DEUTSCHE BUNDESBANK Headquarters

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1 DEUTSCHE BUNDESBANK Headquarters Deutsche Bundesbank Postfach Frankfurt am Main European Commission Internal Market DG MARKET C 4 200, Rue de la loi 1049 Brussels Belgium By Unofficial Translation Your ref., your communication of Our ref. Telephone, name Date R 0-6 (0 69) Dr Thomas Ollinger Dear Sirs At the last meeting of the "Payment Systems Government Experts Group" in Brussels you invited us to comment on the working document entitled "A possible legal framework for the Single Payment Area in the Internal Market" and to answer the questions raised in it. We are happy to comply with this request. BBk-Vordr (PC) Please allow us first of all to make some general remarks. 1. It is no doubt right and proper in some areas to review the laws on payments to see whether they are coherent in a Single Payment Area in the Internal Market and to adopt Community legislation where necessary. Nevertheless, when reading through the working document one can gain the impression that there is to be harmonization through legislation even in areas where it does not appear to be necessary. We, on the other hand, hold the view that wherever possible market participants should first of all be given the opportunity to make their contribution to achieving the goal of a Single Payment Area by self-regulation and development of new technologies and standards. 2. Regulation through legislation also entails the risk that market participants will be squeezed into too tight a corset, with the consequence that innovation will be held up and the existing choices, which benefited consumers, merchants and payment service Bank building Telephone Fax / Internet S.W.I.F.T. Wilhelm-Epstein-Straße 14 (0 69) (0 69) zentrale.bbk@bundesbank.de MARK DE FF Frankfurt am Main or

2 providers, will no longer be available. In future customers and merchants should still be free to choose whether they wish to use a high-security payment instrument (with correspondingly higher costs) or one which tends to have a slightly higher risk and correspondingly lower costs, provided the risks are clearly apparent and the parties involved are aware of them. In some respects the ideas in the working document seem to go in a different direction. 3. Furthermore, care should be taken to ensure that new payment legislation at Community level does not make it impossible to use systems which work well and are accepted by the market participants at national level. The aim of the initiative should be to regulate crossborder payments in such a way that consumers can make payments across the borders without problems and at prices which compare with those in their own country. This does not require complete harmonization of all the European laws on payment transactions. There are different "cultures" in some cases which should be accepted as long as they do not jeopardize the objectives mentioned above. This is in line with the principle of subsidiarity which, although mentioned in the working document, does not seem to govern all the considerations raised in it. 4. It should also not be forgotten that in the end consumer protection always has to be paid for by the consumer. Where legislation to protect the consumer is concerned it is always necessary to question whether it will, firstly, lead to higher prices, which are no longer in proportion to the purpose of the legislation, which was to protect the consumer, and, secondly, whether it will not result in price increases for all consumers, while only some of them will benefit from the new arrangements. 5. In the overview of EU legislation on retail payments (p. 11) the E-Money Directive should be removed from the column headed "Payment Legislation" and placed instead in the first column of the "Other Legislation Relevant to Payments", as this regulation relates primarily to banking supervision. -2-

3 In answer to the individual questions: Question 1: Do we need a coherent concept to improve the Single Payment Area? There is no doubt that a coherent concept to improve the Single Payment Area is a good idea but the decisive factor is what such a concept should cover. Question 2: What are your views on these general preliminary considerations? What other subjects should be examined in this context? Please refer to the introductory remarks. Apart from this, we agree that Interbank payments should be excluded from the legal framework. Question 3: Do you agree that all means of payment - credit transfers, card payments and electronic payment instruments, direct debiting as well as cheques - should be considered by this initiative? In principle, none of the payment instruments mentioned should be left out of the discussion. However, the particular characteristics of the different forms of payment should be taken into consideration now at this stage of the discussion: As cheques are technically outdated, their use should not be encouraged by European initiatives. Where direct debiting is concerned, care should be taken to ensure that harmonization at European level does not take away the basis for national systems which work well and are accepted by businesses and customers. In this respect, where there is considered to be a need for a harmonized EU direct debiting system, one could first of all consider introducing an additional European direct debiting system to complement the existing national systems. A European direct debiting system of this kind should be developed first and foremost by the European credit industry; if it should emerge that there is a need for action in terms of European legislation, appropriate measures can be considered. With regard to card payments, care needs to be taken to ensure that there is no unnecessary intervention in the contractual relationships between the parties under civil law. Various type of card payments have emerged and they each have specific advantages and disadvantages. Card users and outlets are free to choose which of these different systems to use. The only important point is that there is transparency concerning -3-

4 the advantages and disadvantages of the various models. Harmonization in this area could lead to an undesired restriction of the freedom of choice. Question 4: Do you agree that all payments made within the European Union - both at national level and cross-border payments - should be covered? At least where direct debiting is concerned, future legislation should relate only to crossborder direct debiting, for the reasons outlined above. Full harmonization appears to be overambitious, given the extremely different structures in the various member states. It would take too much time, with no certainty that the result would be successful. It is also not necessary for the purpose of ensuring a Single Payment Area. Legislation covering cross-border direct debits would be sufficient for this. Even this would only be necessary if the European credit industry is unable to offer a solution of its own. Question 5: Do you agree with keeping the (well-established) threshold of for retail payments? The threshold of should not be increased. Question 6: Do you agree that the initiative should focus on the "customers" (hence including SMEs) and not only on the "consumers"? Question 7: Do any of the definitions contained in the existing legal texts present difficulties? Is there a need for adaptation/clarification? Questions 8-10: Is there a need to review at EU level the market access and the licensing requirements for undertakings providing payment services? Should there be a special regime for undertakings providing only payment services? How can competition between payment service providers (including payment transmission services) be improved? Under German law, the transmission of cashless payments and clearing is banking business (Section 1 (1) No. 9 KWG [German Banking Act]) and therefore requires a banking licence (Section 32 KWG). There is no "simplified banking licence" for payment service providers. The aim of bringing these types of business under banking supervision is to ensure the security and convenience of cashless payments and clearing, which are important to the national economy. It seems reasonable to make the same provisions under Community law, in order to ensure the security and reliability of payments throughout the EU and, at the same time, create a -4-

5 level playing field. This would also establish equal competitive conditions. A special regime or a "simplified banking licence" for operating giro business does not seem to be advisable, in our view. Questions 11-13: Is there a need to establish a new EU body to improve the standard setting in the field of payments? If so, what would be the appropriate form/statute of such a body? How should such a body act to validate standards? What is the role for legislation in this area? Issues of standards in the field of payments should be resolved by the European Payment Council on its own initiative. We do not believe that there is any need for a new European authority/institution. There is the risk of over-bureaucratisation. Questions 14-15: Is the VAT question a serious concern in the field of payment services? Are there other issues related to payment services and taxation? Question 16: How does each Member State deal with the issue of non-resident accounts? What justifications are given for different treatment of residents and nonresidents in this area? In Germany, payments between resident and non-resident accounts are still sometimes treated differently from payments to and from purely resident accounts. The credit institutions give the following reasons for making this distinction: duties to report statistics, statistical requirements within the institutions and the desire of customers that such payments should be made differently. Question 17: Do you agree that the special treatment and conditions for non-resident account-holders is an obstacle for the Single Market which has to be eliminated? We hold the view that there is no longer any justification for different treatment of resident and non-resident currency accounts held in euros, at least as far as the prices and charges are concerned. Question 18: Is there a need to regulate value dates for payments at European level? The question of the value dates of transferred amounts for the beneficiary is regulated in Germany in Section 676 (1) sentence 4 BGB [German Civil Code]. According to this, a credit to a giro account, even if made subsequently, has to be made in such a way that the value -5-

6 date of the amount received in the customer's account, unless agreed otherwise with business owners, is the date of the day on which the amount was made available to the credit institution. From our point of view, a corresponding European regulation would be very welcome because it would provide clarity and transparency for the customer and create a level playing field. Question 19: Are there different needs for different kinds of payment instruments? Any regulation would have to cover all bookings to giro accounts, irrespective of the payment instrument used. Question 20: Do you consider that portability of bank account numbers could also be a realistic approach for the payment sector in future? Portable account numbers seem unrealistic in the foreseeable future because this would mean abandoning the IBAN concept. Question 21: What should be done in order to avoid excessive charges preventing customer mobility and competition? In Germany there does not seem to be a problem with excessive charges for closing accounts. As a matter of principle, however, it would seem advisable to be cautious about possible legislation in this area because this would encroach upon the contractual relationships between the bank and the customer. From the point of view of competition it seems sufficient if the relevant charges have to be transparent; agreements about the level of the charges should be left in principle to the contracting parties. Questions 22-23: Is there a need to introduce legal provisions as a framework to facilitate the introduction of the Common Criteria/Protection Profiles methodology in the EU? What should be the role of public authorities within a co-ordinated and structured security approach involving all stakeholders? Here it should be left mainly to the market participants to establish Common Criteria / Protection Profiles to increase security in payments. We do not consider that there is currently a need for legislative action to be initiated in this area. Questions 24-25: Are further initiatives needed, and if so with respect to which specific problems, in the -6-

7 legally binding and non-binding field in order to make networks and information systems more secure with respect to payment transactions? If so, which stakeholders should be more involved? What should be the role of public authorities in the EU? Question 26: Which appropriate legal measures should be considered in relation to the allocation of legal responsibility and customer protection in the case of a breakdown or disruption of a payment network? The legal responsibility in the case of breakdowns in a payment network should be left, in principle, to the contractual agreements between the parties. Apart from this, we would refer to the existing money-back guarantee, which is not dependent on fault and which ensures that transferred amounts that do not reach the recipient are refunded. One should err on the side of caution in introducing liability provisions which go further than this, particularly where consequential damages are concerned, as this could lead to unpredictable financial risks for the providers of payment services (refer also to further details in answer to Questions 41/42). Question 27: Are there any legal or administrative obstacles to implementing FATF Recommendation VII, which need to be removed? Questions 28-29: How do you evaluate the present legal environment for digital certification services for payments in the Internal Market? Are there loopholes which are specific for payment transactions? Are there any legal or technical barriers hampering the mutual recognition of electronic signatures for payment applications in the Internal Market? Question 30: Would there be problems if the information requirements (information to be provided before contract conclusion, in the contract and after transactions) relating to the use of any non-cash payment instrument were to be harmonized in Community legislation? Question 31: Do you agree that it is necessary to further promote the idea of ADR mechanisms in the Single Payment Area by foreseeing legally binding provisions regarding ADRs in any future EU payment legislation? -7-

8 Question 32: What is the legal situation in Member States for different kinds of payment instruments with respect to "revocability/cancellation"? Under German law the following rules apply to credit transfers: In principle, cancellation of credit transfers is permitted if the cancellation has been notified to the beneficiary's credit institution by the time the amount transferred is made finally available to that credit institution for crediting to the beneficiary's account (Section 676a (4) sentence 1 BGB). In contrast, when using payment systems, it is no longer possible to cancel the credit transfer after the time specified in the rules of the system (Section 676 a (4) sentence 2 BGB). Where debit transactions are concerned, the following distinction is made in German law: If it is a debit transaction using the direct debiting method ("direct debit"), the person owing the payment is not allowed to protest to his bank about a debit that has already been made. If, on the other hand, the debtor has issued a collection authority to his creditor and his account is debited on the basis of a debit transaction using the "collection authority method", the debtor may protest to his bank about the debit charge. In principle there is no time limit on this opportunity for objecting; however, the general terms and conditions of the banks usually contain a rule that debit transactions are considered to be authorized if the customer does not object to the direct debit charges made in a particular quarter within a specific period after being notified of the quarterly statement. In the credit card business signature of the payment slip is considered as an instruction from the cardholder to the card company to pay the amount stated on the slip to the contracting company. According to the prevailing opinion in the literature and court rulings, this instruction is not revocable; objections arising from the relationship between the customer and the contracting company cannot, as a general rule, be asserted in the relationship between the customer and the card company. Question 33: Do you consider that diverging rules on "revocability/cancellation" represent a problem for the proper functioning of the Internal Market? There are already adequate rules concerning revocability in the laws on credit transfers, given the rules in the Credit Transfer Directive (97/05) and the Settlement Finality Directive (98/26). As far as debit transactions are concerned, it should be borne in mind that in Germany there are two well-established and accepted methods, each offering different options for revocation, which allow the contracting parties to select the most suitable option depending on their interests. In this respect harmonization at European level carries the risk that the parties could lose this welcome freedom of choice. -8-

9 Question 34: Do you consider it necessary and appropriate to introduce sanctions or penalties for cases of non-compliance with certain provisions of the payments legislation? It would be premature to introduce sanctions or penalties. Also, this would be a matter for the jurisdiction of the Member States. Questions 35-36: Should payment providers have under certain circumstances joint liability with the merchant in the case of "non-delivery of product"? Should payment providers also be liable in the case of "non-conformity of the products or services with the contract"? We agree with the Commission's analysis in that complaints arising from the relationship between the cardholder and merchant should never have an impact on the relationship between the cardholder and the card company. However, this should apply not only to the case where there are problems in the relationship between the cardholder and the merchant related to the "quality of the products", but also, as a matter of principle, to the case raised in the analysis, where the cardholder maintains that he has not received the goods he ordered. This problem is not specific to the use of credit cards, but applies quite generally to the mail order business and it should be possible to solve it by means of obligations to provide documentation on the receipt of mail order goods and appropriate rules concerning the burden of proof. Overburdening the card company generally with this risk, on the other hand, seems unreasonable. On the contrary, problems with performance should always be settled between the contracting parties with whom they arise. A different approach can only apply if there is no doubt that the merchant is responsible for a clearly provable abuse of the law. Only in such blatant exceptional cases should problems in the relationship between the cardholder and the merchant have an effect on the relationship between the cardholder and the card company. In German law this is achieved through general clauses (Section 242 BGB: "good faith"), which are elaborated in detail by court rulings. It should not, however, be the role of European legislation to formulate individual cases in which problems between the cardholder and the merchant exceptionally have an effect on the relationship between the cardholder and the card company. Regulations of this kind could prove to be too inflexible. -9-

10 Question 37: In the case of liability of the payment provider, should it cover all noncash means of payment (including cheques, credit and debit transfers, micropayments, etc.) offered by the payment provider? These considerations do not apply to the same degree to cheques (which can be blocked by the issuer until the debit is charged to the account) and, under German law, to debit transactions using the collection authority method, where the person owing the payment can object to his account being debited within a particular period. The debit transaction is then reversed. Question 38: In the case of liability of the payment provider, should it be limited to distance selling? See answer to Questions Questions 39-40: Do you agree that payment providers should be obliged, in the case of disputes, to prove that a payment transaction was accurately executed? Are there other issues to be addressed in the context of the burden of proof? It would probably be reasonable for the payment provider to be obliged to prove that a payment was correctly executed. Question 41: Should the issue of consequential damages be dealt with in the legal framework? Concerning the issue of consequential damages we would point out that significant parts of the Credit Transfer Directive 97/05 represent implementation of the UNCITRAL Model Law on International Credit Transfers. However, the Directive deviates from the rules of the Model Law in its treatment of consequential damages. Whereas Article 18 of the Model Law stipulates that there is no claim for compensation for consequential damages except where damage has been caused intentionally or knowingly, there is no equivalent rule in the Credit Transfer Directive. It seems advisable for several reasons to provide for specific exclusion of liability for consequential damages: As a rule it is not possible for payment providers to see whether a payment made by them carries the risk of high consequential damages. Only the person issuing the payment instructions has this knowledge. Imposing the risk of consequential damages on the payment provider therefore seems unreasonable, unless the assumption of such a risk is specifically agreed between the parties (possibly in return for correspondingly higher charges). -10-

11 Liability of the payment provider for consequential damages would ultimately increase the costs of transmitting payments for all participants in payment systems, whereas the benefit would apply to only a few payments. As far as we are aware, the UNCITRAL Model Law has been put into practice in the USA in such a way that liability for consequential damages is excluded. Liability of European banks for consequential damages would therefore place the European credit industry at a serious disadvantage compared with its American competitors. Question 42: What is the existing legal situation in the Member States with regard to consequential damages in the area of payments? In Germany, liability for consequential damages currently exists in principle; however, such liability can be limited by the parties (for example through general terms and conditions) to (Section 676 g (4) sentence 5 BGB). Question 43: Please comment on these considerations [Our/Share/Ben approach] and changes to be envisaged. Are there specific further aspects to be covered resulting from the concept? The EU Regulation on Cross-Border Payments in euros may well also exacerbate the problem of approaches to charging. It remains to be seen, however, whether in future there will only be one option for charging or whether other models are offered as an alternative. This can and, for the time being, should be left up to the market Question 44: Are there any difficulties with the Commission's plans to reduce the present 6 days default execution times for cross-border credit transfers to a much shorter period? Question 45: Are there any other problems or shortcomings in the processing of crossborder credit transfers which should be addressed by future legislation? In our view, the rules on liability and the scope of application of the Credit Transfer Directive, which have until now been structured to provide minimum harmonization, should be designed to provide mandatory full harmonization. This would make it possible to avoid problems resulting from the varying degree of implementation of the Directive in some States (higher money-back guarantee in the Netherlands (see Draft Report on the Application of Directive 97/5, Section ) and the more broadly interpreted general scope of application ( ) in Germany). -11-

12 Question 46: Are there other circumstances of payment instruments (cheques) for which execution times should be determined in the Payment Area? Where cheques are concerned, it should continue to be the case that no legislative measures of any kind are taken to promote their use. Question 47: Is there agreement with the Commission's plans to raise the money-back guarantee of Article 8 in Directive 97/5/EC to ? The limit for the money-back guarantee should remain at for the time being. An increase should, however, be considered if the other party has explicitly excluded liability for consequential damages (see Question 42). Question 48: Are there any similar problems or shortcomings in executing crossborder credit transfers which should be addressed by future legislation? Questions 49-50: Should all electronic payment instruments be covered in the same legal framework? Is there a need to take account of the different nature of different EPIs? Here, care should be taken to ensure that harmonized rules for different payment instruments do not take away the variety of the instruments. There is certainly a point to having such variety, as it means that market participants have at their disposal different payment instruments with different legal frameworks and are therefore able to choose the payment instrument which appears most suited to the particular purpose. Question 51: Would there be any problems if the respective obligations and liability of the holder and issuer of an EPI were harmonized in binding legislation in accordance with the Recommendation on Electronic Payment Instruments? In principle we have no objections to harmonization of the rules on the obligations and liability of cardholders and card companies. However, there would be a need for detailed clarification of whether harmonization should take place in accordance with every point of the Recommendation on Electronic Payment Instruments or should deviate from it where necessary. Question 52: Should the holder be obliged to notify the issuer without delay after becoming aware of the loss or theft of an EPI or the means that enable it to be used? Yes. -12-

13 Question 53: Should the issuer be obliged to give the holder at least one month's notice before changing the terms relating to the use of an EPI? Yes. Question 54: Should the holder have limited liability before notification in case the instrument has been used fraudulently by a third party (e.g. non-authorized transactions) and if the holder has acted in accordance with the terms and conditions of the contract? Yes. Question 55: Should the holder have no liability after notification in case the instrument has been used fraudulently by a third party (e.g. non-authorized transactions? Yes. Question 56: Should the issuer be liable for the non-execution or defective execution of a holder's transaction? No. Question 57: Do you see any problem in obliging the issuer to ensure that appropriate means are available to enable the holder to make a notification at any time of the day and to provide the holder with the means of proof that he or she made such a notification, especially if the notification was made by telephone? No. Question 58: Do you agree that there is a need to harmonize the legal framework relating to direct debiting? Where direct debiting is concerned, care should be taken to ensure that harmonization at European level does not take away the basis for national systems which work well and are accepted by businesses and customers. In this respect, where there is considered to be a need for simplification of cross-border direct debiting, one could first of all consider introducing an additional European direct debiting system to complement the existing national systems. A European direct debiting system of this kind should be given priority over the European credit industry in its development; if it should emerge that there is a need for action in terms of European legislation, appropriate measures can be considered Question 59: Do alternative means for cross-border payments exist for all the cases that are today covered by cheques? -13-

14 There are no apparent cases in which cheques could not be replaced by other retail payment means in cross-border payments. Yours sincerely DEUTSCHE BUNDESBANK Krauskopf Dr Ollinger -14-