reduction, they shall inform the user prior to initiation of the transaction. Rules applying specifically to single transactions The rules on information that are specifically applicable to single transactions are as follows: Prior information and conditions Articles 36 and 37 establish that, before the user is bound by a contract, the provider must make available in an easily accessible manner: the unique identifier (e.g. a PIN number); the maximum execution time for the transaction; all charges payable, and a breakdown where applicable; 4 The PSD defines a low-value payment instrument as one which, according to the framework contract, only allows individual payment transactions of 30 or less, or that have either a spending limit of 150 or store funds that do not exceed 150 at any time. SEPA MEETING THE ADMITTANCE CRITERIA 21 of 66

22 and the reference exchange rate, where applicable. Information after the payment order/execution Articles 38 and 39 prescribe that immediately after receipt of the payment order or execution of the transaction, the provider must make available: a reference for the payer/payee to identify the transaction; the amount of the transaction in the currency in which the funds are available; the amount of any charges and a breakdown; the exchange rate and amount of the transaction before the currency conversion; and the date of receipt of the order or (in the case of direct debits) the credit value date. Rules applying specifically to framework contracts The rules on information that are specifically applicable to framework contracts are as follows: Prior information and conditions Articles 41, 42 and 43 provide that, before the user is bound by a contract, the provider must make available: the name and address of the provider, any addresses relevant for communication, details of the provider s regulator and its registration number; a description of the main characteristics of the service, the unique identifier (e.g. a PIN number), the procedure for giving consent to execution, the point in time at which the order will have been deemed received, the maximum execution time and any cut-off time (e.g. the end of the business day) established by the provider; any possibility of agreeing spending limits for the use of the instrument; interest and exchange rates to be applied, and methods for their calculation, including bases and indices; the means of communication for transmission of information, the manner and frequency of information, language of the contract, and the user s right to receive certain information on request; information on steps necessary to keep the payment instrument safe, how to notify the provider on becoming aware of loss, theft or misappropriation, and conditions for blocking the instrument; the liability of the payer, how the user must notify the provider of an incorrect transaction, the provider s liability for execution, and the conditions for refund; and information on the form for making changes to the contract, the duration of the contract, the rights of the user to terminate, and information on the complaints and redress procedures. 22 of 66 ISSUED MAY 2010

23 Change in conditions of the contract Article 44 states that any changes to the conditions of the contract shall be proposed no later than two months before their date of application, with the user having the right to terminate beforehand and without charge. Changes in interest or exchange rates must also be implemented in a neutral manner that does not discriminate against users. Termination Article 45 allows the user to terminate the contract at any time, unless a notice period of one month or less has been agreed. After 12 months, termination is free for the user. In other cases, charges must be appropriate and in line with actual costs. Information before execution Article 46 stipulates that before execution of an individual transaction under a framework contract, the provider shall, at the payer s request, provide information on the maximum execution time and charges for the particular transaction. Information on individual transactions Articles 47 and 48 require the provider, after a payment transaction has been made under a framework contract, to provide the same information that is required for single transactions (see ). However, a framework contract may include a condition that the information is provided or made available periodically (but at least once a month). 4.5 Title IV Rights and obligations The principal provisions of Title IV relate to rights and obligations of all payment service providers and users (and, in some cases, third parties) in relation to payment transactions. The provisions apply as the default conditions for any contract. However, where the user is not a natural person or a small business, the PSD provides that the parties may agree that certain provisions may not apply. This is to reduce the risk of moral hazard that could arise if the rights and obligations appropriate to natural persons or small businesses were also applied to large corporates, which, typically, are able to invest more in payments security The Title also establishes certain requirements in relation to settling disputes outof-court. Rights and obligations in relation to payment transactions The key rights and obligations are as follows: Consent Article 54 provides that a transaction is considered authorised only if the payer has given consent to execute it, in the form agreed between the payer and provider. SEPA MEETING THE ADMITTANCE CRITERIA 23 of 66

24 Limits on the use of an instrument Article 55 requires that if a payment instrument is blocked (i.e. its use suspended), the provider shall, where possible, inform the payer of the reasons beforehand. Obligations of providers and users Article 56 places an obligation on users to keep the security features of a payment instrument safe, and notify their provider on becoming aware of theft, loss or misappropriation Article 57 obliges payment service providers to: ensure that the security features of a payment instrument are not accessible to parties other than the user; refrain from sending unsolicited instruments unnecessarily; ensure that the user can notify the provider at all times of loss or theft and request unblocking; and, prevent all use of the instrument, once a notification has been made. Unauthorised/incorrect transactions Article 58 provides that a user may obtain reimbursement from a provider for an unauthorised or incorrectly executed payment transaction only if the user has notified the provider of the disputed transaction no later than 13 months after the debit date. This restriction does not apply where the provider has failed in its Title III obligations Article 59 stipulates that where a user denies having authorised a transaction or claims that the payment transaction was not correctly authorised it is for the provider to prove the transaction was authenticated. Liabilities of providers and user Articles 60 and 61 stipulate that providers must immediately refund the amount of an unauthorised transaction and restore the debited account to its previous state. The payer is required to bear losses up to a maximum of 150, unless the payer has acted fraudulently or been grossly negligent, in which case liability is unlimited. Refunds Articles 62 and 63 set out the conditions that must be met for a refund on a payment transaction to be given. Execution of payment transactions Article 63 provides (with some limited exceptions) that the point in time of receipt of a payment order is the time when the payment order was received by the payer s provider Article 66 stipulates that a user cannot revoke an order once received by the provider. An exception is made for standing orders and direct debits, where the payer may revoke the order by the end of the business 24 of 66 ISSUED MAY 2010

25 day preceding the agreed debit day Article 69 deals with execution times and provides that payments must be executed by D+1 by 1 January 2012, up until when a time of D+3 may be agreed upon between providers and users. (A further business day is permitted for paper-initiated transactions.) Conditions on non-execution or defective execution are dealt with in Article 75. These stipulate the circumstances in which payment service providers are liable. Out-of-court redress Article 83 requires Member States to ensure that there are adequate and effective out-of-court complaint and redress procedures for the settlement of disputes between payment service users and their payment service providers. SEPA MEETING THE ADMITTANCE CRITERIA 25 of 66

26 5 MEETING PSD EQUIVALENCE IN JERSEY: SCOPING ISSUES 5.1 Introduction This chapter considers what the scope of the prudential requirements (set out in Title II of the PSD) and the conduct of business requirements (set out in Titles III and IV of the PSD) should be Fundamentally, these scoping issues arise as a result of considering whether Jersey should seek to do just the minimum necessary to achieve jurisdictional admittance into the SEPA or go beyond that minimum, for example, for reasons of efficiency, fairness, or consumer protection This chapter considers: To what extent (if any) Title II should be implemented Whether the conduct of business requirements of Titles III and IV should apply to payment transactions in currencies other than the euro Whether the conduct of business requirements of Titles III and IV should apply only to circumstances where both the payment service provider of the payer and the payment servicer provider of the payee are in Jersey, or more widely Whether the conduct of business requirements of Titles III and IV should be applied only to payment services provided using a SEPA payment instrument, or more widely. 5.2 Title II - prudential regulation As described in 4.3.1, the purpose of Title II is to provide a prudential licensing regime for payment service providers that are not banks or e-money issuers. The PSD calls such providers authorised under Title II, payment institutions A view could be taken that there is no need to introduce a prudential regulatory regime covering the provision of payment services by payment institutions. This is because the EPC is not expected to require a third country to implement Title II substantially equivalent measures in order to satisfy the admittance criteria (beyond MVT operators 5 which are regulated and supervised in Jersey as money service businesses) and only banks are likely to utilise SEPA payment instruments (at least initially) Even if Jersey were to implement Title II, it would be possible to take the view that Jersey should only introduce a prudential licensing regime for those payment institutions that provide a payment service using a SEPA payment instrument. 5 MVT means money/value transfer as referred to in Special Recommendation VI issued by the Financial Action Task Force (FATF). 26 of 66 ISSUED MAY 2010

27 5.2.4 However, to do that would result in two different prudential regulatory regimes for businesses that provide a payment service involving the transmission of money. This is because, under the FSJL, a business that provides a money transmission service (save in certain limited circumstances) must register with the Commission as a money service business. Having two different regimes one for those payment institutions using a SEPA payment instrument and another (the existing FSJL regime) for those that do not - would add additional complexity to Jersey s regulatory framework and, potentially, result in different prudential requirements applying to businesses that offer similar services In the light of this, if the view was taken that Title II should be implemented, there could be an argument that it should be done in such a way that it covers payment institutions that provide a payment service using a SEPA payment instrument or equivalent non-sepa payment instrument In addition, a view could also be advanced that the implementation of Title II should go beyond that, so that payment institutions in Jersey, regardless of which payment service they provide, are prudentially regulated to the same standard as in the EU thus providing greater protection for consumers and the reputation of the Island In summary then, consideration needs to be given to the extent (if any) that Title II substantially equivalent measures should be implemented in Jersey. The table below summarises the scoping options: Title II Prudential regulation (a regime for payment institutions i.e. payment service providers which are not banks or e-money issuers) SCOPING OPTIONS MINIMUM SCOPE MAXIMUM SCOPE Payment services scope Do not cover any payment services (i.e. no implementation of Title II) Cover payment services provided using a SEPA payment instrument Cover payment services provided using any payment instrument (i.e. SEPA or non- SEPA - in particular CHAPS, BACS and SWIFT) Cover all payment services (see Appendix E) SEPA MEETING THE ADMITTANCE CRITERIA 27 of 66

28 5.2.8 Do you consider that: there is no need, at this time, to implement measures in Jersey that are substantially equivalent to Title II; or Jersey should implement measures that are substantially equivalent to Title II that would cover only payment services provided using a SEPA payment instrument; or Jersey should implement measures that are substantially equivalent to Title II that would cover only payment services provided using any payment instrument (i.e. SEPA or non-sepa ); or Jersey should implement measures that are substantially equivalent to Title II that would cover any payment service provided by a payment institution. Please give reasons for your answer. 5.3 Titles III and IV conduct of business In relation to the conduct of business requirements of the PSD, sections 5.4, 5.5 and 5.6 below consider what the currency, geographical and payment instrument scope of the Island s implementation should be. 5.4 Currency scope In order to meet the SEPA admittance criteria, it is believed that implementation in Jersey of Titles III and IV of the PSD need cover only payment transactions in euro This is because, whilst the PSD covers all payment transactions between EEA payment service providers that are in euros or the currency of any EEA country that has not adopted the euro as its domestic currency, the criteria set by the EPC for admittance of third countries into the SEPA is concerned only with euro payments effected through a SEPA payment instrument There is a case for implementing Titles III and IV only for payment transactions in euro. Euro payment transactions using a SEPA payment instrument are (at least initially) likely to form only a very small percentage of total payment transactions carried out by Jersey payment service providers and, if the main objective is to obtain SEPA admittance, changing the Island s regulatory regime to apply Titles III and IV provisions to a wider range of currencies than is absolutely necessary to meet the EPC s admittance criteria, could be regarded as a disproportionate approach However, the UK legislation that implements the majority of the provisions in Titles III and IV the Payment Services Regulations 2009 (the UK Regulations ) applies the conduct of business provisions (in line with requirements in the PSD) to payment services that are carried out in euro or in the currency of an EEA country that has not adopted the euro as its domestic currency (e.g. sterling). 28 of 66 ISSUED MAY 2010

29 5.4.5 There could be a case for implementing Titles III and IV in way that follows the approach taken in the UK Regulations. This is because: Most payment transactions in Jersey will be executed in sterling, not euros, and it would be anomalous if information and transparency provisions and rights and obligations extended only to a minority of payment transactions Many of the banks and other payment service providers operating in Jersey will be branches or subsidiaries of UK payment service providers subject to the UK Regulations, or use payment systems and procedures that are designed to work with the UK Regulations There could also be a case for applying the Title III and IV substantially equivalent measures to payment transactions that are carried out in the currency of any SEPA country, to provide a high level of protection for consumers. However, this would mean that payment service providers in the Island were subject to conduct of business requirements that went beyond those applying to their cohorts in the EEA. In other words, implementation could be said to be super-equivalent In summary then, consideration needs to be given as to whether the conduct of business requirements of Titles III and IV should apply to payment transactions in currencies other than the euro. The table below summarises the main scoping options, although other hybrid options might be possible, e.g. covering payment transactions in euro and sterling only. (Note that transactions in currencies other than euro or the currency of any EEA country that has not adopted the euro as its domestic currency (e.g. United States dollars, Canadian dollars, Japanese Yen, etc.) would not be covered by any of the three scoping options set out below). Titles III and IV Conduct of business regulation SCOPING OPTIONS MINIMUM SCOPE MAXIMUM SCOPE Currency scope Apply Titles III and IV to payment transactions in euro Apply Titles III and IV to payment transactions made in the currency of any EEA country Apply Titles III and IV to payment transactions made in the currency of any SEPA country Do you consider that: Jersey s implementation of Titles III and IV should cover payment transactions in euro only; or Jersey s implementation of Titles III and IV should cover payment transactions in the currency of any EEA country; or SEPA MEETING THE ADMITTANCE CRITERIA 29 of 66

30 Jersey s implementation of Titles III and IV should cover payment transactions in the currency of any SEPA country. Please give reasons for your answer. 5.5 Geographical scope Article 2 of the PSD explains that Titles III and IV will apply only where both the payment service provider of the payee and payment service provider of the payer are located in the EEA Replication of such an approach in Jersey would limit the application of conduct of business requirements to circumstances when both payment service providers were located in Jersey. The Commission considers that this would be unnecessarily restrictive, and implementation in such a manner would be unlikely to be considered substantially equivalent As a result, it is believed that it will be necessary for Titles III and IV to be applied in cases where the payment service providers of both the payee and the payer are located within the UK Payment Area 6 (because this includes Guernsey and the Isle of Man, who are also expected to seek SEPA membership) or the EEA 7 (because this replicates the scope of the PSD) In practice, this would mean that Titles III and IV would not apply where a payment service provider was located in a country that is in the SEPA but is not in the EEA (i.e. Switzerland or Monaco). However, a payment service provider in Jersey (and one in Switzerland or Monaco) that executes a payment transaction using a SEPA payment instrument would be required, as a consequence of the SEPA Rulebook that it would be contractually bound by, to apply provisions to the transaction that match PSD requirements Titles III and IV could be applied where the payment service providers of both the payee and the payer are located in a country that is a SEPA member (which would include Switzerland and Monaco). However, this would place obligations on Jersey payment service providers that would not apply to payment service providers in EEA countries and could be considered to be super-equivalent In summary then, consideration needs to be given as to whether the conduct of business requirements of Titles III and IV should apply only to circumstances where both the payment service provider of the payer and the payment service provider of the payee are in Jersey, or more widely It is important to note however, that the application of Jersey legislation would be limited to setting requirements on the outward leg of a payment to a payment service provider outside Jersey and the inward leg of a payment to Jersey from a payment service provider outside Jersey. Payment service providers outside Jersey would not be required to apply the provisions of the PSD to their dealings 6 Means an area consisting of the United Kingdom, Jersey, the Bailiwick of Guernsey and the Isle of Man. 7 The only exception would be Article 73 of the PSD on value dating, which would apply whether or not the payment service providers of both the payee and the payer are located within the UK Payment Area or the EEA. 30 of 66 ISSUED MAY 2010

31 with payment service providers in Jersey, save where the payment is made through the SEPA The table below summarises the scoping options: Titles III and IV Conduct of business regulation SCOPING OPTIONS MINIMUM SCOPE MAXIMUM SCOPE Geographical scope Apply Titles III and IV where the payment service providers of both payee and payer are in Jersey Apply Titles III and IV, to the extent that is possible (see 5.5.7), where the payment service providers of both payee and payer are in the UK Payment Area or the EEA Apply Titles III and IV, to the extent that is possible (see 5.5.7), where the payment service providers of both payee and payer are in a SEPA country Do you consider that: Jersey s implementation of Titles III and IV should cover payment transactions only where the payment service providers of both payee and payer are in Jersey; or Jersey s implementation of Titles III and IV should cover payment transactions only where the payment service providers of both payee and payer are in the UK Payment Area or the EEA; or Jersey s implementation of Titles III and IV should cover payment transactions where the payment service providers of both payee and payer are in a SEPA country. Please give reasons for your answer. 5.6 Payment services scope To meet the EPC s admittance criteria for third countries, it is believed that Jersey s implementation of Titles III and IV of the PSD need cover only payment services provided using a SEPA payment instrument Payment services provided using a SEPA payment instrument are (at least initially) likely to form only a very small percentage of total payment services carried out by Jersey payment service providers. Given this, if the main objective is to obtain SEPA admittance, changing the Island s regulatory regime to apply Titles III and IV provisions to a wider range of payment services than is absolutely necessary to meet the EPC s admittance criteria, could be regarded as a disproportionate approach. SEPA MEETING THE ADMITTANCE CRITERIA 31 of 66

32 5.6.3 Notwithstanding this, a case could be made for extending the Title III and IV requirements so that they apply also to payment services provided using an equivalent non-sepa payment instrument (e.g. payments made using CHAPS, BACS and SWIFT) There are potentially a number of advantages to such an approach: It would avoid a confusing situation for payment service users whereby payment service providers were subject to PSD equivalent conduct of business requirements only for payment services provided using a SEPA payment instrument Given that most payment transactions will be executed using CHAPS, BACS and SWIFT, it would avoid an anomalous position arising whereby PSD information and transparency provisions and rights and obligations extended only to a minority of payment transactions (which SEPA transactions are expected to be, at least initially) Implementation is likely to be less costly for businesses: they would not have to operate under two different conduct of business regimes for the same type of service A case could also be made for further extending Jersey s implementation of the Title III and IV requirements so that they apply to all payment services. This would bring Jersey into line with the position throughout the EEA and enhance the protections available to consumers In summary then, consideration needs to be given as to whether the conduct of business requirements of Titles III and IV should apply only to payment services provided using a SEPA payment instrument, or more widely. The table below summarises the scoping options: Titles III and IV Conduct of business regulation SCOPING OPTIONS MINIMUM SCOPE MAXIMUM SCOPE Payment services scope Apply Titles III and IV to payment services provided using a SEPA payment instrument Apply Titles III and IV to payment services provided using any payment instrument (i.e. SEPA or non-sepa) Apply Titles III and IV to all payment services (see Appendix E) 32 of 66 ISSUED MAY 2010

33 5.6.7 Do you consider that: Jersey s implementation of Titles III and IV should cover only payment services provided using a SEPA payment instrument; or Jersey s implementation of Titles III and IV should cover only payment services provided using any payment instrument (i.e. SEPA or non-sepa); or Jersey s implementation of Titles III and IV should cover all payment services. Please give reasons for your answer. 5.7 E-money issuers As mentioned earlier, e-money issuers might also be affected by the proposals in this consultation paper. However, they are not directly considered in this paper because the Commission recently consulted on options for the future regulation of e-money issuers in Jersey. The Commission s Consultation Paper No. 12 of 2009 refers (available from the Commission s website) The Commission would like to bring to the attention of respondents to this consultation paper that if, after considering the scoping options set out in this chapter, they consider that: Title II should be applied to payment services provided using any payment instrument (i.e. SEPA or non-sepa), or to all payment services; and Titles III and IV should be applied to payment services provided using any payment instrument (i.e. SEPA or non-sepa), or to all payment services; this would support the selection of Option 1 set out in Consultation Paper No. 12 of 2009 for the future regulation of e-money issuers in Jersey That Option 1 envisages the implementation of a regulatory regime for e-money issuers based on the EU approach. Regulation would be both prudential (setting minimum financial resource requirements) and cover conduct of business (the setting of minimum standards when dealing with consumers). The prudential regime would broadly follow that in a new Directive on Electronic Money Issuers recently finalised by the EU. The conduct of business regime would broadly follow that in the PSD Once the feedback to this consultation paper and to Consultation Paper No. 12 of 2009 has been analysed, the Commission will issue a statement setting out how it envisages the proposals in this paper impacting on e-money issuers. SEPA MEETING THE ADMITTANCE CRITERIA 33 of 66

34 6 MEETING PSD EQUIVALENCE IN JERSEY: IMPLEMENTATION OPTIONS 6.1 Introduction This chapter considers how Titles II, III, and IV of the PSD might be implemented in Jersey In determining how to implement in Jersey provisions that are substantially equivalent to Titles II, III and IV of the PSD, the Commission considers that it will be useful to take a number of factors into account First, Title II (if implemented), and Titles III and IV should be implemented in a way that they can be easily understood by providers and users of payment services. In particular, an approach that implements some of the conduct of business requirements of Titles III and IV through legislation, some through registration (licence) conditions, and some through Codes of Practice is less likely to be understood Second, Titles II, III and IV should not be implemented in a way that introduces a substantive risk that the Island s application to join the SEPA area will fail (because provisions are not substantially equivalent ). The EPC has said that it is not in a position to provide any guidance in this regard Third, implementation of Titles II, III and IV should not involve any substantial modification to the structure of the Island s existing regulatory framework, and Codes of Practice should not be used to set detailed requirements Finally, because many institutions in Jersey that offer payment services have UK parents and/or use UK-based payment systems there are practical and economic advantages to implementing Titles II, III and IV of the PSD in a way that is similar to the UK Regulations The implementation of Titles II, III and IV requirements for e-money issuers is not directly considered in this chapter. The attention of e-money issuers is drawn to section 5.7 in the previous chapter. 6.2 Title II prudential regulation Section 5.2 considered the extent (if any) that Title II should be implemented in Jersey. If Jersey were to introduce Title II, two implementation options are considered feasible. 8 Article 19 of the FSJL provides for the Commission to, prepare and issue Codes of Practice for the purpose of establishing sound principles for the conduct of financial service business. 34 of 66 ISSUED MAY 2010

35 6.2.2 The first option would be to implement Title II requirements (save in respect of PSD Article 18 and aspects of Article 21) by: introducing a new class of business into the FSJL for payment institutions; and use of registration (licence) conditions, secondary legislation and Codes of Practice (to set financial resource requirements) in a similar manner to existing classes of business under the FSJL This new class of business would cover all payment service providers, except banks. A consequential change to the FSJL would be made so that the current definition in the FSJL of money service business would be revised to exclude businesses that transmit or receive funds by wire or electronic means, or which engage in money transmission services The second option would be to, adopt a similar approach to that of the UK 9, and implement standalone legislation to cover the requirements of Title II Of these two options, the Commission is of the view that the first option would be the most appropriate. In particular, it has the advantage of ensuring that the new prudential regulatory regime is implemented in a manner consistent with other prudentially regulated activities. In addition, using the existing regulatory framework avoids complicating the Island s financial services regulation by adding a different mechanism for applying prudential regulation A summary cost/benefit analysis for each option is shown in Chapter If Jersey were to implement Title II, which of the two options do you consider should be used? Please give reasons for your answer. 6.3 Other options for implementing Title II The Commission would welcome any suggestions that respondents may have on other possible approaches to implementing provisions that are substantially equivalent to those of Title II of the PSD If Jersey were to implement provisions that are substantially equivalent to Title II, do you consider that there are other implementation options that should be considered? If so, please give details. 6.4 Titles III and IV conduct of business Three options are identified in this consultation paper. These are: Option 1: The intention behind Option 1 is to use, to the greatest extent possible, the regulatory framework that is already in place in Jersey, and to minimise the need for new legislation to be adopted Option 2: The intention behind Option 2 is to introduce standalone 9 See the UK Regulations. SEPA MEETING THE ADMITTANCE CRITERIA 35 of 66

36 legislation and follow, as far as is possible, the approach taken in UK legislation to implement the PSD Option 3: The intention behind Option 3 is to demonstrate substantial equivalence to the PSD - without need for legislation, instead relying on contractual arrangements between payment service providers and the EPC (i.e. equally binding practice ) A fourth option based on the approach taken by Monaco which would have involved substantial equivalence with Titles III and IV of the PSD being met by SEPA participating banks being contractually bound by bye-laws issued by the JBA, has been considered by that association but discounted as not being practicable To determine options available for the regulation of payment service providers, the Commission has reviewed each Article in Titles III and IV of the PSD to determine the extent to which each one could be accommodated under the existing regulatory framework (i.e. through the FSJL, the secondary legislation it provides for and the existing Codes of Practice framework (and the seven core principles therein)) A summary cost/benefit analysis for each option is shown in Chapter Option 1 use existing framework The intention behind Option 1 is to use, to the greatest extent possible, the regulatory framework that is already in place in Jersey, and to minimise the need for new legislation to be adopted Option 1 proposes implementing Title III through Codes of Practice 10, and Title IV through a combination of Codes of Practice, registration (licence) conditions and new standalone legislation Title III requirements could, in most respects, be accommodated by setting requirements under existing Codes of Practice principles Title IV would be difficult to fit within the FSJL regime because, as well as setting obligations (and liabilities) on payment service providers, it also sets other obligations (and, in some cases, liabilities) on customers and third parties. Whilst registration (licence) conditions could be used to set some of the requirements 11 others (a limited number) would most likely require standalone legislation There are a number of potential advantages to implementation Option 1. The most significant of these are that: The combination of statutory and enforceable regulatory measures (Codes of Practice and registration (licence) conditions) for 10 Save for PSD Article 45. This would not fit within the Codes of Practice framework and would fit best as a condition of registration (licensing). 11 Having said this however, there could be a case for arguing that conditions should primarily be used for setting general parameters for the operation of a business rather than be used to set the type of detailed requirements set out in the PSD. 36 of 66 ISSUED MAY 2010

37 implementation should provide the Island with a strong case that it has put in place requirements that are substantially equivalent to those of the PSD Save in respect of those (limited number of) PSD requirements that would require new standalone legislation, implementation could use a regulatory framework that regulated businesses will be familiar with. The requirements would also be bespoke to Jersey There are a number of potential disadvantages to implementation Option 1. The most significant of these are that: Accommodating Titles III and IV of the PSD within the existing regulatory framework would result in payment service providers being subject to requirements set by a miscellany of methods including registration (licence) conditions, Codes of Practice and new standalone legislation (for those PSD requirements that would not fit within the FSJL framework). This might be likely to be confusing, inefficient, and make it complicated, and more expensive, for businesses to comply with Using such a miscellany of methods to set requirements is likely to make demonstrating substantial equivalence more complicated, time consuming and expensive than the other implementation options Many payment service providers will be familiar with and already voluntarily following the UK legislation that implemented the PSD (see Option 2 below) New legislation would require a lead time of several months (but see ) particularly as it would likely involve the preparation of detailed law drafting instructions to support the introduction of bespoke legislation Do you consider that Option 1 should be adopted? Please give reasons for your answer. 6.6 Option 2 follow the UK model The intention behind Option 2 is to follow, as far as is possible, the approach taken in the UK Regulations Option 2 proposes implementing Titles III and IV through new standalone legislation. It is believed that this could be achieved by the enactment of Regulations pursuant to the European Communities Legislation (Implementation) (Jersey) Law Option 2 would effectively involve the wholesale adoption of Titles III and IV into Jersey legislation, using the text of the PSD (save where it would need clarifying or amending to avoid any conflict with other Jersey legislative or regulatory requirements). This approach would differ from that of Option 1, which would necessarily involve interpreting the intention of each Article in Titles III and IV so that provisions could be placed in the existing regulatory framework that, whilst meeting the perceived intention of each PSD Article, would also be SEPA MEETING THE ADMITTANCE CRITERIA 37 of 66

38 consistent with the language and stylistic approach of the existing regulatory framework. Consequently, this would mean that the provisions implementing Titles III and IV under Option 1 would not necessarily use the same text as in the PSD In the UK, HM Treasury looked at implementing the PSD through the existing UK regulatory framework established by the Financial Services and Markets Act 2000 ( FSMA ). However, it concluded that the PSD s provisions would not neatly fit within the FSMA regime and would have required substantial modification or disapplication of the FSMA regime for payment service providers. Ultimately, it came to the conclusion that a standalone piece of legislation would be a better way forward. It thus enacted the UK Regulations There are a number of potential advantages to implementation Option 2. The most significant of these are that: Putting the requirements of Titles III and IV in one piece of standalone legislation should make demonstrating equivalence fairly straightforward Putting the requirements of Titles III and IV in one piece of standalone legislation should reduce the cost of implementation for payment service providers (particularly those with strong UK links who already operate to the requirements of the UK Regulations) It should, to the maximum extent possible, enable the provisions implementing Titles III and IV to use the same text as in the PSD, expediting the preparation of law drafting instructions and the drafting of legislation There are a number of potential disadvantages to implementation Option 2. The most significant of these is that: New legislation would require a lead time of several months, but could come into force immediately following adoption by the States Of the two legislative options outlined in this chapter, the Commission is of the view that the strength of the advantages of Option 2 would make it the most appropriate implementation option Do you consider that Option 2 should be adopted? Please give reasons for your answer. 6.7 Option 3: rely on Rulebook provisions The intention behind Option 3 is to demonstrate substantial equivalence without legislation or other binding practice, because each Jersey payment service provider that wishes to use the SEPA schemes would be contractually bound (through the SEPA Rulebooks) by provisions that are substantially equivalent to those of Titles III and IV of the PSD This option follows the approach taken by Switzerland, which is not a member of the EEA, and therefore not obliged to transpose the PSD into its domestic 38 of 66 ISSUED MAY 2010

39 legislation. Switzerland was admitted into the SEPA at an early stage, and well before the EPC drew up its admittance criteria for third countries Whilst an EPC Resolution of 8 March 2006, states that, Switzerland needs to ensure that the provisions of applicable EU/EEA legislation affecting payments services enabled by the SEPA Schemes are effectively represented in Swiss law or in equally binding practice for Swiss Scheme Participants, it is understood that the Swiss have no plans to introduce domestic legislation to match the provisions of the PSD Instead, it is understood that Switzerland will continue to rely upon the fact that Swiss banks that sign up to the SEPA are contractually bound by the SEPA Rulebooks that require participant banks to comply with and perform obligations that are substantially equivalent to the provisions of Titles III and IV of the PSD There are a number of potential advantages to implementation Option 3. The most significant of these are that: An application to join the SEPA could be made very quickly given that no changes would be required to the Jersey regulatory framework or legislation Implementation costs for Jersey payment service providers are likely to be the lowest of the three options There are a number of potential disadvantages to implementation Option 3. The most significant of these are that: Whilst Switzerland was permitted to join the SEPA without PSD equivalent legislation in force (or likely), it is understood that the EPC Plenary would now be extremely unlikely to allow third countries to be admitted to the SEPA on such a basis. The risk that Jersey s application to join the SEPA would be turned down is therefore greater. (It is thought that a major determining factor in this is the difficulty of enforcing provisions that are in effect solely bilateral contractual arrangements, where a breach of contract would have to be pursued through the courts by the aggrieved party) In view of the fact that payment service providers in 30 of the 32 countries in the SEPA will be subject to domestic statutory requirements that implement the PSD, to implement PSD-equivalent measures in Jersey by a method other than statutory or enforceable regulatory means could be viewed as inconsistent with the Island s good neighbour policy and might serve to confuse payment service providers and payment service users used to operating under a statutory basis in other jurisdictions Such an approach would provide less protection for payment service users. As noted above, a breach of contract by a payment service provider would have to be pursued through the courts by a payment service user. In addition, unlike in some jurisdictions, there is no provision in Jersey that would allow a payment user to enforce compliance by a payment service provider with the SEPA Rulebooks. SEPA MEETING THE ADMITTANCE CRITERIA 39 of 66

40 6.7.7 Do you consider that Option 3 should be adopted? Please give reasons for your answer. 6.8 Other options The Commission would welcome any suggestions that respondents may have on other possible approaches to implementing provisions that are substantially equivalent to those of Titles III and IV of the PSD Do you consider that there are other options that should be considered for implementing provisions substantially equivalent to Titles III and IV of the PSD? If so, please give details. 40 of 66 ISSUED MAY 2010

41 7 COST BENEFIT ANALYSIS 7.1 Implementing Title II COST Option 1 Cost of implementation for the Commission and Government. Cost of implementation for payment service providers in terms of changing systems and procedures. IMPLEMENTING TITLE II (Implement Title II through the existing regulatory framework of the FSJL.) Option 2 (Implement Title II through new standalone legislation.) Likely to be the somewhat lower than Option 2. Likely to be somewhat higher than Option 1. Both options are likely to involve similar costs. Both options are likely to involve similar costs. Ease of demonstrating equivalence. Likely to be slightly more difficult than for Option 2 due to the Title s requirements being implemented through primary legislation, secondary legislation, registration conditions and Codes of Practice. Should be straightforward given that the Title s requirements would be in one piece of legislation. Probability of being deemed substantially equivalent implementation. Considered to be high. Considered to be high. Speed of implementation. Both options are likely to have similar lead times. Both options are likely to have similar lead times. SEPA MEETING THE ADMITTANCE CRITERIA 41 of 66

42 COST Option 1 Implementation would make extensive use of the existing regulatory framework, with which payment service providers are likely to be familiar with IMPLEMENTING TITLE II (Implement Title II through the existing regulatory framework of the FSJL.) Yes. Option 2 (Implement Title II through new standalone legislation.) No. Most requirements would be set by one method: User-friendliness for payment service providers. Levels of consumer protection (through the setting of prudential requirements). Payment service providers who are used to the existing regulatory framework should find the method reasonably user friendly. Others may find Option 2 more user-friendly. High protection either through statutory measures or enforceable regulatory means. See comments under Option 1. Highest through statutory means. Enhancement of Jersey s reputation and image as an international finance centre. High PSD requirements implemented either through statutory means or enforceable regulatory measures. Very high measures in statute. 42 of 66 ISSUED MAY 2010

43 7.2 Implementing Titles III and IV COST Option 1 Cost of implementation for the Commission and Government. IMPLEMENTING TITLES III AND IV (Implement Titles III and IV primarily through the existing regulatory framework.) Likely to be the highest option due to the PSD s requirements being implemented through a number of different methods (primary legislation, secondary legislation, registration conditions, Codes of Practice, new standalone legislation, etc). Option 2 (Implement Titles III and IV through new standalone legislation.) Likely to be somewhat lower than Option 1. Option 3 (Implement through reliance upon the SEPA Rulebook provisions ( the Swiss model.) Minimal. Cost of implementation for payment service providers in terms of changing systems and procedures. Each of the three options is expected to involve a similar level of costs. Each of the three options is expected to involve a similar level of costs. Each of the three options is expected to involve a similar level of costs. Ease of demonstrating equivalence. Likely to be the least easy to demonstrate equivalence due to the PSD s requirements being implemented through a number of different methods (primary legislation, secondary legislation, registration conditions, Codes of Practice, new standalone legislation, etc) Should be straightforward given that the Titles III and IV requirements would be in one piece of legislation. Would be self-evident. SEPA MEETING THE ADMITTANCE CRITERIA 43 of 66

44 COST Option 1 Probability of being deemed substantially equivalent implementation. IMPLEMENTING TITLES III AND IV (Implement Titles III and IV primarily through the existing regulatory framework.) Option 2 (Implement Titles III and IV through new standalone legislation.) Option 3 Considered to be high. Considered to be high. Low. (Implement through reliance upon the SEPA Rulebook provisions ( the Swiss model.) Speed of implementation. Lengthy lead-time. Lengthy lead-time. Short lead-time. Implementation would make extensive use of the existing regulatory framework, with which payment service providers are likely to be familiar with. Yes. No. N/A. Most requirements would be set by one method: User-friendliness for payment service providers. Low level. Moderate level. High level. Levels of consumer protection (through conduct of business standards). High protection either through statutory measures or enforceable regulatory means. Highest through statutory means. Lowest contractual basis. 44 of 66 ISSUED MAY 2010

45 COST Option 1 Enhancement of Jersey s reputation and image as an international finance centre. IMPLEMENTING TITLES III AND IV (Implement Titles III and IV primarily through the existing regulatory framework.) High PSD requirements implemented either through statutory means or enforceable regulatory measures. Option 2 (Implement Titles III and IV through new standalone legislation.) Very high most measures in statute (and close to UK approach). Option 3 (Implement through reliance upon the SEPA Rulebook provisions ( the Swiss model.) Likely to be low given that, unlike in 30 of the 32 countries in the SEPA, Jersey payment service providers would not be subject to domestic statutory requirements that implement the PSD. SEPA MEETING THE ADMITTANCE CRITERIA 45 of 66

46 8 SUMMARY OF QUESTIONS REFERENCE QUESTION Do you consider that: there is no need, at this time, to implement measures in Jersey that are substantially equivalent to Title II; or Jersey should implement measures that are substantially equivalent to Title II that would cover only payment services provided using a SEPA payment instrument; or Jersey should implement measures that are substantially equivalent to Title II that would cover only payment services provided using any payment instrument (i.e. SEPA or non-sepa ); or Jersey should implement measures that are substantially equivalent to Title II that would cover any payment service provided by a payment institution. Please give reasons for your answer Do you consider that: Jersey s implementation of Titles III and IV should cover payment transactions in euro only; or Jersey s implementation of Titles III and IV should cover payment transactions in the currency of any EEA country; or Jersey s implementation of Titles III and IV should cover payment transactions in the currency of any SEPA country. Please give reasons for your answer Do you consider that: Jersey s implementation of Titles III and IV should cover payment transactions only where the payment service providers of both payee and payer are in Jersey; or 46 of 66 ISSUED MAY 2010

47 Jersey s implementation of Titles III and IV should cover payment transactions only where the payment service providers of both payee and payer are in the UK Payment Area or the EEA; or Jersey s implementation of Titles III and IV should cover payment transactions where the payment service providers of both payee and payer are in a SEPA country. Please give reasons for your answer Do you consider that: Jersey s implementation of Titles III and IV should cover only payment services provided using a SEPA payment instrument; or Jersey s implementation of Titles III and IV should cover only payment services provided using any payment instrument (i.e. SEPA or non-sepa); or Jersey s implementation of Titles III and IV should cover all payment services. Please give reasons for your answer If Jersey were to implement Title II, which of the two options do you consider should be used? Please give reasons for your answer If Jersey were to implement provisions that are substantially equivalent to Title II, do you consider that there are other implementation options that should be considered? If so, please give details Do you consider that Option 1 should be adopted? Please give reasons for your answer Do you consider that Option 2 should be adopted? Please give reasons for your answer. SEPA MEETING THE ADMITTANCE CRITERIA 47 of 66

48 6.7.7 Do you consider that Option 3 should be adopted? Please give reasons for your answer Do you consider that there are other options that should be considered for implementing provisions substantially equivalent to Titles III and IV of the PSD? If so, please give details. 48 of 66 ISSUED MAY 2010

49 APPENDIX A List of representative bodies and other organisations who have been sent this consultation paper Jersey Bankers Association Jersey Chamber of Commerce Jersey Finance Limited Jersey Consumer Council Jersey Citizens Advice Bureau SEPA MEETING THE ADMITTANCE CRITERIA 49 of 66

50 APPENDIX B The SEPA admittance criteria set by the EPC (a) Relationship with the EU: (i) (ii) (b) The Applicant shall demonstrate strong economic links with the EU. Alternatively, the Applicant shall demonstrate its economic co-dependency with a member state of the EEA. The Applicant shall demonstrate the existence of a strong legal relationship with the EU, including treaties and bi-lateral agreements concluded between the Applicant and the EU itself and/or Member States of the EU, as well as the practice of adoption of EU norms or standards in national legislation. Criteria to ensure a level playing field with SEPA participants: (i) (ii) (iii) (iv) (v) (vi) The Applicant shall ensure that the provisions of applicable EU/EEA legislation affecting payments services enabled by the SEPA are effectively represented in its law or in equally binding practice for the Applicant's SEPA participants. The Applicant shall demonstrate that provisions substantially equivalent to Titles III and IV of the Payment Services Directive 2007/64/EC as well as to those of Regulation 1781/2006 on Information on the Payer Accompanying Transfers of Funds and those of Regulation 2560/2001 on Cross-border Payments in Euro are represented in the Applicant's law or in equally binding practice for the Applicant's SEPA participants. The Applicant shall ensure that banking regulation is functionally equivalent to the Directive 2006/48/EC relating to the taking up and pursuit of business of the credit institutions and the regulation of other payment services providers is functionally equivalent to the Directive 2007/64/EC on payment services in the internal market. The Applicant shall ensure that anti money laundering processes are functionally equivalent to the Directives 2005/60/EC and 2006/70/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing and that the Applicant is not blacklisted by Financial Action Task Force. The Applicant shall ensure that all United Nations Security Counsel financial sanctions are implemented to the same extent as implemented by Regulation in the EU. The Applicant shall demonstrate that it has ratified the Rome Convention on the Law Applicable to Contractual Obligations of 19 June 1980, as subsequently amended. 50 of 66 ISSUED MAY 2010

51 (c) Other Legal and Regulatory criteria (i) (ii) (iii) (iv) (v) (d) The Applicant shall demonstrate that the provisions of applicable EU/EEA legislation relating to competition law are effectively represented in its law or in equally binding practice for the Applicant's SEPA participants. There are no laws or regulations applicable to the Applicant (for example sanctions legislation) which would prohibit or impede the cross-border dealings between the Applicant and a SEPA participant. The transfer of data to the Applicant by a SEPA participant would not create any legal or regulatory issues for such SEPA participant (for example, under the participant's data protection laws). The Applicant shall demonstrate that its financial regulators have signed a memorandum of understanding with the SEPA country regulators. There shall be no tax or, regulatory or operational issues that would make the Applicant unfairly competitive vis-à-vis other SEPA participants. Market and operational criteria (i) (ii) (iii) (e) The Applicant shall demonstrate use of the Euro for payment transactions in the country or territory. The Applicant shall prove a demonstrable volume of cross-border payments into or from the SEPA countries or territories in Euro. However, such volume shall not be of a magnitude to distort or disrupt the operation of the Schemes. The Applicant shall demonstrate that it has a well-developed payments infrastructure and is using TARGET. Additional criteria to preserve the integrity of SEPA (i) (ii) (iii) There are no political or social issues which could make it reputationally damaging for the EPC to recognise the Applicant as being part of the SEPA. The European Central Bank, the European Commission and the banking and/or payments regulator in the Applicant country or territory have all been consulted and raised no objection to the inclusion of the Applicant within the SEPA. The size of the Applicant's economy, as relevant to payments in euro, is not such as to introduce distortion or disruption in terms of the operation of the SEPA payment schemes. SEPA MEETING THE ADMITTANCE CRITERIA 51 of 66

52 APPENDIX C Chief Minister s letter 52 of 66 ISSUED MAY 2010

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