It is safe to say that many of us at some point have had a varied collection of multicoloured plastic cards in our wallets, ranging from membership cards, transport cards or vouchers.
Some of these closed-loop payment instruments are likely to fall within a specific regulatory ambit that exempts their respective issuers from licensing, due to their nature and usage – yet this exclusion has historically been rife of legal uncertainty, thereby warranting a new set of guidelines being published by the European Banking Authority (EBA) to clarify certain market queries and concerns.
By way of background, Directive (EU) 2015/2366 on payment services in the internal market (PSD2) − transposed under Maltese law by inter alia the Financial Institutions Act (FIA) (Chapter 376 of the Laws of Malta) − imposes a licensing obligation on an entity to issue payment instruments, such as payment cards. However, there are various exclusions or exemptions to this licensing requirement which, inter alia, emerge from the directive itself, one of which is the limited network exclusion (LNE).
The LNE focuses on closed-loop, low-value payment instruments that are merely used for specific purposes and only in three limited circumstances. In fact, Article 3(k) of PSD2 excludes from the directive services based on specific payment instruments that can be used only in a limited way and which meet any one of the following conditions:
- 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 issuer;
- Instruments that can be used only to acquire a very limited range of goods or services (for example, where the scope of use is effectively limited to a closed number of functionally connected goods or services regardless of the geographical location of the point of sale); or
- 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.
Therefore, service providers issuing specific-purpose payment instruments which are merely used in the above limited circumstances, may carry on such business without requiring a licence. However, if the limited purpose of the instrument eventually morphs into a broader and more general one, then the LNE no longer remains applicable.
Historically, the provisions of the LNE, as first introduced under Directive 2007/64/EC (PSD1), gave room to various diverging practices across the continent and, consequently, the European Commission limited the LNE's breadth under the PSD2.
In fact, PSD2 had introduced, under article 37(2), a notification requirement for service providers to duly notify the national competent authority should the value of the total payment transactions within the limited network exceed the threshold of €1 million over the preceding 12 months.
Upon such notification, the competent authority must then decide as to whether the activities qualify for the exemption or not on the basis of the criteria laid down under Article 3(k) of PSD2 as outlined above and inform the service provider of its decision accordingly.
Since the promulgation of the PSD2, feedback from the market revealed certain lacunae with respect to the LNE. Following a public consultation, the EBA also noted:
- a divergence in the modes of assessment used by various competent authorities in different EU member states in determining whether a payment instrument falls within the LNE or not, consequently causing a hindrance to the efficacy of the single market for payment services within the community which resulted in situations of regulatory arbitrage; and
- that some consumers using payment instruments within the LNE were also left unaware of the fact that they do not enjoy the protection offered by PSD2 since the payment instruments they used fell outside of the scope of the directive.
Following an assessment of such issues, the EBA published the guidelines on the limited network exclusion under PSD2 (EBA/GL/2022/02) principally aimed at providing national competent authorities with clarified modes of assessing whether a network of service providers or a specific range of goods fall under the LNE regime.
Primarily, the guidelines confirm that a "specific payment instrument" cross-refers to PSD2 definition under Article 4(14) PSD2 and that the application of the LNE is not limited to card-based payment instruments only, but also to other modes of payment, which can be used to purchase both physical and digital goods and services.
It further confirms that the issuers can issue more than one specific payment instrument under the LNE insofar as each instrument satisfies the conditions set out in the guidelines, and that a single payment instrument excluded under Article 3(k) does not enjoy any other exclusion under PSD2. It emanates from the guidelines that an issuer need not necessarily be a third-party issuer but it may also be a provider of goods/services or an acceptor in the limited network.
Furthermore, the EBA sets out a list of mandatory indicators that must be considered by the competent authorities in carrying out their assessments, which ultimately make a network 'limited' or otherwise, including inter alia that a direct contractual agreement for acceptance of payment transactions must be concluded between the issuer of the payment instrument and each provider of goods/services, and if applicable, also with each acceptor within the network.
In addition, it also establishes certain complementary additional indicators that should also be considered (e.g. the specific geographical area for the provision of goods and services set out by the issuer).
The guidelines clarify that the term 'premises' only refers to the physical premises of the issuer and not online stores, and also delves into the terms 'limited range of goods' and the 'functionally connected goods and/or services'. To this effect, the EBA sets out a number of mandatory and accessory indicators which authorities must bear in mind to check if there is a functional connection or otherwise.
Procedurally, the guidelines provide more clarity to the market as what information the notification relating to the LNE should contain, where the issuer is to submit the same and how this should be carried out. It was outlined that issuers who exceed the €1 million threshold for the value of payment transactions carried out in the preceding 12 months ought to notify the competent authority at the moment when the threshold is exceeded and not after the 12-month period referred to in Article 37(2) of the PSD2 elapses.
In terms of timing, the guidelines will enter into force on June 1, 2022, after which issuers already falling under the LNE will have an additional three-month transitional period to submit a new notification to their national competent authority.
Issuers who have already submitted their notifications in one or more member states are to ensure that they resubmit their notifications, in line with the guidelines, by latest September 1, 2022. Then, once the notification is received, the competent authorities are to assess the resubmitted notifications expeditiously.
Lastly, competent authorities in member states are obliged to notify the EBA as to whether or not they will be applying the guidelines or not, and if not, with reasons as to why they will not be applying them.
The author would like to thank Kyra Pullicino, an intern at Ganado Advocates, for his assistance during the drafting of this article.
This article was first published in the Times of Malta.
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