Although some e-money is regulated in the EU (Directive 2000/46/EC, September 2000) it falls short of defining the legal status of e-money, which remains a simple contractual obligation - all e-money is a promise by its issuer to the holder to redeem it at face value. It is regulated under the E-money Directive, which came into force in April 2002 and will be implemented by the Financial Services Authority (FSA). Deposits paid into e-money accounts are subject to the account terms and conditions and not the wider banking regulations unless: a) the customer can withdraw funds from it, and b) the issuer uses the deposited money to fund its other business activities. If the issuer gives the customer a credit facility (say where the account is settled monthly via direct debit) the issuer will probably have to comply with the Consumer Credit Act 1974, depending on what and/or how the technology is used. It might be possible to structure this relationship as a service and not credit provision (as with mobile telephone customers), in which case only the account terms and conditions apply. Most e-money users will be consumers so the consumer protection rules will apply to the account terms and conditions, making unfair terms unenforceable. E-money, as a financial product, is likely to come under the auspices of the UK banking code. This will influence any court's decision when assessing the fairness of terms and conditions. The issuer of e-money is responsible for redeeming it, so if it becomes insolvent its e-money may be worthless. Some of these risks may be controllable through customer terms and conditions, depending on the type of e-money involved, the technology used and any regulatory framework. Where the customers are consumers, they will have normal consumer protection. Issuing e-money to foreign customers may well create regulatory problems because it will be subject to the laws of both the issuer's and the customer's country.
E-money will be an important enabling technology for online business because it will allow customers to make more and different kinds of purchases. However, the legal regime that will govern e-money is not well understood, writes Chris Reed. Here are the FAQs.
What is the legal status of e-money?
What kinds of e-money exist?
How is the stored value of e-money regulated?
- Systems that store monetary value on a device, usually a chip-card (such as pre-pay phone cards)regulated by the directive
- Systems that transfer funds to and from special e-money accounts, subject to banking regulations
- Systems that manipulate existing payment mechanisms such as credit cards, which are unregulated because the service provider does not issue value or establish customer accounts.
How is account-based e-money regulated?
- Issuers must not carry out unrelated activities such as granting credit by e-money
- Issuers must ring-fence their e-money activities from other areas of business risk
- There will be tight controls on how e-money issuers invest the funds received, essentially limited to pre-defined low-risk investments
- Issuers must protect their businesses from technological risks
- Many of the general FSA rules and guidelines will apply to e-money issuers
- E-money issuers will be required to cap individual purse limits at £250.
How do consumer protection rules affect e-money?
What happens if an e-money issuer becomes insolvent?
Can e-money be used for cross-border payments?
- If merchants accept
- e-money in ignorance of the insolvency, it is unlikely that they will be entitled to refuse to perform the transaction and/or demand some other form of payment
- Service providers who re-brand third-party e-money as their own might be liable to redeem it, at least for their own customers.
Chris Reed is counsel at law firm Tite & Lewis
- Issuers of e-money can issue online in any EU country (under the directive). For account-based
- e-money, local law may still present obstacles
- The US has stated that
- e-money is not subject to banking and financial services regulation
- Elsewhere, check the banking, financial services and credit laws.