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New framework for electronic money institutions

Claudia Chiper

In October 2008, the EC reported that the legal framework set forth by the first Electronic Money Directive was holding back the development of the market. Therefore, with a view to enhance competition and to facilitate innovation in the developing field of e-commerce, in 2009, the EU adopted Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (EMD). Member states are expected to implement EMD into their national legislation by April 30 2011.

In 2010, the National Bank of Romania and the Romanian Ministry of Public Finances announced that a new regulatory regime for e-money issuers (Draft EM Law) has been prepared and will be made available for public consultation. The new rules are based on the requirements of EMD.

The Draft EM Law aims mainly at ensuring the financial soundness of electronic money institutions, and contains provisions that are meant to ensure that e-money providers: (i) ringfence their e-money activities from other business areas; (ii) invest funds held in exchange for the issue of e-money in high quality liquid assets; (iii) ensure that sound and prudent systems and adequate internal control mechanisms are in place; and (iv) comply with money laundering requirements.

The key changes as a result of the implementation of EMD into Romanian law include the creation of electronic money institutions, which under the current framework can be organised only as credit institutions. Electronic money institutions will be authorised by the National Bank of Romania and their initial capital requirements will be reduced from €1 million to €350,000.

Furthermore, the investment rules currently applicable to e-money issuers will be replaced by safeguarding rules that are subtly different from those set forth in the Payments Services Directive. For instance, by way of derogation from the general rules governing insolvency in Romania, if an electronic money institution becomes subject to insolvency proceedings, e-money holders will have priority by reference to other creditors in the distribution of proceeds.

As a supplementary safety measure, the funds received by an electronic money institution must be covered by an insurance policy or by other comparable guarantees issued by an insurance company or a credit institution that is not part of the same group as the electronic money issuer.

Additionally, the new regime will repeal the restrictions concerning the activities that may be performed by e-money issuers. Hence, electronic money issuers will be entitled to carry out activities that include: (i) payment services; (ii) ancillary services such as execution of payment transactions, foreign exchange transactions, custody or data processing; (iii) operation of payment systems; and (iv) business activities, other than issuance of e-money.

In relation to e-money instruments as such, the Draft EM Law, in line with EMD provisions, amends the definition of 'electronic money' to define it as electronically (including magnetically) stored monetary value, 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 electronic money issuer.

Furthermore, the Draft EM Law institutes the prohibition of electronic money institutions to grant interest or other similar benefits in connection with their e-money instruments while also touching upon certain aspects related to the redemption of e-money instruments by regulating the circumstances where a redemption fee may not be applied.

Lastly, EMD allows Member States to waive some of the prudential requirements for electronic money institutions.

By way of example, Romania opted to transpose the waiver provided in Article 3(3) paragraph 6 and therefore provided that in case of an acquisition of a qualified participation in a hybrid electronic money institution (those institutions that perform other business activities as well) the acquirer is not bound to notify the National Bank of Romania.

However, even though it is provided in the Romanian legislation, Romania has decided not to implement the option to waive the authorisation and supervision requirements of small payment institutions respectively; the total business activities of which "generate an average outstanding e-money that does not exceed a limit set by a member state but that, in any event, amounts to no more than €5 million".

The EMD and the Draft EM Law are certainly an important step forward for the e-money industry. These reflect the pragmatic nature of e-money instruments into a regulatory framework that is meant to strengthen the confidence of consumers in using such instruments as well as to facilitate e-money issuers to provide cross-border services and expand their activities.

Claudia Chiper

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