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Thursday, 23 October 2014

Regulatory Creep Hits Big Loyalty Schemes - Updated

Store cards, gift cards and loyalty rewards are currently exempt from payments regulation where they are only accepted within the issuer’s premises or certain ‘limited networks’. The new European Payment Services Directive (PSD2) extends the scope of this exemption - which is helpful to some extent - but also introduces a notification requirement that will bring big schemes within the regulatory sphere from 13 January 2018, and oblige the authorities to decide whether the exemption is available. This post explains the changes, and the options open to the operators of such schemes. For other significant changes proposed under PSD2, see my longer SCL article). The Treasury's consultation on introducing PSD2 in the UK has just been published.

The limited network exemption under PSD1 applies to services based on instruments that can be used to acquire goods or services only: (a) in the premises used by the issuer; or (b) under a commercial agreement with the issuer either (i) within a limited network of service providers or (ii) for a limited range of goods or services (my numbering/emphasis).

The exemption under PSD2 is for:
"services based on specific payment instruments that can be used only in a limited way, that meet one of the following conditions:
(i) instruments allowing the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a 'professional issuer' [not defined];
(ii) instruments which can be used only to acquire a very limited range of goods or services;
(iii) instruments valid only in a single Member State provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer." (my emphasis)
Some guidance as to what is meant by 'limited' or 'very limited' is to be found in the relevant recital to PSD2, which states:
"Instruments which can be used for purchases in stores of listed merchants should not be excluded from the scope of this Directive as such instruments are typically designed for a network of service providers which is continuously growing."

In addition, operators of large limited network schemes will be obliged to notify the regulator “if the the total value of payment transactions executed over the preceding 12 months exceeds the amount of EUR 1 million”. The regulator must then decide whether the exemption criteria actually apply, and notify the service provider if the regulator concludes that it does not. There is no provision for a transition period to explore alternative methods of supporting the scheme.

This means that loyalty scheme operators need to consider now whether their scheme will be covered by the revised limited network exemption in January 2018 and, if not, whether they should outsource the operation of the programme to an authorised firm (or the agent of one); or seek their own authorisation (or agency registration). Ultimately, they might restructure the scheme to fit the exemption, or shut it down.

The UK Treasury was due to issue its consultation paper in August 2016 on how it plans to implement PSD2, but has not done so yet. Hopefully, either the Treasury and the FCA will clarify further how they plan to handle the notification process, including whether pre-clearances will be possible during 2017, for example, given the lack of any transition period should the FCA conclude that the exemption does not apply.  Otherwise, queries arising out of any uncertainty in the application of the exemption might be directed to the FCA's Innovation Hub

This kind of regulatory 'scope creep' is not at all healthy, however. PSD2 should be clearer on what activities are in or out of scope. Instead, we have activities that are out of scope altogether; in scope but exempt; in scope with authorisation required; in scope with registration required; or in scope with only notification required (as here).

The question also remains why loyalty schemes are being targeted in this way. There is no evidence of any harm to consumers in such scenarios, as discussed in the context of earlier plans by the UK Treasury to propose self-regulation to ring-fence retail loyalty scheme funds (here and here).  It seems a case of mistaken identity with retail pre-payment schemes such as operated by Farepak and certain tour companies which don't appear to be caught anyway.  Similarly, there is no distinction made for 'limited network' schemes whose rules do not allow cash to be obtained by either redeeming the limited network value or seeking a refund for a purchase made using that value.

[First published 23.10.14, and since updated to reflect the change to the notification threshold; again to reflect the removal of 'unlimited' in a late draft of PSD2; and again to include the date when PSD2 takes effect in national law]