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    2005-06-30

AUTH App 3.1 1Application and purpose

Application

AUTH App 3.1.1 G

This appendix applies to a person who needs to know whether a particular electronic payment product is e-money and whether the person issuing it needs to be authorised under the Act.

AUTH App 3.1.2 G

This appendix also applies to a person who needs to know the extent to which section 21 of the Act (Restrictions on financial promotion) and COB 3 (Financial promotion) apply to e-money.

Purpose

AUTH App 3.1.3 G

There are two main purposes of this guidance on the definition of e-money. These are:

  1. (1)

    to outline the main features of the regulated activity of issuing e-money;

  2. (2)

    to explain the application of the restriction on financial promotion under section 21 of the Act so far as it concerns issuing e-money.

AUTH App 3.1.4 G

This guidance is issued under section 157 of the Act. It represents the FSA's views and does not bind the courts. For example, it would not bind the courts in an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of section 19 (The general prohibition) or 21 (Restriction on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)).

AUTH App 3.1.5 G

Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (the Regulated Activities Order), the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 (SI 2002/682) and to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335) (as amended) (the Financial Promotion Order). These should be used to find out the precise scope and effect of any particular provision referred to in this guidance, and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, then the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

AUTH App 3.2 The regulated activity of issuing e-money

The Regulated Activities Order

AUTH App 3.2.1 G

Under section 19 of the Act (The general prohibition), no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is authorised or exempt under the Act.

AUTH App 3.2.2 G

A regulated activity means an activity of a kind specified in the Regulated Activities Order which is carried on by way of business and which (generally) relates to an investment of a kind specified in the Regulated Activities Order.

AUTH App 3.2.3 G

Further guidance on section 19 and regulated activities can be found in AUTH 2.

AUTH App 3.2.4 G

Article 9B of the Regulated Activities Order says that issuing e-money is a specified activity of the kind described in AUTH App 3.2.2 G. Article 74A of the Regulated Activities Order says that e-money is a specified investment for that purpose.

AUTH App 3.2.5 G

E-money is defined in Article 3(1) of the Regulated Activities Order. It says that e-money means monetary value, as represented by a claim on the issuer, which is:

  1. (1)

    stored on an electronic device;

  2. (2)

    issued on receipt of funds; and

  3. (3)

    accepted as a means of payment by persons other than the issuer.

The E-Money Directive

AUTH App 3.2.6 G

The E-Money Directive introduces a framework for the regulation of e-money at a European level.

AUTH App 3.2.7 G

The Regulated Activities Order copies out the definition of electronic money in the E-Money Directive, with one exception.

AUTH App 3.2.8 G

The exception is that the words - of an amount not less in value than the monetary value issued? in article 1(3)(b)(ii) of the E-Money Directive are not reproduced in the Regulated Activities Order.

AUTH App 3.2.9 G

The words in article 1(3)(b)(ii) omitted from the definition in the Regulated Activities Order are aimed at stopping e-money issuers from issuing e-money at a discount. They were omitted from the Regulated Activities Order to make it clear that issuing electronic monetary value at a discount is not an unregulated activity. Instead, the prohibition on issuing e-money at a discount is left to FSArules. The FSA rules on this are in ELM 4 (Limitations on activities).

AUTH App 3.2.10 G

On this basis, the FSA believes that the definition of e-money in the Regulated Activities Order should be interpreted consistently with the E-Money Directive.

Exclusions

AUTH App 3.2.11 G

Article 9C of the Regulated Activities Order says that the issuing of e-money by a person to whom the FSA has given a certificate under that article is not a regulated activity provided that the certificate has not been revoked. The FSA may only issue such certificates to small or local e-money schemes. Further guidance on this topic can be found in ELM 8 (Small e-money issuers).

The issuer of e-money

AUTH App 3.2.12 G

As explained in AUTH App 3.2.4 G, the regulated activity relating to e-money is issuing e-money.

AUTH App 3.2.13 G

In some e-money schemes an originator creates e-money and then sells it to banks and other distributors. The latter then sell the e-money to the public. In the FSA's view, references to the issuer of e-money in the Regulated Activities Order are to the originator and not the distributors.

AUTH App 3.2.14 G

The issuer is the issuer of the e-money rather than the issuer of the electronic device on which it is stored, if they are different.

Exclusion from the definition of deposit

AUTH App 3.2.15 G

Article 9A of the Regulated Activities Order says that a sum is not a deposit if it is immediately exchanged for e-money.

AUTH App 3.2.16 G

Thus if a customer pays for e-money but the e-money is not issued until later, that initial payment will be a deposit, as long as the payment comes within the definition of deposit in the Regulated Activities Order.

AUTH App 3.2.17 G

AUTH 2.6.2 G to AUTH 2.6.4 G has guidance on the meaning of deposit.

AUTH App 3.2.18 G

Some e-money products may be charged up by means of scratch cards that can be purchased from shops. The price paid for the card is the monetary value of the e-money. The card contains a number. The purchaser then enters the number on a web site to activate the e-money account. There is thus a delay between the payment for the e-money and its use by the holder. Such a delay does not make the payment for the e-money a deposit. This is because the means of spending the e-money is put into the hands of the purchaser when he purchases the card.

AUTH App 3.2.19 G

A person may also pay for e-money by cheque. The e-money issuer will not receive the value until the cheque has cleared. This delay does not make the payment for the e-money into a deposit. The purchaser has paid for the e-money, even though his payment obligation has only been satisfied conditionally.

Transitionals

AUTH App 3.2.20 G

Article 9 of The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 has transitional provisions relating to those who were issuing e-money on 27 April 2002.

AUTH App 3.2.21 G

Where, immediately before 27 April 2002, a full credit institution with Part IV permission to accept deposits was carrying on by way of business in the United Kingdom the activity of issuing e-money, its permission is to be treated as including, for a period of six months beginning at 27 April 2002, permission to carry on the activity of issuing e-money.

AUTH App 3.2.22 G

Where, immediately before 27 April 2002:

a) an EEA firm of the kind mentioned in paragraph 5(b) or (c) of Schedule 3 to the Act qualified for authorisation under that Schedule; and

b) the activities which were treated as permitted activities for the purposes of paragraph 13 or 14 of that Schedule as it applied to that person included issuing e-money; the firm'spermission under paragraph 15 of that Schedule is to be treated as including permission to carry on that activity.

AUTH App 3.2.23 G

The transitional provisions also apply to a body corporate or partnership which, immediately before 27 April 2002:

  1. (1)

    has its head office in the United Kingdom, and is carrying on by way of business in the United Kingdom the activity of issuing e-money; or

  2. (2)

    has its head office in an EEA State other than the United Kingdom, and is carrying on such an activity by way of business in the United Kingdom without contravening the law of that other EEA State.

AUTH App 3.2.24 G
AUTH App 3.2.25 G

A person described in AUTH App 3.2.23 G is not to be treated as carrying on the regulated activity of issuing e-money until the beginning of 27 October 2002, unless it receives permission to carry on that activity before then.

AUTH App 3.2.26 G

On and after 27 October 2002, an e-money issuer with its head office in the United Kingdom will not be able to continue issuing e-money in the UK (or other EEA States) unless it has been granted permission under Part IV of the Act (or its existing permission has been varied to include the activity of issuing e-money). Similarly, an e-money issuer whose head office is in another EEA State will not have permission to carry on that activity on or after 27 October unless it has been duly authorised in its Home State.

AUTH App 3.2.27 G

However, if an e-money issuer falling under AUTH App 3.2.23 G (1) that was issuing e-money as at 27 April 2002 continues to issue e-money after the beginning of 27th October 2002, its carrying on that activity after that date will continue to be excluded from the regulated activity of issuing e-money, provided that he has made an application before 27th June 2002 under section 40 of the Act (Application for permission) for permission to carry on that activity, and has not withdrawn it. That exclusion ends when the application has been finally determined.

AUTH App 3.2.28 G

For these purposes an application is to be treated as finally determined:

  1. (1)

    In a case where the FSA gives permission to carry on the activity and does not exercise its power under section 42(7)(a) or (b) (Permission) or section 43(1) (Imposition of requirements) of the Act, on the date on which the permission takes effect;

  2. (2)

    In a case where the FSA refuses permission, or gives permission but exercises its power under section 42(7)(a) or (b) or section 43 of the Act, at the time when the matter ceases to be open to review (within the meaning of section 391(8) of the Act) (Publication).

AUTH App 3.2.29 G

The transitional exclusions described in AUTH App 3.2.23 G to AUTH App 3.2.28 G do not cover an e-money issuer whose head office is outside the EEA.

AUTH App 3.3 Elements of the definition of e-money

Monetary value

AUTH App 3.3.1 G

The definition of e-money says that for a product to be e-money, it must be monetary value as represented by a claim on the issuer. Guidance on the meaning of issuer can be found at AUTH App 3.2.12 G to AUTH App 3.2.14 G

Storage on an electronic device

AUTH App 3.3.2 G

The definition of e-money says that for a product to be e-money, it must be stored on an electronic device.

AUTH App 3.3.3 G

E-money is an electronic payment product. The value is held electronically and payments using the value are made electronically.

AUTH App 3.3.4 G

The fact that the device may be magnetic does not stop it being an electronic device for the purpose of the definition of e-money. Thus for example value stored on a personal computer does not fall outside the definition merely because it is stored on the computer's magnetic hard disk. Similarly, value stored on a plastic card that uses magnetic stripe technology may also fall within the definition if the value is transferred for spending using electronic technology.

Prepayment

AUTH App 3.3.5 G

The definition of e-money says that for a product to be e-money, it must be issued on receipt of funds.

AUTH App 3.3.6 G

This part of the definition means that e-money is a prepaid product. That is, unlike credit provided through a credit card, the customer pays for the spending power in advance. This is why credit cards are excluded from the definition of e-money.

AUTH App 3.3.7 G

This does not mean that e-money paid for with a credit card falls outside the definition. The purchase of the e-money represents the purchase of monetary value. The fact that the purchaser is lent the funds to buy the e-money does not affect this. There are two contracts, one for the sale of e-money and one for credit.

AUTH App 3.3.8 G

Value on a debit card may be e-money or a deposit. Guidance on this is given in AUTH App 3.3.14 G to AUTH App 3.3.20 G.

AUTH App 3.3.9 G

The fact that the device on which monetary value is stored is made available on a plastic card that also functions as a debit or credit card does not stop that monetary value from being e-money.

Multipurpose

AUTH App 3.3.10 G

For a product to be e-money, persons other than the issuer must accept it as a means of payment.

AUTH App 3.3.11 G

AUTH App 3.3.10 G means that the e-money holder must be able to use it to buy goods and services from persons other than the issuer.

AUTH App 3.3.12 G

Thus, for example, electronic value issued by an employer to its employees that can only be used to buy food and drink from the employer in its canteen is not e-money.

AUTH App 3.3.13 G

If monetary value can be spent with third parties, it does not stop being e-money just because the e-money can also be spent with the issuer.

Accounted e-money schemes

AUTH App 3.3.14 G

An electronic payment scheme that involves prepaid monetary value that can be spent without the involvement of the issuer is likely to be e-money. However, a product does not cease to be e-money merely because the scheme is account based.

AUTH App 3.3.15 G

The document published by HM Treasury in March 2002 called "Implementation of the Electronic Money Directive: A Response to Consultation" says:"An important issue that respondents [to HM Treasury's consultation on the implementation of the E-Money Directive] requested clarification on was whether the Directive's definition should catch account-based schemes (i.e. e-money held remote from the owner and spent at the owner's direction) as well as, for example, card-based schemes (i.e. e-money in the possession of the owner, whether stored on a personal computer or a smart card, and directly spent by them). The Treasury believes that the Directive's definition does allow for the possibility of account-based schemes being e-money. Not allowing account-based e-money schemes would effectively create a regulatory gap between the e-money and deposit-taking regimes - and a difference of treatment between schemes that pose similar regulatory risks. Rather than attempting to amend the definition in the Order (which is already expressed suitably widely), the Treasury has clarified in the accompanying Explanatory Memorandum that the definition of e-money is to be interpreted as covering account-based schemes (so long as they remain distinct from deposit-taking)."

AUTH App 3.3.16 G

That explanatory memorandum says:"The Treasury believes the Directive's definition includes both e-money schemes in which value is stored on a card that is used by the bearer to make purchases, and account-based e-money schemes where value is stored in an electronic account that the user can access remotely."

AUTH App 3.3.17 G

Thus monetary value issued under an account-based scheme can be e-money. On the other hand, not all monetary value recorded electronically on an account will be e-money. If all such monetary value were e-money, any deposit recorded in records maintained electronically could be e-money, thereby turning most conventional bank accounts into e-money. Thus it is necessary to distinguish between an account-based e-money scheme and a conventional bank deposit.

AUTH App 3.3.18 G

Recital (3) to the E-Money Directive says that "electronic money can be considered an electronic surrogate for coins and banknotes, which is stored on an electronic device such as a chip card or computer memory and which is generally intended for the purpose of effecting electronic payments of limited amounts."

AUTH App 3.3.19 G

The European Commission published an explanatory memorandum along with its proposal for a Directive about e-money. It said that it is appropriate to emphasise that e-money does not represent a deposit. Unlike a depositor, a user does not advance funds to an issuer in order to ensure their safe keeping and handling. Neither the issuer nor the customer pursues this objective. The Commission said that the underlying contract between the customer and the issuer is that the user will get value for the e-money from those merchants that accept it and that the issuer will honour his commitment to give value.

AUTH App 3.3.20 G

In distinguishing e-money and deposits, relevant factors include the following.

  1. (1)

    As explained in AUTH App 3.3.3 G, e-money is a purely electronic product. If the monetary value is kept on an account that can be used by non-electronic means, that points towards it being a deposit. For example, an account on which cheques can be drawn is unlikely to be e-money.

  2. (2)

    If a product is designed in such a way that it is only likely to be used for making payments of limited amounts and not as a means of saving, that feature points towards it being e-money. Relevant features might include how long value is allowed to remain on the account, disincentives to keeping value on the account and the payment of interest on it.

  3. (3)

    If an account has features on it in addition to those necessary for a pure payment facility, such as an overdraft or direct debit facility, that points towards it not being e-money.

  4. (4)

    One should have regard to whether the product is sold as e-money or as a deposit.

AUTH App 3.3.21 G

In other words, a deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. E-money, in contrast, involves the purchase of a means of payment.

AUTH App 3.4 Financial promotion

AUTH App 3.4.1 G

Guidance on the restrictions on financial promotion under section 21 of the Act (Restrictions on financial promotion) can be found in AUTH App [to be added to the Handbook at a later date]. AUTH App 3.4 gives further guidance on its application to e-money.

AUTH App 3.4.2 G

As explained in AUTH App [ ], section 21 of the Act applies to the communication of an invitation or inducement to engage in investment activity. Section 21(8) defines engaging in investment activity as:

  1. (1)

    entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or

  2. (2)

    exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

AUTH App 3.4.3 G

Controlled activity and controlled investment are both defined by reference to Schedule 1 to the Financial Promotion Order. Issuing e-money is not included as a controlled activity and e-money is not included as a controlled investment.

AUTH App 3.4.4 G

Accepting deposits is however a controlled activity and a deposit is a controlled investment. As explained in AUTH App 3.2.15 G, the definition of deposit under the Regulated Activities Order says that a sum is not a deposit for the purposes of the Regulated Activities Order if it is immediately exchanged for e-money.

AUTH App 3.4.5 G

The definition of deposit in the Financial Promotion Order follows the definition of deposit in the Regulated Activities Order. Therefore the purchase price paid for e-money is not a deposit for the purposes of the Financial Promotion Order.

AUTH App 3.4.6 G

Hence the provisions in the Act and the Handbook about financial promotions do not apply to e-money.

AUTH App 3.4.7 G

However, if the purchase price for e-money is not immediately exchanged for e-money, the purchase price may be a deposit if the payment comes within the definition of deposit in the Regulated Activities Order. AUTH 2.6.2 G to AUTH 2.6.4 G has guidance on the meaning of deposit. In such a case, the provisions in the Act and the Handbook about financial promotions relating to deposits apply.