Thursday, June 08, 2017

Response to FCA consultation: please clarify what will happen to the payment in 'payment instrument' in article 3k?

This April, the FCA launched its consultation on the Implementation of the revisedPayment Services Directive(PSD2): draft Approach Documentand draft Handbook changes. When reading this I was in particular paying close attention to the discussion of the limited network exemption in article 3k.

Background: limited network exemption
The limited network exemption has its background in the fact that many retailer-based shopping or payment solutions exist, that have a function similar to that of a payment, albeit on a local scale or for a limited range of goods. In order not to be burdened with a huge supervisory obligation, the regulator has taken this class of activities out of the scope of the Payment Service Directive and rightly so.

There is a relevant difference between providing EU wide, reachable payment instruments and solutions that solve a specific niche retailer problem. But getting this right in all detail is tough and therefore the wording of article 3k is somewhat vague.
(k) services based on instruments that can be used to acquire
goods or services only in the premises used by the issuer or
under a commercial agreement with the issuer either within
a limited network of service providers or for a limited range
of goods or services;
This allows supervisors to apply the article in a sensible way, in line with the spirit of the regulation.

Changes in PSD2: from instruments to payment instruments
The Paysys report of March 2014, describes the following on the evolution of the article:

In its final report on the PSD II (11 March 201412) the ECON Committee accepted the Recital 12 with the statement of the Commission of the existence of “massive payment volumes and values” offering “hundreds or thousands of different products and services” which are wrongfully operating under the exception of the limited networks of the Payment Services Directive (2007/64/EC). In order to improve consumer protection, these huge payment schemes should no longer be waivered.

Therefore, the Commission proposed a narrowed definition of “limited network/limited range” (Article 3 k) and a very restrictive implementation. In general, the ECON Committee followed the proposal of the Commission by taking over uncritically its assumption of the existence of non-regulated “massive payment volumes” in the market.

In phrasing the new article however, something did happen that may have been legally quite relevant. The wording instruments changed into payment instruments. This means that instruments which do not qualify as payment instruments and are not used to deliver payment services under the PSD2, will not qualify.

(k) services based on specific payment instruments that can be used only in a limited
way, that meet one of the following conditions:

  • (i) instruments allowing the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a professional issue;
  • (ii) instruments which can be used only to acquire a very limited range of goods or services;
  • (iii) instruments valid only in a single Member State provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer; 

Effectively this takes out a lot of retailer instruments, which sometimes can be card-based, as they are not truly payment instruments but tools to add purchases into a shopping basket (which can be paid monthly via direct debit payment for example). It also means that petrol cards or fuel cards that are based on a similar mechanism - and may include a chain sale - will not fall under the exemption but can be considered out of scope.

Now, my personal guess is that while this legal consequence is clear, supervisors may want to ignore the relevant adjective 'payments' in order to keep their hold on near-payment mechanisms, even when they are not in scope of the PSD2 and do not fit under this definition. For that reason I was very interested to see what the FCA did with the difference between instruments and payment instruments.

What does the FCA propose to do with this?
It' turns out that in the consultation document the FCA sometimes pays lip service to the original definition, but mostly conveniently forgets the 'payment' part of 'payment instrument' in the definition of 3k. See for example their summary phrasing on page 19:
Limited network exclusion
2.18 Under the PSRs 2009, a business that offers a payment service may be excluded from regulation if its service is based on instruments that can be used only in a limited way to acquire goods or services in certain limited circumstances (often called the “limited network exclusion”) e.g. some gift or store cards.   
2.19 PSD2 aims to standardise the application of the limited network exclusion across the EU, and makes changes to the exclusion which mean it now applies less widely. One limb of the exclusion’s application is narrowed so that it relates to instruments used to acquire a “very” limited range of goods and services (rather than “limited range” set out previously in PSD). A new limb excludes certain instruments provided for social or tax purposes from regulation under the PSRs 2017. Our proposed amendments to Q40 and Q41 in PERG 15 give guidance on the scope of the amended exclusion. 
Then again, the formal notification form does state that the respondent should clarify if the notification tix all the boxes of the law:
Please explain how the product or service falls within the limited network exclusion specified, including details of the following where relevant:
  • the payment instrument; 
  • where and how the payment instrument can be used; 
  • where the customers or users are based; 
  • etc.....
Well, this proposed approach is pretty confusing, so therefore I sent in a reply to the consultation asking to clarify the FCA interpretation of article 3k. In doing so I also referred to the fuel card situation and the set up with chain sales.

Clarify the confusion: are you reading payment instruments as 'instruments' in 3k or not?
We are wondering why the FCA is properly using the delineation payment instruments in a lot of the texts on limited network exclusions, but when it comes down to the actual formulation of excluded activities in Perimeter Guidance, it chooses to forget the word "payments" and sticks to: payment services based on instruments used within a limited network of service providers or for a very limited range of goods or services (“limited network exclusion”). This would create an inconsistency in which the old understanding of limited network is moved towards the new PSD2-interpretations although the legal wording is substantially different.
Should we understand the changed wording to be merely an omission or a situation of intended regulatory scope creep, to include all kind of non payment instruments under the scope of the payments directive? 

When the final document comes in, we'll have a look at the response of the FCA, to see if things have become more clear.