Payment Services Directive (PSD) .

1. Payment Services Directive (PSD). Rob Robinson 28 May 2009

2. Contents 1 Background to the PSD 2 How the PSD affects banks 3 Insights and industry issues from our experience

3. Background to the PSD

4. Background Impacts Insights Background - SEPA and PSD The PSD is a key part of the move towards SEPA - compliance is mandatory by 1 November 2009 • SEPA • The Single Euro Payments Area (“SEPA”) is a major industry initiative led primarily by the banking community. • The current SEPA timeline envisages a single EU market for payments by 2010 • Under SEPA there is to be no difference between a "domestic" and a "cross-border" payment. 1 November 2009 Member states implement PSD into national law February 2008 PSD regulations laid before UK parliament December 07 Published in official EU Journal October 2007 FSA appointed as UK’s “competent authority” April 2007 Euro Council and Parliament agreement December 05 EC adopts legislative proposal for PSD PSD Progress (2005 - present) • PSD • The Payment Services Directive (“PSD”) provides the legal framework for SEPA. • The PSD must be implemented into national law by 1 November 2009. • Compliance with PSD is a mandatory requirement for banks.

5. How the PSD affects banks

6. Background Impacts Insights PSD requirements - overview For the first time, the payment services activities of banks will be subject to statutory regulation • Scope • (Title I of PSD) • Sets out the scope of the PSD • Defines key terms • Information for customers • (Title III of the PSD) • Prescribes the information that banks have to give to customers Payment Services Directive • Rights and Obligations • (Title IV of the PSD) • Sets out the rights and obligations of both the bank and the customer • Prudential rules (Title II of PSD) • Not relevant to banks • Sets out authorisation requirements & prudential rules for non-banks

7. Background Impacts Insights PSD requirements - Title I - definition of a payment service Current accounts, credit card accounts and some savings accounts will be in scope Payment accounts allowing the user to place and withdraw cash, and execute payments (direct debits, standing orders, payment cards) • Current accounts, e-money accounts, flexible easy access savings accounts Execution of payment transactions where funds are covered by a credit line (e.g. direct debits, standing orders, payment cards) • Current accounts, credit card issuers Issue and/or acquiring payment instruments • Card issuing and card merchant acquiring services Money remittance • Money transfer Telecom, digital or IT payments where acting solely as an intermediary (not relevant to banks) • Some mobile phone payments Not in scope - Intra-payment service provider relationships - Paper-based payments - Mobile operators adding value to services - Provider not in possession of funds

8. Background Impacts Insights PSD requirements - Title III - transparency and information requirements Banks will have to revise all of their customer facing documentation 1 Aims • Improve transparency of pricing and service levels, terms and conditions. • Inform consumers of the relative merits of payment systems and facilitate cross-border competition. • Framework contracts • Prior information and conditions • Changes in contract conditions • Termination by the service user • Information before execution • Information in individual transactions • Single payment transactions • Prior information and conditions • Information after the payment order/execution Rules Applicable to both Art 33 Burden of proving compliance rests on the information provider Art 50 Charges or reductions must be notified to users prior to transactions Art 34 Low value payment & e-money instruments require less information Art 32 Providers may not charge users for information required by PSD Art 49 Currency conversion charges and exchange rates must be given

9. Background Impacts Insights PSD requirements - Title IV - rights & obligations of providers and users For the first time the rights and obligations of banks and customers will be codified in law • Increase payments security. • Clearer refund rights. Aims • Faster end-to-end processing. • Eliminate float, with D+1 execution. When things go wrong… Correctly executed payment transaction Unauthorised transactions Consent Obligations Liability, refusal and revocation Value date and availability of funds Refunds Receipt Right of recourse

10. Insights and industry issues from our experience

11. Background Impacts Insights Industry issues - summary Banks are struggling to comply with all the provisions of the directive Key themes Corporate opt out – Banks are having to apply the PSD to corporate as well as retail customers. Interest rates – Banks may have to give 2 months notice of downward rate changes. Payment account definition – Still uncertainty as to which savings accounts are in scope. Unpaid item fees – Charges will have to correspond to the actual costs incurred. Immediate credits – Banks will have to make cash paid to an account available immediately. • Turbulent banking environment where organisational focus and resource are concentrated elsewhere. • Implementing PSD at the same time as new liquidity requirements. • Co-ordination across multiple jurisdictions and business areas. • Time is tight to investigate IT implications and design and implement solutions. • Unclear how to use the discretion provided by a more outcome-focussed regulatory framework. Death by a thousand cuts

12. Background Impacts Insights Industry issues - corporate opt out Banks are having to apply the PSD to corporate as well as retail customers Issue If banks are not able to identify their corporate customers that fall outside the definition of a “micro-enterprise” then they will be unable to take advantage of the opt out, and will have to apply the full PSD information requirements to all of their corporate accounts as well as retail accounts. Current interpretation of definition • PSD/HMT – Article 30 allows member states discretion in whether to apply the opt out. The Payment Services Regulations state that “parties may agree that any or all of the [information requirements] provisions…do not apply to a contract for payment services”. • FSA – as above. • Legal/Commentators – as above. Industry view • UK view – this is regarded, especially by banks, as being primarily a UK issue. • European View – the discretion given to member states on this issue has created a lack of consistency within the EU on the treatment of micro enterprises as consumers. Potential impact Identifying firms that qualify for the opt-out, maintaining accurate data going forward, potentially implementing “split” systems.

13. Background Impacts Insights Industry issues - interest rates Banks may have to give 2 months notice of downward rate changes Issue If interest rates applying to payment accounts are deemed to be within the scope of the PSD, banks will be required to give 2 months notice of downward rate changes on all accounts, or alternatively they would be required to link the interest rate to an external interest rate. Current interpretation of definition • PSD/HMT – refers to interest rates being applicable to payment transactions. • FSA – have indicated in their Perimeter Guidance (Annex 8, Q13/14) that they see payment accounts as separate from payment transactions. • Legal/Commentators – some commentators have interpreted this requirement as applying to interest on payments accounts as well as transactions. Industry view • UK view – some lawyers have taken the view that PSD does apply to notification of interest rates on accounts. However, other lawyers have taken the opposite view. Some firms are using a working assumption that interest rates applying to accounts are excluded. Interest rates against payment transactions are more likely to apply to the new category of payment institutions. • European View – Euro Commission Q&A 146 asks “is interest on payments accounts in scope?” The answer is yes, but there is no expansion given to confirm if this applies to Payment Transaction Account held by a non deposit taking firm, compared to a sophisticated savings account held with a credit institution. Potential impact Either quoting all rates in relation to reference rates (e.g. base rates), or advising rate changes individually to customers 2 months in advance.

14. Background Impacts Insights Industry issues - definition of a payment account Still uncertainty as to which savings accounts are in scope Issue If the definition of a payment account remains as broad as it is sometimes being interpreted then almost all savings accounts will be in the scope of PSD and would need remedial action to comply with PSD information requirements. Current interpretation of definition • PSD/HMT – defines a payment account as “an account…which is used for the execution of payment transactions”. • FSA – repeat PSD/HMT definition and expand to say that this captures for example current accounts, credits cards and flexible savings accounts. A distinction is made between payment transactions and the underlying account features, with the latter being out of scope of the PSD. • Legal/Commentators – some have interpreted this as catching almost all types of savings account, for example notice accounts. Industry view • UK view – current accounts and flexible savings accounts with similar features could be considered as being in scope, whereas savings accounts with restrictive features are out of scope. • European View – Q&A 150 also supports this view. Potential impact Reviewing and reissuing terms and conditions; notifying customers of interest rates; uncertainty around impact on savings accounts (e.g. ISAs, which have annual limits).

15. Background Impacts Insights Industry issues - unpaid item fees Charges will have to correspond to the actual costs incurred If banks comply with the PSD requirement that charges must reasonably correspond to actual costs, this may impact on how such charges are currently made and reported, affecting existing revenue streams. Issue Current interpretation of definition • PSD/HMT – states that a Payment Service Provider (“PSP”) is entitled to charge for notification of non-payment where “charges reasonably correspond to the PSP’s actual costs”. • FSA – charges must be agreed with customers and be in line with the PSP’s actual costs for making the notification. • Legal/Commentators – give different outcomes based on legal risks and commercial considerations. It has been suggested that charges could be based on average costs rather than any precise costs. Industry view • UK view – awaiting outcome of ongoing court case on bank overdraft charges. • European View – UK issue. Potential impact Current fees for unpaid items generate significant revenues. There could be a significant gap if the basis for fees were to be changed.

16. Background Impacts Insights Industry issues - immediate credits to non real time systems Banks will have to make cash paid to an account available immediately Issue To comply with the PSD requirement that cash placed on a payment account must be available immediately, banks would have to alter their batch based systems where accounts are currently only updated overnight. Current interpretation of definition • PSD/HMT – states that cash placed on a payment account must be made available and value dated immediately at the time of receipt. • FSA – as above. • Legal/Commentators – as above. Industry view • UK view – no dispute that “immediately” does apply to a normal payment account. This is a common problem for all firms with batch based systems, including all major UK banks. Consideration is being given to the interpretation that it is acceptable to run batch updates provided that immediate value can be shown from time of receipt (for example, on a shadow balance or file). The view in the case of credit cards is that a cash lodgement is made with the purpose of repaying a debt and not to have the funds immediately available to spend. • European View – bulk of European Countries do not provide credit card accounts, or accept cash payments to them. Potential impact Customer accounts cards on batch based systems are not updated immediately which may require some non core systems to change to generate immediate posting.

17. Questions?

18. PSD – how Deloitte can help Banks need help to meet the PSD compliance deadline of 1 November 2009 • Why now? • PSD compliance is a high priority for banks – the level of effort required has been underestimated. • Compliance with PSD is a mandatory requirement for banks and building societies. • The FR can take enforcement action against firms who fail to comply by 1 November 2009. • What are our services? • Gap analysis/healthcheck – evaluating PSD impact on a bank and the state of readiness of the bank. • Programme Management – project management of a bank’s PSD implementation plan, systems changes. • Quality assurance/internal audit – providing external assurance to banks’ PSD programmes. • Why Deloitte? • We have been working on some of the largest PSD programmes in the banking and credit card sectors. • We have a cross-firm proposition that leverages compliance, programme management and technology skills. • The delivery team combines FSA, industry and trade body experience. • We have been tracking the PSD for over 2 years and we understand the challenges facing banks.

19. Member of Deloitte Touche Tohmatsu