The monthly law journal covering legal issues in banking, e-finance, e-money and online payments including, mobile payments (m-payments), micropayments, pre-paid cards and other payment cards, online banking, NFC (near field communication) and other contactless payments, digital currencies such as Bitcoin, mobile wallets and virtual money, e-invoicing, e-billing and e-payments, card fraud and other cybercrime, as well as regulatory regimes such as the E-Money Directive (EMD and 2EMD), the Payment Services Directive (PSD), SEPA, the US Electronic Money Regulations 2011, and the UK Bribery Act 2010. / read more
Regulation (EU) No 260/2012 (the ‘SEPA 2012 Regulation’) established common technical and business requirements for credit transfers and direct debits denominated in euros and was seen as an important building block in creating a single euro payments area (‘SEPA’) in the EU.
The SEPA 2012 Regulation originally set 1 February 2014 as the end-date for the migration to SEPA of direct debit payments and credit transfers in the euro area. However, the European Commission considered that the migration rates for credit transfers and direct debits were not high enough to ensure a smooth transition to SEPA and therefore adopted a proposal in December 2013 to introduce an additional transition period of six months - until 1 August 2014 - to ensure minimal disruption for consumers and businesses, in particular SMEs. The proposal was approved by the European Parliament on 4 February 2014 and will apply with retroactive effect.
The Parliamentary vote confirming the extension helps to provide some legal certainty for the six month ‘grace period’ announced by the European Commission last month. It effectively gives businesses until 1 August 2014 to prepare their systems to accept SEPA Credit Transfers (‘SCTs’) and SEPA Direct Debits (‘SDDs’) before legacy payment instruments are stopped. During the period up to 1 August 2014, banks and payment institutions will still be able to process direct debit and credit transfer payments that differ from the SEPA standard.
The European Commission took action because migration data indicated that a substantial number of market participants, and particularly small and mid-sized businesses (‘SMEs’), would not have fully migrated to the new common standards by 1 February. The migration rates did not appear to be fast enough for the European Commission who had been monitoring the progress of all stakeholders: banks, payment institutions, national and local administrations, corporates (including small and medium-sized businesses), and consumers. Although migration rates had been growing over the last few months of 2013 to reach 64.1% for SEPA compliant credit transfers and 26% for SEPA compliant direct debit payments in November 2013, the European Commission sensed that it was highly unlikely that the target of 100% for SCTs and SDDs would be reached by 1 February 2014.
The European Commission hopes that this extended transition period, which it views as an exceptional one-off measure, provides certainty to payment service users that their payments will continue to be processed after 1 February 2014 and allow those not yet migrated to do so as rapidly as possible.
SMEs, small public administrations and local authorities appear to be the least prepared for actual migration - the efforts of the banking industry and national campaigns to raise awareness did not appear to produce the results expected by the European Commission.
The proposal of an extended transition period had met with resistance from the Eurosystem of central banks, which had been urging the region's banks to be ready for the original SEPA migration end date of 1 February 2014. The Eurosystem of central bankers in Europe has been continuing to urge corporates and banks to still aim for the original migration deadline at the start of February 2014, citing the recent upturn in SCT compliance to 74% and 41% of SDDs. However, with just weeks to go until the migration date, it seems that the last-minute surge was enough.
One of the biggest reasons cited for market participants in the euro area struggling to achieve compliance on time is the absence of clarity about SEPA. Certain departments in corporates were not given enough information about the full impact of SEPA until sometime after the deadline had been set. The scale of the technological and business process changes required made the deadline they were facing extremely tight. The SEPA Scheme Rulebooks are open to interpretation and dealing with different counterparties in different EU countries has made achieving standardisation a challenge.
The extension of the migration deadline gives SMEs the extra time they evidently need to make the transition and it will give banks the breathing space to educate the SME market space and develop solutions for them. Nevertheless, companies should not take the announcement as a signal to relax - it should be viewed as a grace period for those who are struggling to be compliant rather than as an extension. The European Commission and regulatory authorities are not likely to be as lenient with companies who are not compliant by the 1 August deadline and may look to make examples of larger non-compliant companies. Therefore, it is recommended that companies stay focused on migrating to SEPA at the earliest possible opportunity, if not already compliant.
The key issue that results from this grace period is whether a six month delay is sufficient for the corporates to implement their systems so that they are SEPA compliant - and what will the European Commission's reaction be as the transition window winds down to 1 August 2014?
By Michael McKee, Partner, and Gavin Punia, Solicitor, at DLA Piper UK LLP