Banks may be affected by PISA proposals if they are involved in the operation of payment schemes or exchanges for digital payment tokens.
John Casanova, Sidley Austin
On October 27, 2020, the European Central Bank (ECB) issued a public consultation on its draft oversight framework for electronic payment instruments, schemes and arrangements (PISA).
Although less obviously affected than card and interbank payment scheme operators, commercial banks should take note of the ECB’s proposals and consider the potential impacts to their businesses.
Banks may be affected directly by the proposals if they are involved in the operation of payment schemes or exchanges for digital payment tokens, which the ECB plans to bring within scope of the regime. Banks may also be affected indirectly through their arrangements with such schemes and exchanges.
Lastly, with the European Commission’s review of the second EU Payment Services Directive (PSD2) expected in the fourth quarter of 2021, the ECB’s consultation could have broader significance to banks that provide regulated payment services.
This article provides a brief overview of the ECB’s consultation and highlights certain points that may be of interest to banks.
Oversight framework
The PISA oversight framework will apply to the governing bodies of payment schemes and arrangements in relation to their activities, systems, and procedures linked to certain electronic payment methods denominated, funded, backed or redeemable in euro.
The ECB’s stated intention is to replace and expand on its existing Harmonised Oversight Approach, Oversight Standards for Payment Instruments, and related oversight frameworks for cards, direct debits, credit transfers, and the security objectives for electronic money.
Key changes to the existing frameworks include:
a) extending the scope of application of certain of the Principles for Financial Market Infrastructures to a broader range of payment schemes and arrangements, including principles relating to governance, risk management, settlement arrangements, access, and disclosure;
b) enhancing reporting requirements, including incident reporting; and
c) bringing certain digital payment tokens within scope of ECB supervision.
Exemption policy
The ECB has proposed a points-based system for determining which payment schemes and arrangements will be subject to the PISA framework. Points will be applied under four categories:
(i) the size of the end user or payment service provider base;
(ii) the degree of market penetration in terms of volume;
(iii) the degree of market penetration in terms of value; and
(iv) geographic relevance, relating to the number of countries in which the scheme or arrangement is actively offered.
Generally, payment schemes and arrangements awarded the threshold level of points would be subject to oversight under the PISA framework, unless operating under the rules of another payment scheme overseen under the framework.
Assessment methodology
The ECB has also proposed a new methodology under which it, and relevant national central banks, will supervise payment schemes and arrangements within scope of the framework against the applicable principles. A self-assessment conducted by the governing body of the scheme or arrangement will form the main input for such supervision.
Why is this important to commercial banks?
Max Savoie, Sidley Austin
Based on the consultation documents published by the ECB, the PISA framework looks set to apply to a broader range of schemes and arrangements than the frameworks it replaces. The expansion of the framework to include digital payment tokens may well be a primer for more active regulatory supervision of stablecoin exchanges, and other platforms on which digital payment tokens may be transferred (together with other developments such as the proposed EU Markets in Crypto-Assets (MiCA) Regulation). With more banks starting to venture more confidently into this space, many could find that their activities fall within the ECB’s expanding supervisory remit.
In addition, the application of additional principles and reporting obligations to more traditional payment schemes (such as card schemes) could have knock-on effects for banks that participate in those schemes, as the scheme operators may need to revise the rules they apply to their participants in order to ensure the scheme is able to satisfy the relevant requirements. Scheme operators may, for example, require more extensive information from participants or impose additional rules relating to risk management to ensure the scheme is able to satisfy the ECB’s supervisory principles.
Lastly, as the PISA consultation forms part of a broader array of ongoing regulatory reforms relating to the payments sector by EU policymakers, it may be a good indicator of what is to come. Some of the key concepts under the proposed PISA framework are derived from PSD2 and the proposed MiCA Regulation would (in its current form) significantly extend the scope of regulatory requirements applicable to firms involved in issuing or distributing crypto assets, including digital payment tokens. Banks should therefore pay close attention to the ECB’s responses to the PISA consultation, as these may influence or reflect the thinking of other EU institutions.
Next steps
The ECB’s consultation closed on December 31, 2020. The ECB has said it will assess all responses, make any required amendments to its proposals. It will then publish its finalised PISA framework, which will take effect one year after publication.
John Casanova and Max Savoie are partners at law firm Sidley Austin.
