EBA consults on guidelines on the limited network exclusion under PSD2

On July 15, 2021, the European Banking Authority (EBA) published a consultation draft on guidelines on the limited network exclusion. The draft contains guidelines on the application of the exemptions under Section 2 Para. 1 no. 10 of the German Payment Services Supervisory Act (Zahlungsdiensteaufsichtsgesetz – ZAG). Contrary to what the name of the draft suggests, the proposed guidelines do not only contain explanations on limited networks, but also on limited-range products and payment instruments for certain tax and social purposes. Interested members of the public have until Oct. 15, 2021, to comment on the consultation draft. We have taken a first look at the document and would like to give you an overview of its main contents below.

Application of the EBA guidelines

The proposed guidelines are addressed to national competent authorities in the European Union. While they are not legally binding, a national authority must, however, explicitly state if it does not wish to apply the guidelines (so-called comply or explain principle). We assume that BaFin will adhere to the guidelines for Germany. We consider deviations, if any, to be likely only in a few sub-areas. The guidelines are to apply from 01.10.2022.

Guideline 1: Requirements for payment instruments covered by an exemption

In Guideline 1, the EBA explains the requirements it imposes on payment instruments that may fall under an exemption. In line with BaFin’s previous administrative practice for Germany, the exemptions should apply not only to physical payment instruments (e.g., plastic cards), but also to digital payment instruments (e.g., payment apps). On the other hand, it should not matter whether the products to be purchased are physical or digital goods and services. The issuers must ensure compliance with the restrictions justifying an exception not only contractually, but also technically. This requirement will pose new challenges for many issuers of such products. In addition, Guideline 1 essentially contains statements on whether and under what conditions multiple payment instruments may be offered in combination on a single storage medium (e. g. a payment card or a cell phone).

Guidelines 2 and 3: Requirements for limited networks

In Guideline 2, the EBA defines requirements that should be in place for a limited network. Compared to BaFin’s previous administrative practice, it is noticeable that the absolute number of participating merchants and the geographical area of use of the payment instrument are to play a special role. In addition, the number of users, customer categories and customer risks are mentioned as further new criteria for limited networks. Unlike today in Germany, a limited network is also to be able to exist only online without the same range of goods also being offered at a POS. In contrast, the “premises card” exception should only apply to merchants in a single building (e.g., a department store or shopping mall).

Guideline 4: Requirements for limited-range products

The requirements for limited-range products are quite similar to the current situation in Germany. There, the focus is essentially on a functional connection between the products to be purchased. However, greater emphasis is to be placed on whether there is a “leading” product when examining the exemption. As in the case of limited networks, further criteria are to play a role with the number of users, customer categories and customer risks, which currently do not apply according to BaFin’s administrative practice.

Guideline 5: Use of the exemptions by licensed institutions.

EBA clarifies that licensed institutions (e.g. banks or e-money institutions) can also issue products under an exemption. This is particularly important for the question of whether customers need to be subject to KYC measures under anti-money laundering laws. But it also plays a role in the safeguarding requirements. If a licensed institution issues products under an exemption, it must comply with various additional obligations. In particular, the customer must be clearly advised that a product issued under an exemption is subject to lower regulatory requirements.

Guideline 6: Notifications of the use of an exemption.

In Guideline 6, the EBA sets out what it expects from the notification procedure for the use of exemptions. In Germany, this notification procedure is governed by Section 2 Para. 2 ZAG. This topic was very important to the EBA because there were sometimes major differences in the notification procedures in the individual EU member states. Due to the importance of this topic, we will deal with it in a separate blog post.

Guideline 7: Requirements for special purpose cards (tax and social purposes)

Guideline 7 contains the potentially quite consequential statement that the payments instruments for tax and social purposes should not be required to fulfil the requirements applying to limited networks or limited range products. This will possibly have an impact on payment instruments issued as tax-exempt benefits in kind (so-called 44-euro exemption). The most recent statements by the German Federal Ministry of Finance on benefits in kind actually indicate that only products issued in a limited network or as limited-range products are to be recognized as tax-free benefits in kind. It is questionable whether this view can be reconciled with the EBA’s requirement. In principle, the member states (and thus also Germany) are not limited by the European Union in their tax sovereignty with regard to income tax. However, the legislator has referred to the ZAG exemption in Section 8 Para. 1 sentence 3 of the German Income Tax Act. It would be strange if one and the same law were to be interpreted differently in supervisory and tax law terms.

What are the consequences of the new EBA guidelines?

Even though the consequences of the new EBA guidelines can only be properly assessed once they have been adopted, we can, however, already say that there will most likely be products that cannot any longer be issued without a license under an exemption in the future. On the other hand, some restrictions which, according to BaFin’s administrative practice in Germany, should apply to certain exemptions could be dropped. The future treatment of special-purpose cards will be particularly interesting.

If all this is too abstract for you, I would ask you to be patient. We will be going into a little more detail on individual aspects and product categories in the coming weeks. So, stay tuned!

Cover picture: Copyright © Adobe/Yuri Zap