SEPA 2.0: The New Regulatory Reality Governing the Integration of the Euro Payments Market
In February 2012, the European Parliament (EP) adopts the ‘Regulation Establishing Technical Requirements for Credit Transfers and Direct Debits in Euros’ (the single euro payments area (SEPA) Regulation). This will define 1 February 2014 as the deadline in the euro area for compliance with the core provisions of this regulation.
Effectively, this means that as of February 2014, existing national euro credit transfer and direct debit schemes will have to be replaced by the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) schemes. The SCT and SDD schemes were developed by the European Payments Council (EPC), in close dialogue with the customer community, as requested by European Union (EU) governments, the European Commission (EC), the EP, and the European Central Bank (ECB).
The majority of market participants recognise the value of setting a deadline for migration to harmonised SEPA payment schemes through EU regulation. The EPC shares the view that an end date for phasing out legacy euro payment schemes for credit transfers and direct debits ensures planning security for all market participants and eliminates the high costs of running multiple payment schemes in parallel. The EPC also welcomes that the SEPA Regulation establishes one end date for compliance of euro credit transfer and direct debit schemes with this regulation, as opposed to two separate end dates as originally envisaged by the EC. This will spare bank customers such as businesses the duplication of implementation efforts and required resources.
The EPC has frequently pointed out that full migration to SEPA is subject to the EU legislator establishing the appropriate legal and regulatory environment. The SEPA Regulation sets the conditions to fully realise the benefits inherent to the harmonisation of the euro payments market. A study carried out by Capgemini, on behalf of the EC in 2007, found that the replacement of existing national euro credit transfer and direct debit schemes by harmonised SEPA payment schemes holds a market potential of up to €123bn in benefits, cumulative over six years to the advantage of payment service users (PSUs). As confirmed by the findings of this study, these benefits for bank customers are, however, contingent upon swift migration to a single set of SEPA payment instruments by both the demand and supply sides.
It is important to note that the SEPA Regulation does not only affect payment service providers (PSPs) but also PSUs such as businesses. Specifically, the SEPA Regulation includes provisions with regard to the initiation of payments, the use of the International Bank Account Number (IBAN – ISO standard 13616) and the Business Identifier Code (BIC – ISO standard 9362), as well as direct debits relevant to the corporate community1:
The SEPA Regulation defines the meaning of the ISO 20022 XML message standard as follows: “ISO 20022 XML standard means a standard for the development of electronic financial messages as defined by the International Organization for Standardization (ISO), encompassing the physical representation of the payment transactions in XML syntax, in accordance with business rules and implementation guidelines of Union-wide schemes for payment transactions in scope of this Regulation.” The “implementation guidelines of Union-wide schemes” referred to in this definition are, for example, the implementation guidelines published by the EPC with regard to the SCT and SDD schemes. These guidelines are available for download on the EPC website at www.epc-cep.eu. For more information on the ISO 20022 message standards see www.iso20022.org.
The SEPA Regulation also states that a PSP “shall ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission, the message formats specified in point (1)(b) of the Annex are used.” Point (1) (b) of the Annex to the SEPA Regulation specifies that the message formats referred to in Article 4a. 1d are the ISO 20022 XML message standards.
The Regulation allows individual EU Member States to extend the deadline for compliance with this provision – i.e. to allow PSPs to offer conversion services. It is recommended that corporates verify at national level whether the requirement to use the ISO 20022 message standards as described above applies as of February 2014 (in the euro area) or only at a later stage.
The SEPA Regulation details the use of the account and bank identifiers IBAN and BIC. It also specifies the timelines leading to the application of the so-called ‘IBAN only’ rule, which the EU legislator introduced in the last stages of the legislative process. For cross-border payments the ‘IBAN only rule’ will apply as of February 2016 – i.e. PSUs will not be required to provide the BIC with a payment instruction. For national payments, the ‘IBAN only rule’ will apply as of February 2014; however individual EU Member States have the option to delay this to February 2016 if required.
The SEPA Regulation allows for the optional continued use of national account identifiers by consumers during a transitional period. The regulation defines Basic Bank Account Number (BBAN) as follows: “BBAN means a payment account number identifier, which unambiguously identifies an individual payment account with a PSP in a EU Member State and which can only be used for national transactions while the same account is identified by IBAN for cross-border transactions.”
The regulation includes a provision, which states that EU Member States are “permitted to allow, until 1 February 2016, PSPs to provide PSUs with conversion services for national payment transactions, enabling PSUs that are consumers to continue using BBAN”, instead of the IBAN.
The SEPA Regulation makes it mandatory for PSPs to offer specific mandate checking features to bank customers. A mandate is signed by the payer to authorise the biller to collect a payment and to instruct the payer’s bank to pay those collections. The Regulation, however, implies that these mandate checking obligations do not apply to the SDD Business-to-business (B2B) scheme developed by the EPC. Responding to the specific needs of the business community, the SDD B2B scheme offers a significantly shorter timeline for presenting direct debits and a reduced return period than the SDD Core scheme.
The reason for the shorter timelines of the SDD B2B scheme, compared to the SDD Core scheme, is that business payments by direct debit require a timely certainty about the finality of the payments, so that goods or services can be delivered, while minimising financial risks and costs for the payee.
The SEPA Regulation states that any “valid payee authorisation to collect recurring direct debits in a legacy scheme prior to 1 February 2014 shall continue to remain valid after that date and shall be considered as representing the consent to the payer’s PSP to execute the recurring direct debits collected by that payee in compliance with this Regulation in the absence of national law or customer agreements continuing the validity of direct debit mandates”. In other words, this Article ensures the continued legal validity of existing mandates under the SDD schemes and therefore facilitates the transition to the SDD schemes by bank customers (both creditors and debtors).
The SEPA Regulation stipulates that the prohibition of multilateral interchange fees for regular cross-border direct debit payments applies as of November 2012. For national direct debit payments, a clause allows the existing practices to be continued until February 2017.
The gtnews Payments Survey 2011, which asked its corporate treasury readers to rank SEPA instruments among regularly used methods to make and receive payments found that just over a third of respondents regularly made payments via SCT, while 14% used SDD. Almost 20% of corporate respondents already invested in SEPA compliance and more than 40% said that investment plans were already in the making, whether that is within a three-month timeline or just ‘at some point’.
The gtnews 2011 Payments Survey results also show that some corporates are still hesitant to invest in SEPA services. When asked if their organisation planned to make that investment in the future, 20% of those corporates operating in western Europe stated they had no plans. Taking into consideration that corporates handling euro payments in the EU will have to comply with several provisions of the SEPA Regulation, it is strongly recommended to identify the resources required to adapt operations and systems in accordance with applicable deadlines – i.e. to set up a SEPA implementation project at the level of individual businesses now.
The SEPA Regulation also redefines the process governing the evolution of the SCT and SDD schemes. To date, the EPC develops the SEPA payment schemes and frameworks, based on global technical standards developed by international standardisation bodies, in close dialogue with the customer community. It remains the EPC’s objective to ensure that the SCT and SDD Rulebooks evolve in response to proven market needs, based on a predictable release schedule.
It must be clarified, however, that the EPC can no longer be held accountable in this regard. Moving forward, the EPC will be under the legal obligation to align the SCT and SDD Rulebooks with the technical requirements detailed in Article 4a and in the annex to the SEPA Regulation. The SEPA Regulation gives power to the EC to amend the technical requirements set out in the annex to the regulation through ‘delegated acts’. Delegated acts are a new addition to the EU decision-making landscape. They were introduced by the Lisbon Treaty, which entered into force in December 2009 and more specifically, by Article 290 of the Treaty on the Functioning of the EU (TFEU).
Whereas European legislation is adopted by the EU legislators: the Council of Ministers (made up of representatives of the 27 EU Member States) and the EP (made up of 754 directly elected members), Article 290 TFEU allows the Council and EP to delegate the power to adopt non-legislative acts to the EC (the executive body).
When adopting these acts, the EC has committed to consulting experts appointed by EU governments in its preparatory work. It is uncertain to what extent the EC will consult SEPA stakeholders not appointed by EU governments. The EC has reiterated that it has a lot of autonomy in relation to adopting delegated acts and “experts will have a consultative rather than an institutional role in the decision-making procedure”.
All market participants obliged to adapt systems and operations with the technical requirements applicable to the SCT and SDD schemes decreed by the EC, would greatly appreciate it if the regulators were able to make specific information on the principles and timelines governing the further evolution of the schemes available. To date, the EC has however not yet publicly commented on the matter.
1All references in this article relate to the version of the SEPA Regulation as published by the Council representing EU Member States on 16 December 2011.