The new Electronic Money Regulations
This guide is subject to UK law and was last updated on 1st February 2011.
New regulations coming into force in April 2011 aim to encourage more firms to set up electronic money schemes and introduce new protections and safeguards for their customers.
E-money is money that is typically stored on a card which is linked to the user's account and can be used to pay for goods and services.
It is a rapidly expanding market. According to the Electronic Money Association, the number of e-money accounts operated by e-money issuers in Europe grew from 15 million in 2005 to 125 million by the end of 2009.
By far the largest volume of e-money business is currently carried out by issuers who fall outside the scope of regulation because their pre-paid cards can only be used for a limited purpose, such as in a single retail chain or at the office canteen.
But firms operating schemes in which the card is used to pay for goods and services with someone other than the issuer (such as a gift card or travel money card) must either be authorised by the Financial Services Authority (FSA) or registered with the FSA as a "small e-money issuer".
This regulatory framework was first put in place in 2000 by the First E-Money Directive. But in 2008, the European Commission concluded that the e-money market was developing more slowly than expected and that the Directive was holding it back.
The result was the Second E-money Directive of 2009, which is designed to encourage new entrants to the market by imposing lower capital requirements and a lighter regulatory regime for small e-money issuers.
Its provisions will be implemented in the UK by the Electronic Money Regulations 2011, which come into force on 30th April 2011.
Tim Dolan, financial regulation expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said all firms currently issuing e-money should start reviewing the new rules now.
"The Directive contains fundamental changes which mean that some firms who have been exempt from the e-money regime will now be caught by it, while others will now be exempt," he said. "In addition, there are significant changes to the amounts of capital which authorised e-money issuers are required to hold."
Dolan added: "It will be interesting to see whether the new regime results in more firms becoming small e-money issuers and firms such as mobile phone operators entering the money transmission market."
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