The road to regulation


3 May 2011


European Payments Council chair Gerard Hartsink provides a progress report on the march towards SEPA migration. He sets out some of the key issues his organisation believes need to be addressed if it is to come to fruition.


On 16 December 2010, the European Commission published a proposal for a regulation establishing technical requirements for credit transfers and direct debits in euros - otherwise known as the SEPA regulation. It will, among other things, establish definitive deadlines for SEPA migration.

The proposal is now being progressed following the 'co-decision' of the European Parliament and the Council of the European Union. This standard EU legislation adoption process is based on the principle of parity, meaning that neither institution can adopt legislation without the other's assent. Now under review, both institutions will table recommendations on how the proposal should be amended. For SEPA to come into force, the European Parliament and the Council must agree on a final version.

For the Council, the SEPA regulation is being considered by the Economic and Financial Affairs Council, which comprises the 27 EU member states' economics and finance ministers. It tabled its first draft compromise proposals in March and April 2011.

The Committee on Economic and Monetary Affairs is tabling recommendations for the European Parliament and published its draft amendment report on 30 March 2011.

Representatives from both institutions intend to finalise the adoption of the SEPA regulation in 2011, with the two official bodies putting this final draft report to a vote in first reading between June and September 2011.

The European Payments Council (EPC) is analysing this draft report and, based on a first assessment, welcomes the fact that it introduces several key improvements to the proposed SEPA regulation, as follows.

Stakeholders must be consulted when the technical requirements applicable to euro credit transfer and direct debits are amended through delegated acts.

The original SEPA proposal foresees that the legislator will confer executive powers upon the European Commission (EC) to unilaterally amend these technical requirements through so-called 'delegated acts' - in other words, the EC would be able to change these requirements without the approval of the Council and the European Parliament.

The EPC maintains that such articles should be deleted from the proposal. If the legislator decides, however, to confer these executive powers upon the EC, then it must - at a minimum - be ensured that any such amendments are subject to recommendations by the European Central Bank and, in addition, that they reflect a full stakeholder consensus based on adequate market consultation.

The EPC therefore welcomes that the draft report introduces the requirement of stakeholder consultation on technical requirement amendments through delegated acts, and notes that the Council also seems to support this improvement.

The EPC also suggests that timelines for amended technical requirements to take effect be aligned with those governing the release management cycles established by international standardisation bodies and European scheme management bodies.

'Interoperability' of payment schemes should be deleted.

The proposal implies a theoretical scenario of multiple EU-wide payment schemes for euro credit transfers and direct debits. In the EPC's view, this concept of 'interoperability' puts at risk the fundamental requirement of full reachability of all payment service providers across SEPA, counters the objective of overcoming the fragmentation of the euro payments market and disregards the principles governing an optimally efficient payment environment.

The EPC and the Council therefore welcome the deletion of this reference from the proposal.

One end date for migration to an EU-wide SEPA payment scheme should be set.

The EPC advocates setting one end date at EU level for SEPA migration, as detailed in the draft report. Currently, the proposal foresees two separate end dates.

Large-value payment systems should be excluded from the scope of the SEPA regulation.

The scope of the proposed SEPA regulation is too broad. Such legislation would also encompass euro payments made via large-value, systemically important payment systems such as the European Central Bank's TARGET2 and the Euro Banking Association's EURO1.

Thus, the EPC supports the draft report's clarification of the fact that large-value payment systems should be excluded from SEPA - an opinion shared by the Presidency of the Council and the European Central Bank.

Article 6 on multilateral interchange fees for direct debit transactions should be deleted.

Article 6 of the proposal states that "no multilateral interchange fee per direct debit transaction or other agreed remuneration with an equivalent object or effect shall apply to direct debit transactions". Following further evaluation of the possible implications of the proposal on the SEPA direct debits business model, the EPC adopted the position that Article 6 (and its related Articles and Recitals) should be removed, along with the November 2012 date mentioned in Regulation (EC) 924/2009.

The EPC continues to support the default multilateral balancing payment of a maximum 8.8 cents, and the commitment expressed to the directorate-general for Competition of the EC and the European Competition Network (ECN) 3 to review this figure after the migration period.

However, by prohibiting multilateral interchange fees, the proposal is premature and inconsistent with the provisions of Regulation (EC) 924/2009, in particular its 11th Recital and Article 15.

This proposal infringes upon the principle of proportionality laid out in Article 5 of the Treaty on the EU, which stipulates that the content and form of EU action shall not exceed what is strictly necessary to achieve the objectives of treaties. The SEPA regulation's objective is to achieve migration away from national payment schemes to pan-European schemes. An article that interferes in the cost accounting of commercial service providers is far from necessary to achieving this goal.

The prohibition of a per-transaction multilateral interchange fee would oblige banks to build a new business model at a time when they could legitimately base their forecasts on the possibility of applying cost-based multilateral interchange fees. It also infringes upon the fundamental principle of freedom of trade, as the objective to strengthen the single payment services market could be met by basing the fee level on the costs for banks in supplying this service, without prohibiting them in principle.

By eliminating the possible application of interbank fees, the proposal constitutes an infringement of the principle of an open market economy - that is, one that benefits all economic operators in the banking sector with regard to the reciprocal relations necessarily resulting from payment services activities.

Consumer rights established by the Payment Services Directive should not be rewritten.

The proposal makes it mandatory for payment service providers to offer direct debit mandate management features that are currently optional in the SEPA core direct debit scheme - features that 75% of consumers who make direct debit payments in the EU have not requested.

In proposing these technical requirements, the EC effectively reverses its position as previously communicated in a letter sent to the EPC in March 2010, which confirmed that the SEPA core direct debit scheme is based "on proven national concepts, fully meets the respective legal requirements and - in some points - goes even further than required by the Payment Services Directive in order to better satisfy customer needs".

It also noted that "factual and perceived security may not always coincide". It is clear that this part of the SEPA regulation proposal is based on a 'perceived' risk scenario that is not supported by market reality.

As mentioned above, the SEPA core direct debit scheme developed is not just fully aligned with the Payment Services Directive - which provides the legal foundation for the creation of an EU-wide single payments market - it exceeds the requirements, for instance in granting consumers a no-questions-asked refund right during the eight weeks following a direct debit payment.

As there is no basis to assume that the consumer rights defined in the directive would fall short, why would the EC want to overrule these with the forthcoming SEPA regulation? This implies that the EC has no confidence in the directive - a directive that it championed as a major achievement in the area of consumer protection only 18 months ago.

Endorsement of the proposed technical requirements would oblige the 4,000-odd payment service providers that have already implemented the SEPA core direct debit scheme to reinvest in their payment architecture. Subsequently, direct debits would become more costly for all consumers who are pushed to accept these mandatory features - which would be detrimental to the SEPA objectives.