Small Electronic Money Institution UK (Small EMI UK)
Electronic Money Institutions (EMIs) are non-bank payment service providers regulated under the Electronic Money Directive II (EMD2) and the Payment Services Directive II (PSD2) and national legislation implementing the Directives. In the United Kingdom, there are two types of EMIs which are small EMI UK (Small Electronic Money Institution UK) and Authorised Electronic Money Institution UK. In a nutshell, a small EMI is an entity that can issue e-money as well as provide payment services (except Payment Initiation Services and Account Information Services) only in the UK, and under certain limitations.
Considering the fact that the issuance of e-money is central to the services of both an authorised EMI UK and a Small EMI in the UK, a definition of ‘e-money’ is necessary. E-money itself is a very cumbersome term to define but in essence, it refers to the electronic and magnetic storage of monetary value on a technical device. You can read our article about e-money to have a deeper understanding of what e-money is and how it works.
Although a small EMI can provide its client with sort codes, account numbers, payment cards, the same as a fully authorised EMI- it should not be confused with banks. In fact, prudential and conduct regulations applicable to banks are very different from those that small EMIs are subject to and banks can provide a variety of services that neither “big” EMIs nor small EMIs can.
Small Electronic Money Institution UK legal framework
The EU Member States were given the chance to implement a lighter regime for entities interested in the issuance of e-money but whose outstanding e-money amount did not justify the regulatory regime imposed by the EMD2 and PSD2. Both EMD2 and PSD2 leave certain discretion to MS in the regulation of small EMIs. For example, some jurisdictions are stricter in relation to the information to be provided during registration as a Small EMI while others impose stricter limits on Small EMIs.
In the UK, a small Electronic Money Institution is subject to the Electronic Money Regulations 2011 (EMRs) and the Payment Services Regulations 2017 (PSRs) if it intends to provide payment services in addition to the issuance of e-money. Moreover, a small EMI UK must also comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, national implementation of GDPR, and other laws and guidance- including consumer protection legislation.
What services can a Small EMI offer?
Besides issuing e-money, as per Schedule I of the PSRs 2017, a small EMI UK can also apply to provide other payment services that are unrelated to e-money. For example, a small EMI UK can offer services that enable cash to be placed on a payment account and provide for all the operations linked with managing a payment account. In addition, small EMIs can offer money remittances, cash deposit and withdrawal services, or even direct debit and credit transfers. In terms of transaction handling, small EMIs can offer services for transferring funds on payment accounts with the payment service provider of the client or even with other providers, even in instances where the funds are covered by a credit line for the payment service user. These transaction execution services cover direct debit, credit transfers, and transactions that are carried out through cards or payment devices.
Small Electronic Money Institution UK capital requirements and safeguarind rules
In terms of the capital requirements that apply to a small EMI UK, all applicants must submit with their application evidence that the firm holds initial capital consisting of 2% of the average outstanding e-money where the business activities generate average outstanding e-money of EUR 500,000 or more.
However, if the applicant is a Small Electronic Money Institution UK that will not be generating an outstanding e-money amount of not more than EUR 500,000, no initial capital requirements apply and therefore no evidence of maintenance of those requirements is necessary.
Regarding unrelated payment services, a Small Electronic Money Institution UK can provide payment services unrelated to the issuance of electronic money on the same basis as a Small Payment Institution UK. Thus, it means that neither initial nor ongoing capital requirements are applicable for Small Electronic Money Institution UK in relation to their provision of unrelated payment services.
You should note that small EMIs have safeguarding requirements in relation to e-money issuance similar to those of Authorised EMIs while safeguarding requirements in relation to payment services are the same as for Small PIs in the UK. It means that when a Small EMI UK provides services not related to e-money issuance, it has the option of choosing to not safeguard customer funds.
How do you become a Small Electronic Money Institution in the UK?
There are specific requirements that are also restrictions that differ small EMIs from “big” EMIs.
To qualify as a small EMI the total business activities of a firm before the registration and registration must not generate an outstanding electronic money amount exceeding €5m and moreover. Moreover, the monthly average of the total amount of relevant payment transactions over the year before the small EMI application was filed should not be more than €3m. If limits are exceeding a Small Electronic Money Institution should apply for a “big” EMI license.
Lastly, the applicant must be a corporate body incorporated under the laws of the UK and must have its head office and if relevant, its registered office in the UK. Unlike authorised EMIs, Small Electronic Money Institutions are limited to the UK territory only, and do not have any passporting rights. Notably, this difference will disappear after 31 December 2020 with the end of the transition period.
When it comes to getting authorised as an EMI, the following information must be submitted with your application package:
- Company identification details;
- A Business plan as per Regulation 13(7)(b) of the EMRs for the e-money business and if payment services will be offered, such services must also be included in the plan. Moreover, the business plan should also include a background to the application, sources of funding, the target markets and a marketing plan.
- Governance arrangements and internal procedures as per Regulation 13(6) of the EMRs
- Safeguarding measures as per Regulation 13(7)(c) of the EMRs (even if you don’t need to safeguard funds at the time of the application you must show how you will do it when the requirement will apply)
- Anti-Money Laundering controls as per Regulation 13(6) of the EMRs
- evidence that the aforementioned requirements for becoming a small EMI are met in particular:
- evidence that when it starts its operations, the e-money business will generate a monthly average outstanding e-money of less than €5m; and
- evidence that in the 12 months before the application, the monthly average of payment services transactions was not excessive of €3m
- evidence that such a Small EMI meets the initial capital requirements
- a description of the safeguarding procedure adopted by the firm for the funds of e-money holders
The application, as well as information regarding any directors and persons responsible for the management of the small Electronic Money Institution (Small EMI), must be submitted via Connect. In order to use the Connect platform, the firm must be registered for access to Connect. This can either be done by either an approved person of the firm that carries out controlled functions or senior management functions or in case the firm has not appointed such individuals yet, by the authorised representative of the firm with the use of the firm’s Registration Key and Firm Reference number. It is worth noting that the registration process for small EMIs is cheaper and more straightforward than authorisation as a “big” Electronic Money Institution.
How can PSP Lab help with Small EMI UK license?
PSP Lab is a consultancy with a clear focus on Electronic Money Institution and Payment Institution licensing in the UK and the EU. Our consultancy does not only entail the filing of the application itself but also the establishment of the company, assistance with choosing software, HR recruitment, and preparation of all the necessary documentation for becoming Small Electronic Money Institutions UK (Small EMIs UK). If you want to know more about the authorisation process applicable to non-bank PSPs, check our website and don’t hesitate to drop us a query here.
We’ll be happy to help!