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ELM 1.1 Application

ELM 1.1.1 R

ELM applies to every firm and every other person within a category listed in column (2) of the table in ELM 1.1.2 R and in accordance with column (3) of that table. ELM 1.1.3 R applies to an incoming EEA firm and an incoming Treaty firm instead of ELM 1.1.2 R.

ELM 1.1.2 R

Application of different chapters of ELM (except for an incoming EEA firm or an incoming Treaty firm)

(1) Chapter

(2) Categories of person to which chapter applies

(3) Applicable rules and guidance

1 (Application, contents, purpose and general)

Every firm that wishes to issue e-money

ELM 1.3

An e-money firm

The whole chapter

A small e-money issuer and an applicant for a small e-money issuer certificate

The whole chapter except ELM 1.5

2 (Initial and continuing own funds requirements)

An ELMI that is not a lead regulated firm

The whole chapter

3 (Management of the e-money float)

An ELMI that is not a lead regulated firm

The whole chapter

4 (Limitations on activities)

An ELMI

The whole chapter

An e-money firm that is not an ELMI

The whole chapter except ELM 4.3

5 (Systems and controls; Rules for making calculations)

An ELMI

The whole chapter

An e-money firm that is not an ELMI

ELM 5.1 , ELM 5.2 and ELM 5.4

6 (Redemption, information requirements and purse limits)

An e-money firm

The whole chapter

7 (Consolidated financial supervision)

An ELMI that is a member of a group and is not a lead regulated firm

The whole chapter

8 (Small e-money issuers)

An applicant for a small e-money issuer certificate and a small e-money issuer

The whole chapter

Incoming EEA firms and incoming Treaty firms

ELM 1.1.3 R
  1. (1)

    ELM 1 applies to an e-money firm that is:

    1. (a)

      an incoming EEA firm; or

    2. (b)

      an incoming Treaty firm;

    if it has not established a branch in the United Kingdom. Otherwise ELM does not apply to such firms.

  2. (2)

    ELM 1 and ELM 6 apply to an e-money firm that is:

    1. (a)

      an incoming EEA firm; or

    2. (b)

      an incoming Treaty firm;

    if it has established a branch in the United Kingdom. Otherwise ELM does not apply to such firms.

Firms established outside the EEA

ELM 1.1.4 G

The definition of ELMI covers firms that are established outside the EEA. Thus all those parts of ELM that apply to ELMIs apply to such firms. However if the ELMI is a lead regulated firm, chapters 2, 3 and 7 of ELM do not apply.

Distance marketing activities1

ELM 1.1.5 G
  1. (1)

    1ELM 1.4A sets out certain minimum requirements under the Distance Marketing Directive in respect of a customer's cancellation rights. These rules are supplemented by the requirements in COB 6.7.47 R(Exercising the right to cancel); COB 6.7.47 R (Cancellation notices served out of time) and to (Effects of cancellation) which all apply to e-money firms.

  2. (2)

    As set out in , COB 6.4.25R'issuing deposits'

ELM 1.2 Contents and purpose

ELM 1.2.1 G

This chapter sets out which parts of ELM apply to which persons. It also explains that the regulated activity of issuing e-money is restricted to banks, building societies and ELMIs. It also sets out which parts of the rest of the Handbook apply to ELMIs.

ELM 1.2.2 G

Chapter 2 sets out rules and guidance on the capital adequacy of ELMIs. Chapter 3 sets out rules and guidance on the investment of the e-money float in high quality liquid assets. It also restricts the use by ELMIs of derivatives and quasi-derivative contracts. Chapter 4 sets out rules and guidance that restrict the business of ELMIs to activities closely related to issuing e-money. It also prohibits issuing e-money at a discount. Chapter 5 has rules and guidance on systems and controls and rules relevant to making calculations under the ELM financial rules. Chapter 6 has rules and guidance on redemption of e-money, the supply of information and purse limits. Chapter 7 has rules and guidance about the measure of capital adequacy by reference to an ELMI's membership of a group. Chapter 8 contains provisions relevant to small e-money issuers and applications for a small e-money issuer certificate.

ELM 1.2.3 G

ELM implements the parts of the E-Money Directive and (for ELMIs) the Banking Consolidation Directive dealing with these topics.

ELM 1.2.4 G

The rules and guidance in ELM will help the FSA to meet the regulatory objectives of protecting consumers and maintaining market confidence. They do so by setting standards about the backing of e-money issued by an ELMI with high quality liquid assets. They also do so by setting minimum capital and other risk management standards. This mitigates the risk that ELMIs will be unable to meet their liabilities and commitments to consumers. ELM also protects consumers by regulating the relationship between issuers of e-money and those who hold their e-money.

ELM 1.2.5 G

The requirements for ELMIs are intended to take account of the following principles, which are based on the recitals to the E-Money Directive.

  1. (1)

    It is desirable to provide a regulatory framework that helps to ensure that e-money delivers its full potential benefits and that avoids hampering technological innovation. Therefore the regime provides a "technology neutral" regulatory framework.

  2. (2)

    In order to respond to the specific risks associated with e-money, the supervisory regime is targeted specifically at issues relating to issuing e-money. As a result, parts of the prudential supervisory regime applying to banks do not apply to ELMIs.

  3. (3)

    It is necessary to preserve a level playing field between ELMIs and banks and building societiesissuing e-money and, thus, to ensure fair competition among a wider range of institutions to the benefit of holders of e-money. To assist in achieving this, the removal of some features of the prudential supervisory regime applying to banks and building societies is balanced by rules that are stricter than those applying to banks and building societies. The main example of these stricter requirements is the limits on the business activities that ELMIs may carry on and the requirements about asset-liability management of the e-money float. As the main prudential measures that apply to ELMIs are targeted specifically at the issue of e-money, it is necessary to restrict the business of ELMIs to that activity.

ELM 1.3 Restriction on issuing e-money

ELM 1.3.1 G

Article 1(4) of the E-Money Directive says that Member States shall prohibit persons or undertakings that are not credit institutions from carrying on the business of issuing electronic money. The purpose is to ensure that only persons who are subject to a prudential regime designed to deal with the risks of issuing e-money engage in that activity.

ELM 1.3.2 G

For persons who are not firms, this is implemented by the general prohibition. For firms, this is achieved by the rules in ELM. The definition of ELMI covers any firm whose permitted activities include issuing e-money. Only a bank, building society, incoming Treaty firm and incoming EEA firm are excluded. If a firm falls into the definition of an ELMI, all the rules in ELM about ELMIs apply. These include ELM 4.3.1 R (Restriction on activities), which prevents an ELMI from doing anything except issuing e-money and certain related activities. Therefore if a firm (other than a building society) wishes to have a Part IV permission that includes issuing e-money, it will either have to become an ELMI, and accept the restrictions that come with that status, or become a bank.

ELM 1.3.3 G

However, article 8 of the E-Money Directive says that EEA States may allow their competent authorities to waive the application of some or all of the provisions of that Directive and the application of the Banking Consolidation Directive to certain small or local e-money schemes. The regime for such schemes is described in ELM 8. Even though a small e-money issuer does not have a Part IV permission that includes issuing e-money, it does not infringe the general prohibition by issuing e-money.

ELM 1.4A 1Distance contracts: cancellation

Right to cancel

ELM 1.4A.1 R

A retail customer has a right to cancel a distance contract the making or performance of which by the firm constitutes, or is part of, issuing e-money unless:

  1. (1)

    the performance of the distance contract has been fully completed by both parties at the customer's express request before the customer exercises his right to cancel; or

  2. (2)

    the firm has an initial service agreement with the customer and the contract is in relation to a successive operation or separate operation of the same nature under that agreement (see COB 1.11.3 R

Cancellation period

ELM 1.4A.2 R

The right to cancel referred to in ELM 1.4A.1 R starts on the later of:

  1. (1)

    the day of the conclusion of the contract; and

  2. (2)

    the day on which the retail customer receives the contractual terms and conditions and other information required by ELM 6.8 (Information); and lasts for 14 calendar days.

Failure to give information on cancellation rights

ELM 1.4A.3 R

If a firm does not give a retail customer notice of his cancellation rights in accordance with ELM 6.8.2A R and COB 6.4.25R, the contract remains cancellable and the retail customer can cancel the agreement at any time.

Exercising the right to cancel

ELM 1.4A.4 R

A retail customer may, without giving any reason, cancel the contract by serving notice upon the firm, before expiry of the relevant cancellation period, in accordance with the instructions for exercising that right provided to the customer in accordance with ELM 6.8.2A R and COB 6.4.25R.

ELM 1.4A.5 R

The following rules also apply as if issuing e-money were accepting deposits: COB 6.7.47R (Record keeping); COB 6.7.48R (Cancellation notices served out of time) and COB 6.7.51R to COB 6.7.53R (Effects of cancellation).

ELM 1.5 Application of other parts of the Handbook to ELMIs

ELM 1.5.1 G

The application of other parts of the rest of the Handbook to ELMIs is summarised in ELM 1.5.2 G. For the detailed application of each chapter, see the Application provision at the start of the chapter or section. ELM 1.5.2 G does not apply to an incoming EEA firm, incoming Treaty firm or small e-money issuer.

ELM 1.5.2 G

Application of other parts of the Handbook to ELMIs

Block

Module

Application

High level standards

11 11

Principles for businesses (PRIN)

Applies to every ELMI. As explained in PRIN 1.1.3 G, the Principles apply with respect to regulated activities generally, but, in applying the Principles with respect to issuing e-money, the FSA will proceed only in a prudential context.

Threshold conditions (COND)

Applies to every ELMI. Threshold condition 1 says that a firm that wishes to issue e-money must be a body corporate or a partnership. (See COND 2.1 for more detail.)

Statements of principle and code of practice for approved persons (APER)

Applies to every approved person who performs a controlled function for an ELMI.

The fit and proper test for approved persons (FIT)

Applies in relation to the criteria that the FSA will consider when assessing the fitness and propriety of a candidate for a controlled function to be performed for an ELMI. It is also relevant in assessing the continuing fitness and propriety of approved persons carrying on such a controlled function.

Senior management arrangements, systems and controls (SYSC)

Applies to every ELMI.

General provisions (GEN)

Applies to every ELMI.

Business Standards

8 11 11

Interim Prudential sourcebooks: IPRU(INS), IPRU(FSOC), IPRU(BANK), IPRU(BSOC) and IPRU(INV) Integrated Prudential Sourcebook (PRU)10

ELM 7 (Consolidated financial supervision) applies IPRU(BANK), IPRU(BSOC) and IPRU(INV) to certain ELMIs who are members of a group. Chapter NE of IPRU(BANK) is relevant toELM 3.5.16 R, as described in ELM 3.5.20 G. Otherwise, these sourcebooks do not apply to ELMIs.

The Integrated Prudential Sourcebook (PRU)8

PRU 1.8 (Action for damages), PRU 8.1 (Group risk systems and controls requirement), PRU 8.4 (Cross sector groups),PRU 8.5 (Third country groups), PRU 8Ann 1R (Capital adequacy calculations for financial conglomerates),PRU 8 Ann 2R (Prudential rules for third country groups),PRU 8 Ann 3G (Financial Conglomerates: Cooperative decision making by competent authorities and consultation) andPRU 8 Ann 4G (Classification of groups) apply to an ELMI.8

Market Conduct (MAR)

MAR 1 (The Code of Market Conduct) applies if an ELMI is seeking guidance as to whether or not behaviour amounts to market abuse. MAR 2 (Price Stabilising Rules), MAR 3 (Inter-Professional Conduct) and MAR 4 (Endorsement of the Takeover Code) do not apply to an ELMI when issuing e-money. MAR 5(Alternative Trading Systems) will not apply to an ELMI, as there are restrictions on the type of business activities that an ELMI may carry on.

Conduct of Business sourcebook (COB)

The effect of :7

(1) ELM 6.8.2A R is that COB 2.6 (General provisions in relation to distance contracts) applies;7

(2) ELM 1.4A.5 R is that COB 6.7.47R; COB 6.7.48R and COB 6.7.51R to COB 6.7.53R apply; and

7

(3) ELM 6.8.2A R is that COB 6.4.25 R (Entering into a distance contract for accepting deposits) applies in relation to distance contracts concluded with retail customers as if references to 'accepting deposits' and 'deposits' were references to 'issuing e-money' and 'e-money' respectively. 7

Otherwise, COB does not apply to an ELMI when issuing e-money. As explained in AUTH App 3 the rules in COB about financial promotions do not usually apply to e-money, but may do so in certain situations.7

Insurance: Conduct of Business sourcebook (ICOB)9

Does not apply to an ELMI when issuing e-money9

Mortgages: Conduct of Business sourcebook (MCOB)3

Does not apply to an ELMI when issuing e-money

Client Assets sourcebook (CASS)

Does not apply to an ELMI when issuing e-money.4

Training and Competence Sourcebook (TC)

TC 1 (Commitments) applies to ELMIs. TC 2 (Rules and Guidance) applies to a firm whose employees carry on activities listed in TC 2.1.4 R. Those activities do not include issuing e-money.

Money Laundering sourcebook (ML)

For the avoidance of doubt, it is the FSA's view that, where it has an establishment in the United Kingdom, an ELMI is subject to the Money Laundering Regulations. In addition, ML applies to every ELMI.

Regulatory processes

11 11

Authorisation manual (AUTH)

Applies to every ELMI.

Supervision manual (SUP)

The following chapters of SUP apply to every ELMI: 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 13, 15, 16 and 20. The following chapters of SUP do not apply to an ELMI: 4, 12, 14, 17, 18 and 19.

Enforcement manual (ENF)

Applies to every ELMI.

Decision-making manual (DEC)

Applies to every ELMI.

Redress

11 11

Complaints (DISP)

Applies to every ELMI.

Compensation (COMP)

An ELMI is not a participant firm for the purposes of COMP in relation to issuing e-money. Under article 9J of the Regulated Activities Order, the compensation scheme is not to provide for the compensation of persons in respect of claims made in connection with issuing e-money.

Complaints against the FSA (COAF)

Applies to every ELMI.

Specialist sourcebooks other than ELM

11 11

Credit unions (CRED), Professional firms, (PROF), Collective Investment Schemes Lloyd's (LLD), (CIS) or COLL)6 and Recognised Investment Exchanges and Recognised Clearing Houses (REC).

These sourcebooks do not apply to an ELMI.

E-Commerce Directive sourcebook (ECO)

Applies to every ELMI that carries on electronic commerce activities. Also applies to every ELMI in relation to a financial promotion which is an outgoing electronic commerce communication.1

Listing, Prospectus and Disclosure11

Listing Rules (LR)

May apply if the ELMI is applying for listing in the United Kingdom or is a listedissuer in the United Kingdom.

Prospectus Rules (PR)

May apply if the ELMI makes an offer of transferable securities to the public in the United Kingdom or is seeking the admission to trading of transferable securities on a regulated market situated or operating in the United Kingdom.

Disclosure Rules and Transparency Rules (DTR)

May apply if the ELMI is an issuer, any class of whose financial instruments have been admitted to trading on a regulated market, or are the subject of an application for admission to trading on a regulated market, other than issuers who have not requested or approved admission of their financial instruments to trading on a regulated market.5

ELM 1.6 Actions for damages

ELM 1.6.1 R

A contravention of the rules in ELM does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action) unless ELM 1.6.2 R applies.

ELM 1.6.2 R

ELM 1.6.1 R does not apply to the rules in ELM 6 (Redemption, information requirements and purse limits) or ELM 8 (Small e-money issuers).