On October 27, 2020, the European Central Bank (ECB) issued a public consultation (Consultation) on its draft oversight framework for electronic payment instruments, schemes, and arrangements (PISA).
The Consultation invites feedback on three documents:
- a draft Eurosystem oversight framework, which sets out the scope and principles of the regime
- a draft exemption policy, which sets out criteria for determining whether a particular scheme or arrangement will be subject to the framework
- a draft assessment methodology, which prescribes how the ECB and relevant national central banks will assess schemes and arrangements within scope of the framework against its principles
The proposed PISA oversight framework would replace and expand on the ECB’s existing Harmonised Oversight Approach and Oversight Standards for Payment Instruments and related oversight frameworks for cards, direct debits, credit transfers, and the security objectives for electronic money. Oversight requirements under PISA would apply to the governing bodies of payment schemes and payment arrangements in relation to certain electronic payment methods denominated, funded, backed (either partly or fully), or redeemable in euro.
Key changes to the existing oversight frameworks include
a) applying specific provisions of the Principles for Financial Market Infrastructures (PFMIs)1 to payment schemes and arrangements within scope of the framework, including principles relating to governance, risk management, settlement arrangements, access, and disclosure
b) enhancing reporting requirements, including incident reporting, applicable to the governing bodies of relevant payments schemes and arrangements
c) expanding the scope of the framework to include digital payment tokens
The application of certain parts of the PFMIs to payment schemes and arrangements within scope of the oversight framework could have significant implications for payment systems that are not treated by regulators as being “systemically important,” as they may not currently be subject to these requirements. The enhanced reporting requirements could also be a material change for some payment systems, as their governing bodies will need to ensure they have systems and procedures in place to comply with these.
The expansion of the framework to include digital payment tokens is also significant as it lays the groundwork for closer regulatory scrutiny and supervision of stablecoin exchanges and other platforms on which digital payment tokens can be used to settle transactions.
In addition to overhauling the ECB’s existing oversight framework, the Consultation sets out proposals for a new methodology pursuant to which the ECB and relevant national central banks would assess payment schemes and arrangements against the principles of the oversight framework. The Consultation states that this assessment methodology is intended to ensure a consistent and harmonized application of the principles and that the answers provided by the governance bodies of relevant payment schemes and arrangements to the questions set out in the assessment methodology will serve as a key input for the oversight.
The ECB’s draft exemption policy establishes a points-based system under which it and the relevant national central banks would determine which payment schemes and arrangements will be subject to the PISA oversight framework. For these purposes, points would be applied under four categories:
(i) the size of the end user or payment service provider base
(ii) the degree of market penetration in terms of volume
(iii) the degree of market penetration in terms of value
(iv) geographic relevance, relating to the number of countries in which the scheme or arrangement is actively offered
Payment schemes and arrangements falling below the points threshold would be exempt from the PISA oversight requirements. However, below-threshold firms with rapid growth potential would be encouraged to liaise with the ECB and relevant national central banks on a preparatory basis.
A further exemption would apply to any payment scheme operating under the rules of another payment scheme that is overseen under the PISA framework.
Why is the Consultation important?
Firms operating, or planning to operate payment schemes and arrangements, including card schemes and other payment systems, as well as exchanges for digital payment tokens, should consider whether the proposed PISA framework could apply to them and, if so, what impact this would have on their business. Firms that rely on such schemes and arrangements should consider whether these oversight proposals could have an indirect effect on them, for example in relation to information the operators may require from them to comply with the reporting obligations.
Further, the Consultation may have broader significance for the payments sector as it forms part of an array of reforms by EU policymakers — in particular, the European Commission’s pending review of the second Payment Services Directive (PSD2), expected in Q4 2021, and its draft Markets in Crypto-Assets (MiCA) Regulation.2 It is noteworthy that the Consultation adopts the term “payment instrument” from PSD2 but extends the interpretation of the term to include credit transfers and direct debits, which would not typically be considered to be transactions initiated by a payment instrument for the purposes of PSD2. In this regard, the outcome of the Consultation and final form of the PISA framework adopted by the ECB could have wider implications for EU regulatory policy in this space.
The Consultation is open for feedback until 18:00 (CET) on December 31, 2020. The ECB has provided an open-ended response template, seeking views from any interested parties.
The ECB has stated that once the Consultation closes it will assess all responses and make any necessary amendments to the proposals before publishing the final version of the PISA framework, to come into effect one year after publication.
1 A set of international principles published by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions.
2 See further Sidley’s Update on the MiCA Regulation.
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