When is a Payment Account e-money?

When is a payment account also e-money?

Judgment of the Court (Fifth Chamber) of 22 February 2024 – ABC Projektai UAB v Lietuvos bankas (Case C-661/22). 

The CJEU affirms the previous AG’s opinion that a payment account can have funds added to it for future payment transactions for an unspecified time without it thereby becoming ‘ e-money’.

My summary

• It is fundamental to the nature of regulated payment services that a person exchanges their money for a specific form of regulated IOU. The specific nature of the IOU depends on the status of the person giving it and the product they provide.
• For non-bank payment accounts where no interest is granted, in effect customers are prepaying for the ability to make future payment transactions to third parties and themselves (via bank transfer or ATM).
• Whilst a payment service provider that is not a bank holds such funds (whether under e-money permissions or payment permissions) they have many similar obligations, including related to ring-fencing and safeguarding those liabilities to customers and not lending or borrowing against them.
• Therefore placing funds on a payment account to make payment transactions is not obviously different from doing the same under an e-money construct. 
• Where there is no payment account linked to a card then clearly the construct would appear to be e-money. 
• The framework contract with any payment service user (i.e. account holder) must therefore be clear whether the payment service provider considers the service to be the issuance of electronic money (assuming they have those permissions) or whether it is simply a payment account to be used for making payment transactions (including e.g. with a card).

Artificiality of e-money

The artificiality of ‘e-money’ in respect to payment accounts was considered in this case but not directly tackled. The court tried its best to make a distinction (in para 47):

“the issuance of electronic money is distinct from the mere entry in a payment account in that, inter alia, before being used for the purposes of such a payment, such money must be electronically ‘stored’, which implies that it has been issued beforehand..converted into a monetary asset separate from the funds received, and that its use as a means of payment is accepted by a natural or legal person other than the electronic money issuer.”

However, when you make a payment from a payment account it is against a regulated IOU of the bank, EMI or PI, that is to say your funds have already been converted from a legal perspective so, with respect, this is really a distinction without a difference.

UK Position

We note that the FCA Guidance has not yet been updated to take account of this recent determination”

“As a payment institution, any payment accounts you hold must only be used in relation to payment transactions (see regulation 33 of the PSRs 2017). A “payment transaction” for these purposes is defined in regulation 2 of the PSRs 2017 as meaning “an act, initiated by the payer or payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and payee”. Our view is that this means that a payment institution cannot hold funds for a payment service user unless accompanied by a payment order for onward transfer (whether to be executed immediately or on a future date). Funds cannot be held indefinitely. They should not be held for longer than is necessary for operational and technical reasons.” (PERG 15)

However, we expect that the UK and Gibraltar law will follow the CJEU in matters related to the meaning of payment services and payment accounts whilst UK and Gibraltar law for payments and e-money is still substantially based on EU law.

Conclusion

In summary this is a good practical decision. Quite rightly, the CJEU determined that a payment account does not become e-money simply because it is pre-funded for future expected payment transactions. The description of the regulated service, the regulatory status of the provider and the wording of the contract entered into is therefore strongly determinative of whether a payment account is also e-money or not (rather than the length of time value is held on the payment account).