This chapter 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.

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 COBS 4 (Communicating with clients, including financial promotions)1 apply to e-money.

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; and

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.

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 (Restrictions on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)).

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.

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.

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.

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

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

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 introduces a framework for the regulation of e-money at a European level.

The definition of e-money in the1Regulated Activities Order is based on1 the definition of electronic money in the E-Money Directive. The definition in the E-Money Directive is that e-money is "monetary value as represented by a claim on the issuer which is:1

1. (1)

   stored on an electronic device;1

2. (2)

   issued on receipt of funds of an amount not less in value than the monetary value issued; and1

3. (3)

   accepted as means of payment by undertakings other than the issuer".1

The main difference1 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.

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 FSArules on this are in ELM 4 (Limitations on activities).

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.

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).

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

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.

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.

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

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.

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

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.

The delay referred to in PERG 3.2.18 G 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.1

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 PERG 3.2.12 G to PERG 3.2.14 G.

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

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

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.

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

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.

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.

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

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

PERG 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.

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.

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. This is so even if in practice most of the e-money is spent with the issuer and only a small portion is ever spent with third parties.1

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.

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)."

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."

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.

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."

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.

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

1. (1)

   As explained in PERG 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.

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.

1When deciding whether a particular scheme involves issuing e-money or not, it is necessary to take into account the substance of the scheme. In particular it is necessary to consider whether:

1. (1)

   the scheme involves the issue of prepaid electronic monetary value that the holder can spend with third parties; or

2. (2)

   the provision by the issuer of some other sort of service.

1In considering the question in PERG 3.3.22 G, relevant factors include:

1. (1)

   the risks incurred by the holder of the value;

2. (2)

   the nature of the rights and obligations of the holder of the prepaid value, the issuer of the value and third parties involved in the scheme; and

3. (3)

   what the scheme allows the holder of the value to do.

1Therefore artificial features of a scheme that disguise, or try to disguise, the payment function as the supply of another sort of service are not likely to prevent the scheme from involving issuing e-money.

1The European Commission Services published a separate guidance note in January 2005 on the application of the E-money Directive to mobile network operators. The full text of this guidance is available at the following link: http://europa.eu.int/comm/internal_market/bank/docs/e-money/guidance_en.pdf. The FSA will have regard to such guidance when considering whether the issue of prepaid airtime to a mobile phone user, which can be used to pay for third party goods and services, whether delivered through or outside the telephone operator's network, constitutes the regulated activity of issuing e-money.

Guidance on the restrictions on financial promotion under section 21 of the Act (Restrictions on financial promotion) can be found in PERG 8. PERG 3.4 gives further guidance on its application to e-money.

As explained in PERG 8, 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.

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.

Accepting deposits is however a controlled activity and a deposit is a controlled investment. As explained in PERG 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.

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.

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

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. PERG 2.6.2 G to PERG 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.

1This section of PERG 3 contains guidance on whether certain products involve issuing e-money.

An electronic travellers cheque is a product, based on a plastic card, designed to replace paper travellers cheques. There are two types of electronic travellers cheques:

1. (1)

   ones whose only function is to allow the holder to withdraw cash in a foreign currency from automated teller machines ("ATMs") when abroad; and

2. (2)

   ones that can also be used to buy goods and services from third parties.

The card referred to in PERG 3.5.2 G is loaded with value. The holder pays for the value on issue. The value therefore complies with the part of the definition of e-money that says that the value must be issued on receipt of funds (see PERG 3.3.5 G - PERG 3.3.9 G). The card is likely to be an electronic device for the purpose of paragraph (a) of the definition of e-money (which is explained in PERG 3.3.2 G - PERG 3.3.4 G).

The remaining condition that value must meet if it is to be e-money is that the value must be accepted as a means of payment by persons other than the issuer. This part of the definition is explained in PERG 3.3.10 G - PERG 3.3.13 G.

An electronic travellers cheque falling into PERG 3.5.2 G (2) meets the part of the definition of e-money referred to in PERG 3.5.4 G.

An electronic travellers cheque falling into PERG 3.5.2 G (1) does not meet the part of the definition of e-money referred to in PERG 3.5.4 G if the scheme is set up in such a way that:

1. (1)

   it can only be used to withdraw foreign currency from ATMs owned by the issuer of the value; or

2. (2)

   (if (1) does not apply) the withdrawal of foreign currency by a cardholder will never involve the purchase of the currency from the owner of the ATM but instead the repayment of the prepaid value by the issuer of the prepaid value.

A prepaid electronic value payment system may involve the "float" being paid into a trust account. The float is the running balance of money held by the issuer of the electronic value representing payments for the issue of electronic value less the amount of electronic value that has been redeemed.

Holding the float on trust:

1. (1)

   does not prevent the electronic value from being monetary value as represented by a claim on the issuer (this part of the definition of e-money is described in PERG 3.3.1 G);

2. (2)

   is not relevant to the other elements of the definition of e-money; and

3. (3)

   does not mean that the person who accepts the payment for the electronic value is not the issuer of that value.

The result of PERG 3.5.8 G is that putting the float into a trust account does not prevent the person who accepts the payment for the electronic value from issuing e-money.