Different SEPA migration deadlines apply across the euro area during the “additional transition period” envisaged by the European Commission (EC), the European Parliament and EU governments, following the announcement of a six-month ‘grace period’, warns Javier Santamaría, chair of the European Payments Council (EPC). In this blog he examines the legal situation in detail in regard to the single euro payments area (SEPA), the uncertainty caused by the announcement, and the differing country-by-country situation. [Note: for other unrelated viewpoints on the SEPA delay from Celent, Lloyds Bank, RBS, Bottomline, Accuity and Bank of America Merrill Lynch (BofA Merrill) please click on the highlighted links].
The European Commission commented on 20 December 2011 on the agreement by the European Parliament and the Council of the European Union (EU) about the original 1 February 2014 deadline for migration to the single euro payments area (SEPA) in the euro area: “The reasonable transition periods applied will allow customers and banks to get used to the adjustments in domestic payment transactions, provide legal certainty, avoid the cost of operating dual payments systems and bring forward the substantial future benefits of SEPA.” (The Council of the European Union is the EU institution where the national Member States’ government representatives sit - i.e. the ministers of each EU Member State with responsibility for a given policy area). The vast majority of European laws are adopted jointly by the European Parliament and the Council of the EU.
In February 2012, the European co-legislators - i.e. the European Parliament and the Council of the EU - adopted the ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro’, also known as the SEPA Regulation. Article 6(1) and (2) of the SEPA Regulation mandates that credit transfers and direct debits (in the euro area) shall be carried out in accordance with the relevant requirements set out in Article 5 and in the Annex to the Regulation by 1 February 2014, subject to certain limited exemptions mentioned in the Regulation. According to Article 16(8) of this legislative act as currently in effect, the deadline for compliance in non-euro countries, such as the UK, will be 31 October 2016.
It is the task of the EU authorities determining SEPA compliance requirements to ensure planning security for all market participants. The six-month delay has disrupted this planning certainty.
Article 10 of Regulation (EU) No 260/2012 clarifies that EU Member States must designate the competent authorities at national level responsible for ensuring compliance with this Regulation. The list of these designated national authorities is available on the European Commission Website (see items posted on 23 July 2013). Article 11 of the SEPA Regulation states: “Member States shall, by 1 February 2013, lay down rules on the penalties applicable to infringements of this Regulation and shall take all measures necessary to ensure that they are implemented.”
On 9 January 2014, the European Commission observed, in line with previous statements of the European authorities on the application of Regulation (EU) No 260/2012: “If no action were to be taken by the [European] Commission and the [EU] co-legislators, banks and payment services providers [PSPs] would be required to stop processing payments that differ from the SEPA format as of 1 February 2014.”
The EC additionally remarked that: “this could result in serious difficulties for market participants that are not yet ready.” To avoid this situation for non-compliant market participants, the European Commission therefore, on 9 January 2014, introduced a proposal for a new EU Regulation amending the SEPA Regulation to “give an extra transition period of six months during which payments which differ from the SEPA format can still be accepted.”
On 4 February 2014, the European Parliament adopted a new draft EU Regulation “amending Regulation (EU) No 260/2012 as regards the migration to Union-wide credit transfers and direct debits” which states, among other things: “In Article 16 of Regulation (EU) No 260/2012, paragraph 1 is replaced by the following: (...) By way of derogation from Article 6(1) and (2), PSPs may continue, until 1 August 2014, to process payment transactions in euro in formats that are different from those required for credit transfers and direct debits pursuant to this Regulation. [EU] Member States shall apply the rules on the penalties applicable to infringements of Article 6(1) and (2), laid down in accordance with Article 11, from 2 August 2014.”
The Council of the EU adopted this new EU Regulation amending Article 16 of Regulation (EU) No 260/2012 on 18 February 2014. This new EU Regulation will enter into force on the day following that of its publication in the Official Journal of the EU (“to have a retroactive effect as from 31 January 2014”, as proposed by the EC). Publication of the new EU Regulation amending the SEPA Regulation could take place by the end of February or at the start of March 2014; it is a fluid situation as I write.
In the view of the European Commission, this procedure “does not change the formal deadline for migration of 1 February 2014.” Consequently, Article 6(1) and (2) of Regulation (EU) No 260/2012, which stipulates the 1 February 2014 compliance date, will remain unchanged.
Differing Migration Deadlines
Different SEPA migration deadlines apply across the euro area during the “additional transition period” introduced by the European Commission. The bottom line is: since 1 February 2014, payment service users and providers in the euro area are forced to determine their course of action based on assumptions regarding the future legislative situation governing SEPA-compliant euro credit transfers and direct debits. The European Central Bank (ECB) commented: “The proposed regulation [amending Regulation (EU) No 260/2012] has given rise to confusion in the markets on the deadline for migration (...) It is therefore of the utmost importance to reinstate legal certainty, reduce the confusion in the markets and provide them with clear guidance about the deadline.”
This will be difficult to achieve even when the legislative process amending Regulation (EU) No 260/2012 is concluded keeping in mind the following:
The draft EU Regulation amending Regulation (EU) 260/2012 adopted by the European Parliament on 4 February 2014 states that (italics added) “PSPs may continue, until 1 August 2014, to process payment transactions in euro in formats that are different from those required for credit transfers and direct debits” established with this EU law. However, it does not make it mandatory. This formulation creates an asymmetry as it is not certain that payments initiated by a payment service user based on legacy formats will be processed entirely. It may happen that, if not the PSP of the initiator, the receiver PSP may reject those transactions (they are allowed but not forced to process these). In a nutshell, at national level, provisions need to be taken to decide whether PSPs are mandated to remain connected to the legacy systems and are bound to process those operations. Guidance and clarity should be provided by the authorities on how to proceed until August 2014.
Last but not least, different euro area countries might decide on different timelines during which they would make use of the option to continue processing non-SEPA formats (i.e. some countries might do so during the full six months transition period envisaged by the European Commission, the European Parliament and the Council of the EU while others might settle for a shorter timeline).
To give two examples: in Belgium, the additional transition period will end on 1 April 2014. In Spain, the Spanish Automated Clearing House (ACH) (SNCE) has agreed to stop processing legacy credit transfers on 18 March 2014 and legacy direct debits on 10 June 2014.
The ECB makes available country-specific SEPA information, including national SEPA migration plans and SEPA-related contact information, with ‘Fact Sheets on Regulation 260/2012’. Following the announcement of the European Commission proposal to amend Regulation (EU) No 260/2012 to “give an extra transition period of six months” for SEPA migration, these fact sheets now also feature information obtained from Eurosystem national central banks concerning migration timelines envisaged at national level in each euro area country during the additional transition period. (The Eurosystem comprises the ECB and the national central banks of EU Member States whose currency is the euro).
The European Payments Council (EPC) emphasises that once the EU co-legislators have effectively modified the deadline for compliance with Regulation (EU) No 260/2012 in the euro area, it will be crucial that relevant public authorities clarify the implications to payment service users and providers immediately. It is the responsibility of the public authorities determining the SEPA compliance requirements to avoid a situation where uncertainty around applicable legal deadlines would impact on-going migration efforts and further delay the completion of migration. (Note: the EPC, representing the European banking industry in relation to payments, is not an EU legislative body. More generally, the EPC is not part of the EU institutional framework. The EPC has therefore, no role in the adoption or modification of any EU laws).
Plan A: Gaining Efficiencies
The vast majority of stakeholders expected to have achieved SEPA compliance by 1 February 2014 under the original ‘plan A’ should now focus on generating the efficiencies available via cross-border payment standardisation, treasury centralisation and so forth.
Mindful of the unambiguous message propagated by the EU authorities until 9 January 2014 (diligently repeated by many other stakeholders including the EPC) that there would be “no Plan B” and “no alternative to complying with the legal requirements”, thousands of businesses, large and small, public administrations, government agencies and PSPs shouldered the resources required to adapt systems and operations in line with the provisions of the SEPA Regulation by 1 February 2014. The progress of SEPA migration is monitored by the Eurosystem. On 20 January 2014, the ECB commented that the December 2013 quantitative SEPA indicators showed that, “if the current pace of migration continues, the vast majority of stakeholders will complete their migration by 1 February 2014.”
Also in January 2014, the ECB published updated qualitative SEPA indicators. These reflect the assessment of national central banks and take into account the specificities of the respective country. According to this data, all banks, ‘big billers’, public administrations and small and medium-sized enterprises (SMEs) in 15 out of 17 euro countries are expected to have met the 1 February 2014 deadline with regard to both SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD). (Latvia became the 18th euro country on 1 January 2014 with a specific migration timeline according to Regulation (EU) No 260/2012, namely 1 January 2015. However, Latvia completed migration to SCT well in advance by 1 February 2014). As of mid-January 2014, it appeared that part of the SME sector in France was at risk of missing the 1 February 2014 deadline with regard to both SCT and SDD. SMEs in Luxembourg might not have completed migration to SDD by that date.
Early adopters that fully reaped the advantages offered with the SEPA Schemes and technical standards emphasise that compliance is just the first step; organisations can then focus on generating the efficiencies. The EPC Newsletter has frequently highlighted the testimony of representatives of corporates, SMEs, public administrations and government agencies, who reported on their successfully completed SEPA migration projects. They confirm that timely implementation of the new SEPA payment schemes and technical standards is manageable and feasible. They also demonstrate that this investment leads to significant benefits including streamlined internal processes, lower IT costs, reduced costs based on bank charges and a consolidated number of bank accounts and cash management systems. In short, migration to SEPA results in more efficiency and integration of an organisation’s payment business.
Federico Focardi, group finance director, Salvatore Ferragamo S.p.A sums it up in a case study featured on TMI: “SEPA is an opportunity and a catalyst for change – not simply a compliance issue,” he says. Another SEPA compliance case study involving transport services provider, UTA, is available on the gtnews website and the EPC newsletter frequently features case study learning aids.
Organisations in the euro area still working towards achieving SEPA compliance should aim to finalise the migration process as soon as possible under the ‘plan B’ proposal to extend the deadline.
The EC and the EU co-legislators - i.e. the European Parliament and the Council - are now considering enforcing compliance with the SEPA Regulation in the euro area by 1 August 2014. However, as outlined above, different euro area countries might decide on different timelines during which they would make use of the option to continue processing non-SEPA formats.
The EPC recommends that organisations in the euro area still working towards achieving compliance with the SEPA Regulation aim to finalise the migration process as soon as possible. The ECB second SEPA migration report published in October 2013 emphasised that the experiences of those stakeholders that have already completed migration to the SDD and SCT schemes show that there is a real need for a fine-tuning period after the changeover. Banks and other service providers are standing ready to support payment service users to complete the transition.
“After 1 August 2014,” or so said the European Commission on 9 January 2014, “there will be no further transitional period”.