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THE NEW PAYMENT INSTITUTION UNDER MALTESE LAW

RELEASE DATE: 05 AUGUST 2010

by Dr. John Paul Zammit

Title II of the Payment Services Directive (Directive 2997/64/EC) (“PSD”) establishes a new prudential and supervisory regime for “payment institutions”, i.e. firms (other than credit or electronic money institutions) that carry out or intend to carry out payment services. The term “payment institution" encompasses a wide range of firms; from non-bank regulated financial institutions to other entities which were previously unregulated insofar as payments services are concerned, at least on EU level (money remitters and mobile network operators, by way of example).

The provisions of the PSD regulating PIs were partly transposed into Maltese law by Act II of 2010 which amends the Financial Institutions Act (Chapter 376 of the Laws of Malta) (the “Act”) and partly by the MFSA Financial Institutions Rules (the issued FIR/01/2010 and the forthcoming FIR/02/2010).

The Second Schedule to the Act sets out, amongst others, the activities in which a "payment institution" may engage; these can be broadly divided into four categories:

.Services in relation to a payment account, which services enable cash to be deposited in or withdrawn from a payment account or the execution of payment transactions by direct debits, through a payment card (or similar device) or a credit transfer;
Issuing and/or acquiring payment instruments;
Money remittance;
Execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator. However, the operator must act only as an intermediary for the payment services user.

A PI is also allowed to provide ancillary services and may operate payment systems and business activities other than the provision of payment services.

The primary difference between a PI and the other categories of payment services providers (particularly credit institutions and electronic money institutions) regulated by the PSD is that PIs are not allowed to receive deposits or other repayable funds from the public and must use funds solely to provide payment services.

The Act makes it clear that where a PI receives funds from a payment services user, with the view of providing payment services, it will not constitute a ‘deposit or other repayable funds’. The question is for what period such funds may be held by a PI. The maximum execution time limits the period of holding such funds and, as stated by the European Commission, the PI can only accept such funds on a payment account with an order for executing a payment transaction (or a series of them) on a given date, as in the case of direct debits or standing orders, where funds on a payment account are required to be placed prior to the execution of payment.

The Act requires any company intending to commence the business of financial institution in Malta to apply for a licence issued by the MFSA. In the case of a PI the MFSA has to communicate its decision on the application within 3 months of the application receipt, while in accordance to the Act.

Article 26 of the PSD provides the Member States with a possibility to waive the authorization and supervision provisions in the case of small PIs. This applies where the average amount of payment transactions executed in the preceding 12 months do not exceed EUR 3 million per month and none of those responsible for the management or operation has been convicted for financial crime. However, these PIs cannot benefit from the freedom of establishment and the freedom to provide services and Member States have the discretion to decide on whether they are entitled to carry on all or only some of the activities listed in Article 16. Malta has not opted to apply such a waiver.

Due to the fact that the scope of activities that PIs are allowed to carry out is relatively limited, the regulatory and supervisory requirements for PIs are less stringent than those applicable to banks. The PSD remarkably manages to adapt the payment services regime to the lower risks involved in a PI’s business, departing from the original e-Money Directive which disproportionately applied the provisions of the New Banking Directive to e-Money institutions.

1 EC Commission, Your Questions on PSD <http://ec.europa.eu/internal_market/payments/docs/framework/transposition/faq-2009_06_08_en.pdf > (no.18 ) Question 155