Scope of the Electronic Communications Exclusion
A recent change in financial services regulation called the Payment Services Directive 2 (PSD2) seems to have taken telcos by surprise and considering compliance should… Read more
A recent change in financial services regulation called the Payment Services Directive 2 (PSD2) seems to have taken telcos by surprise and considering compliance should have been achieved by 13 January 2018, the applicability of PSD2 to a telcos business (whether fixed or mobile) should be urgently considered. Telco activity that was previously comfortably outside the scope of regulation may now be regulated by the FCA: an electronic communications service and/or network provider will now be considered as providing a ‘payment service’ where it provides ‘a voice based service’ that includes a revenue share arrangement with a third party, unless the telco falls within an exclusion.
Telcos must now either become authorised or comply with stringent requirements to qualify for an exclusion. These requirements include the following:
- Spend cap limits on carrier billing amounts;
- Notification to the FCA of reliance on the exclusion; and
- Annual submission of regular auditors reports confirming compliance with relevant regulation, in particular figures on the spend cap limits.
Kemp Little LLP has been working with telcos since the European legislation was in draft form. We have been helping telcos and others in the payments eco-system navigate the following questions:
Which services fall within the means of ‘voice based services’?
Telcos provide a wide variety of services under the heading ‘voice based services’, but will need to have a clear understanding of the services that fall within this rubric to ensure they fall outside the regulated sphere entirely or sit within the exclusion. ‘Voice based services’ are wider than ‘premium rate services’ regulated by the Phonepaid Services Authority and include directory enquiries and other non premium rate revenue share services that subscribers call using their voice service.
Which services fall within the definition of payment services?
Where telcos allow their customers to use carrier billing to pay for purchases or make calls with a revenue share element (eg third party directory enquiries), telcos may be providing payment services. Telcos will therefore need to understand which of the services they offer might fall within the new PSD2.
How do spend caps affect general telco obligations?
To stay within the exclusion and avoid the need to be regulated, telcos will have to comply with the spend caps, restricting the amount customers can charge to their bill, on both a per-transaction and monthly basis.
How to comply with spend caps?
Compliance with spend caps will require telcos to have in place the appropriate systems and controls, which may be challenging for telcos with older systems. However, compliance – and, critically, being able to provide evidence of compliance on an annual basis – is essential, as telcos cannot benefit from the exclusion otherwise.
What control mechanisms should be put in place to continue to fall within the FCA exclusion?
Telcos will need to ensure that carrier billing or calls/SMSs with a third party revenue share element is strictly limited to the amount of the spend caps; their control mechanisms should be sufficiently robust to track customer spending as well as manage customer notification in the event spend caps are triggered.
What can happen (and is most likely) in the event the spend caps are breached?
Where telcos breach the spend caps, this means they are providing a regulated payment service without appropriate authorisation. They will need to regularise their regulatory position to avoid the imposition of sanctions by the FCA.
When is an audit report needed and what should it cover to continue to rely on the exclusion?
Telcos falling within the exclusion will need to make an official notification of their status to the FCA, as well as providing annual audit reports providing specific information about the services it provides with a ‘payment service’ element, essentially to demonstrate to the FCA that they do in fact comply with the requirements of the exclusion. Telcos must therefore have in place systems to allow auditors the necessary access, as well as the records of their compliance with the requirements for the auditors to review.
If you need further assistance or guidance considering these issues or wider guidance on PSD2 or other opportunities brought about by this change in legislation, please do not hesitate to contact us.