Earlier this year the European Banking Authority (EBA) published the final Guidelines on the limited network exemption (LNE) under the Payment Service Directive 2 (PSD2) (available here). Following the consultation phase initiated by the draft (our article on the draft is available here), further clarifications were added which are relevant to all service providers who plan to rely on the exclusion as well as those who already do.
Most importantly, the EBA Guidelines require a resubmission of the notification for entities which rely on the LNE and have already submitted a notification in the past.
The Financial Market Authority (FMA) – as the relevant National Competent Authority (NCA) in Austria – has notified the EBA that it is fully compliant with the Guidelines. The FMA has published the German translation of the EBA Guidelines on its website (available here) and in July 2022 published updated notification forms which implement the new EBA Guidelines (available here).
Background of the EBA Guidelines
The so-called "limited network exemption" consists of three different sub-exemptions from the licence requirements and scope of PSD2, i.e.:
- instruments allowing the holder to acquire goods or services (i) within the premises of the issuer, or (ii) within a limited network of service providers under a direct commercial agreement with a professional issuer (limited network exemption in the narrower sense);
- instruments which can be used only to acquire a very limited range of goods or services (very limited product range exemption); and
- instruments for the acquisition of specific goods or services for specific social or tax purposes (social and tax exemption).
Key aspects of the new EBA Guidelines on the Limited Network Exemption under PSD2
The following points will have the most significant impact on the current and future scope of application of the LNE:
- Technical and contractual restrictions are required cumulatively: the issuer of the instrument must use technical as well as contractual restrictions in order to ensure that the instrument is only used in a limited way and does not allow for the possibility to develop into a general-purpose payment instrument. The EBA Guidelines already in their draft version clarified that contractual restrictions alone are insufficient.
- In-premises exemption not available for online businesses: payment instruments allowing the holder to acquire goods or services only in the premises of the issuer can only be used in physical premises and cannot be used in online stores. This means that any issuer who plans to issue or already has issued a payment instrument to use in an online store relying on this exemption, must or will have to rely on a different exemption. The EBA clarifies that "within the premises" sets out a restriction on geographical location(s).
- Functional connection between goods and/or services: for the instrument to be considered limited under the very limited product range exemption a functional connection between the goods and/or services should exist and the assessment by the NCA of this functional connection should be determined by the specific category of goods and/or services with a common purpose as identified by the issuer. This corresponds to the current regime applied by the FMA. The EBA Draft Guidelines originally proposed that the functional connection depends on a leading product/service whose ancillary services will then be covered by the instrument.
- Quantitative information required: in order for the regulator to be able to review the notification by issuers relying on the LNE in the narrower sense and the very limited product range exemption, the issuer has to provide information such as, but not limited to, geographic area, volume and value of (expected) payment transactions or the maximum amount to be credited to the payment instrument as all envisaged by the issuer.
- Provision of services by regulated entities: The EBA clarifies that regulated entities may also issue unregulated payment instruments that fall within the scope of the LNE. However, the provision of services should be distinguishable from the regulated services provided by a specific visual manifestation, e.g. by a common brand for the unregulated product.
- Intermediary receiving funds do not fall under LNE: if the issuer uses a third-party entity as intermediary who receives the funds that are then transferred on the payment instrument, the third-party does not fall within the scope of the LNE as the activity is not directly related to the purchase of goods and/or services. This means that the third-party usually will need to apply for authorisation as a payment institution in order to provide that service.
- Common brand (≠payment brand): Providers in the limited network of the issuer, who rely on the LNE in the narrower sense, have to offer their goods and services under a common brand which characterises the limited network. In the case of a group comprising several retail chains where each chain uses a separate brand, the use of the instrument of one of the retail chains in the other retail chains would not fall under the scope of the LNE as it would entail using the same instrument to make payment transactions to acquire goods and services within more than one limited network. The use of a common payment brand (as opposed to a common general retail brand) would alone not be sufficient in the EBA's view. Groups of retail chains offering combined payment voucher cards across their various brands should therefore (re)assess whether changes to the current structure would need to be made.
- Changes to the notification process: The EBA Guidelines clarified that the issuer can be established in an EU Member State different from the one where the payment instrument is used. It underlines that there is no geographical limitation of the LNE, and that cross-border provision of services is permitted (which so far has been seen differently by some EU Regulatory, e.g. the German BaFin). Hence the notification should not be submitted in the country in which the issuer is established, but only in the countries in which the payment instrument is used by users and the threshold is exceeded. Regarding the threshold the EBA Guidelines further clarify that a notification should be submitted once the threshold is exceeded, even if the time period in which the threshold was crossed is less than 12 months.
This among all the other changes should be taken into account by all issuers submitting their notification to the relevant authorities after 1 June 2022.
Resubmission of existing notifications
Issuers who previously benefitted from the LNE under PSD2 or the E-Money Directive and have already submitted a notification, need to be particularly aware about the differences between the FMA Guidelines and the EBA Guidelines when considering what additional information needs to be provided. A three-month transitional period was granted. This means that according to the EBA Guidelines, the new notification needs to be submitted by 1 September 2022. The FMA should assess the resubmitted notifications in an expedited manner. In July 2022 the FMA published the information on its website that re-notifications of existing LNE notification need to be made by 1 September 2022 and has updated its notification forms to be used therefore (see here).
The new EBA Guidelines on the LNE can have a significant impact on providers which already rely on the LNE today because EBA restricts the application of LNE for certain fact patterns (e.g. the use of a common voucher card across different retail chain brands of the same group). This could require introducing changes to the current set-up of exempted payment instruments. On the other hand, the EBA Guidelines clarify that all options of the LNE can also be applied on a cross-border basis (which so far has been interpreted differently by some EU regulators, e.g. by the German regulator BaFin), which will make it easier to set-up an exempted payment product across multiple EU Member States and further harmonises the application of the PSD2 regime in the EU. Generally, providers should evaluate whether they may be able to (continue to) rely on the LNE also under the new EBA Guidelines' approach. For issuers who already previously benefitted from the exclusion and had previously submitted a notification, the EBA Guidelines set out a requirement to resubmit a new notification by 1 September 2022 which takes into account the EBA Guidelines' clarifications (and the FMA has published on its website that it will follow this approach).