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Electronic money (e-money) is described as an electronic store of monetary value on a technological device that may be used to make payments to people and businesses other than the e-money issuer. In the Republic of Cyprus, electronic money services can only be supplied by electronic money institutions that have been authorized by the Central Bank of Cyprus (CBC).
The regulatory framework in perspective
Payment services:
The main goals of Directive 2007/64/EC, Directive 2009/110/EC and Directive 2015/2366 were to put an end to the fragmentation of the European payment services market and increase competition in the payment services sector.
For these purposes, the Directive harmonised the prudential requirements and facilitated the access of new payment service providers in the market.
Electronic money services:
The Directive 2007/64/EC (as amended) modernised the regulatory framework applicable to electronic money institutions. A number of inconsistencies which caused a disruption of the level playing field between payment services institutions and electronic money institutions and prevented the arrival of new entrants in the sector are now resolved.
For the purposes of harmonisation with the acts of the European Community, the Central Bank of Cyprus (“CBC”) issued the Payment Services Law, 2009-2010 and the Electronic Money Law, 2012 and 2018. In accordance with the Laws, payment and electronic money services may only be provided in the Republic of Cyprus by an institution which has been granted the relevant authorisation by the CBC.
In the aforementioned Laws the following are, inter alia, defined:
The amount of the initial capital as well as the amount of own funds that institutions are required to maintain;
The methods for safeguarding the funds received;
The delegation of operational functions to third parties;
The right to exercise the freedom of establishment and the freedom to provide services in another EU member state without establishment.
Distinguishing between payment and electronic services
What is a payment service?
A Payment Service (PS) is one of the services listed below:
1. Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account.
2. Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account.
3. Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider:
Execution of direct debits, including one-off direct debits;
Execution of payment transactions through a payment card or a similar device;
Execution of credit transfers, including standing orders.
4. Execution of payment transactions where the funds are covered by a credit line for a payment service user:
Execution of direct debits, including one-off direct debits;
Execution of payment transactions through a payment card or a similar device;
Execution of credit transfers, including standing orders.
5. Issuing and/or acquiring of payment instruments
6. Money remittance
Execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting only as an intermediary between the payment service user and the supplier of the goods and services
Payment Service Provider (PSP) means one of the following persons:
Credit institutions;
Payment institutions;
Electronic Money institutions;
European and National Central Banks;
Member states or regional authorities;
Post office giro institutions.
A Payment Service User can be any person using a payment service (e.g. natural or legal persons whether acting in trade /profession or as a consumer).
What is electronic money?
Electronic money means a monetary value represented value represented by a claim on the issuer, which is:
Electronically – including magnetically – stored (e.g. chargeable internet based account, magnetic card);
Issued on receipt of funds for the purpose of making payment transactions (conversion of bank money into electronic money); and
Accepted by a natural or legal person other than the electronic money issuer.
Electronic Money Issuer means one of the following entities:
Credit institutions;
Electronic money institutions;
Post office giro institutions;
European and National Central Banks;
Member states or regional authorities.
Similarities and differences
Similarities
Licensing procedure (Central Bank of Cyprus)
Content of application file
Shareholding requirements
Administration & Infrastructure requirements
Accounting and external audit requirements
Both EMIs and PIs can perform commercial activities in addition to their core activity.
Differences
Capital requirements (EMIs: €350.000, PIs: from €20.000 - €125.000)
Legal form (EMIs more restrictive, PIs: “legal person”)
EMIs are duly authorised by Law to conduct payment services, i.e. all services in the scope of PIs. The contrary is not possible as PIs cannot issue e-money.
QUESTIONS AND ANSWERS
Question 1: Who can set up an Electronic Money Institution?
Electronic money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer (source: ECB).
Electronic money services in the Republic of Cyprus may only be provided by an electronic money institution which has been granted an authorisation by the Central Bank of Cyprus (CBC).
An authorisation for the operation of an electronic money institution is only granted to a legal person which has been incorporated and has its head office in the Republic of Cyprus.
The following persons may provide electronic money services in the Republic of Cyprus without obtaining the prior approval of the CBC:
- Banks licensed by the CBC or by a competent supervisory authority of another EU member state.
- Cooperative credit institutions which have been licensed by the Authority for the Supervision and Development of Cooperative Societies of Cyprus.
- Institutions which provide postal payment services and which issue electronic money by virtue of relevant legislation.
- The European Central Bank and national central banks when not acting in their capacity as monetary or other public authorities.
- Member states or their regional or local authorities when not acting in their capacity as public authorities.
- Electronic money institutions that have been granted and maintain a valid authorisation to operate by the competent supervisory authorities of other EU member states.
These institutions may either exercise the right of establishment or the right to provide services on a cross - border basis, provided that the competent authorities of the home member state submit to the CBC a notification.
Question 2: Are there any restrictions?
Restrictions exist on:
The amount of the initial capital that electronic money institutions are required to maintain.
- A legal person applying for authorisation shall maintain, at the time of authorisation, an initial capital of at least EUR 350.000.
The amount of own funds that electronic money institutions are required to maintain.
- Capital requirements for the provision of payment services not connected with the issue of electronic money are defined by the Central Bank in one of the following three methods:
- Capital requirements for the provision of payment services not connected with the issue of electronic money are defined by the Central Bank in one of the following three methods:
Method A
The electronic money institutions own funds shall amount to at least 10 % of its fixed overheads of the preceding year.
This amount may be adjusted in the event of a material change in an electronic money institution's business since the preceding year.
Where an electronic money institution has not completed a full year's business by the date of the calculation, the requirement shall be that its own funds amount to at least 10 % of the corresponding fixed overheads as projected in its business plan, subject to any adjustments at the request of the Central Bank.
Method B
There payment volume (PV) represents one twelfth of the total amount of payment transactions executed by the electronic money institution in the preceding year:
- 4,0 % of the slice of PV up to EUR 5 million, plus
- 2,5 % of the slice of PV above EUR 5 million up to EUR 10 million, plus
- 1 % of the slice of PV above EUR 10 million up to EUR 100 million, plus
- 0,5 % of the slice of PV above EUR 100 million up to EUR 250 million, plus
- 0,25 % of the slice of PV above EUR 250 million
The electronic money institution's own funds shall amount to at least the sum of the above elements multiplied by the scaling factor k which is defined as 0,5 , 0,8 or 1 according to the payment services provided.
Method C
The electronic money institution's own funds shall amount to at least the relevant indicator (refer to point a below), multiplied by the multiplication factor (refer to point b below) and by the scaling factor k which is defined as 0,5 , 0,8 or 1 according to the payment services provided.
a) The relevant indicator is the sum of the following:
i.interest income less interest expenses,
ii.commissions and fees received, and
iii.other operating income.
b) The multiplication factor shall be:
i.10 % of the slice of the relevant indicator up to EUR 2,5 million;
ii.8 % of the slice of the relevant indicator from EUR 2,5 million up to EUR 5 million;
iii.6 % of the slice of the relevant indicator from EUR 5 million up to EUR 25 million;
iv.3 % of the slice of the relevant indicator from EUR 25 million up to 50 million;
v.1,5 % above EUR 50 million.
Question 3: Summary of the process
Legal persons interested in obtaining an authorisation for providing electronic money services, must
- complete and submit to the CBC an Application for authorisation as an Electronic Money Institution (EMI)
- ensure that all required data and documents are included in the application before submitting it to the CBC (refer to question 4)
Legal persons
a) which hold/propose to hold, directly or indirectly a shareholding of 10% or more in the share capital of the applicant or
b) which are partners in an applicant partnership must complete the Questionnaire QHL
Natural persons
a) who hold /propose to hold directly or indirectly a shareholding of 10% or more in the share capital of the applicant
b) who are partners in an applicant partnership and
c) who are directors/proposed directors of the applicant as well as persons who will be responsible for the management of the applicant must complete the Questionnaire QHN
Natural persons
a) Each member of Management Body or
b) A key function holder of the applicant must complete the Questionnaire MMB-KFH as well as a Time Commitment Table.
Additionally, each UBO is required to submit a Net Wealth Statement.
Question 4: Information required to be submitted
For the purpose of obtaining an authorisation as an electronic money institution, interested persons must submit
an application to the CBC
accompanied by the following information and documents
a) a program of operations, setting out in particular the issue of electronic money and the type of any possible payment services envisaged
b) a business plan including a forecast budget calculation for the first three financial years, which demonstrates that the applicant is able to employ the appropriate and proportionate systems, resources and procedures to operate soundly
c) evidence that the legal person applying for authorisation holds the required initial capital of at least EUR 350.000
d) a description of the measures taken to safeguard the funds of electronic money users
e) a description of the applicant's governance arrangements and internal control mechanisms, including administrative, risk management and accounting procedures, which demonstrates that these governance arrangements, control mechanisms and procedures are proportionate, appropriate, sound and adequate
f) a description of the internal control mechanisms which the applicant has established in order to comply with obligations in relation to the Prevention and Suppression of Money Laundering Activities Laws of 2007 (as amended) on information on the payer accompanying transfers of funds, as amended or replaced
g) a description of the participation of the applicant in a national or international payment system as well as the intended arrangements for outsourcing of operational activities, the intended use of agents and branches and the intended use of natural or legal persons for the distribution and redemption of electronic money
h) the identity of the persons that have, directly or indirectly, control of the applicant, including the identity of the natural persons that hold, directly or indirectly, shares or voting rights in one or more legal persons that have control of the applicant, as well as details on the size of the actual participation of these persons and their suitability, taking into account the need to ensure the sound and prudent management of an electronic money institution
i) the identity of directors and persons responsible for the management of the electronic money institution and, where relevant, persons responsible for the management of the issue of electronic money and the provision of payment services activities, as well as evidence that they are of good repute and possess appropriate knowledge and experience to issue electronic money and perform payment services, and in particular copy of clean criminal record report, no bankruptcy report, description of professional and academic qualifications, managerial or board positions held in other legal persons, previous employments and experience in the issue of electronic money and the provision of payment services
j) the identity of statutory auditors
k) the applicant’s legal status and articles of association
l) the address of the applicant’s head office
m) a draft contract between the electronic money issuer and the electronic money holder and the draft framework contract
n) the process for filing, monitoring, tracking and restricting access to sensitive payment data
o) the procedure for monitoring, handling and following up on security incidents and security-related customer complaints and
p) a security policy document, including a description of the IT systems and a detailed risk assessment of the electronic money institution.
IMPORTANT NOTE
No authorisation shall be granted by the CBC unless it has been satisfied that the electronic money institution maintains an adequate organisational framework for its electronic money services business.
This includes
- a clear organisational structure with well-defined, transparent and consistent lines of responsibility,
- effective procedures to identify, manage, monitor and report the risks to which it is or might be exposed,
- adequate internal control mechanisms, including sound administrative and accounting procedures.
Therefore, applicants must ensure that the arrangements, procedures and mechanisms described in their business plan are comprehensive and proportionate to the nature, scale and complexity of the electronic money services applied for.
Question 5: How long does the CBC approval process take?
Within three months of receiving a duly completed application for authorisation as an electronic money institution, the CBC shall decide on the application and notify the legal person applying for authorisation of the approval or the rejection of the application.
An application shall be considered as being duly completed only if it is submitted with all the required information (refer to question 4).
Rejection of an application shall be duly justified. *DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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