What is the legal status of e-money?
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.
What kinds of e-money exist?
- 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 the stored value of e-money regulated?
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).
- 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 is account-based e-money regulated?
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.
How do consumer protection rules affect e-money?
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.
What happens if an e-money issuer becomes insolvent?
The issuer of e-money is responsible for redeeming it, so if it becomes insolvent its e-money may be worthless.
- 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.
Can e-money be used for cross-border payments?
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.
- 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.
Chris Reed is counsel at law firm Tite & Lewis