Insights

In the context of a request for preliminary ruling brought before the Court of Justice of the European Union (the “CJEU”) in the case of ABC Projektai UAB v. Lietuvos banks (C-661/22), Advocate General M. Campos Sánchez-Bordona (the “AG”) delivered his opinion on 5 October 2023 on the classification of activities relating to payment accounts and the holding of clients’ funds.

The Facts and the Question referred for Preliminary Ruling

The request was made following a legal dispute between Bruc Bond UAB (which eventually changed its name to ABC Projektai UAB) (the “Institution”), an entity licensed in Lithuania to provide payment services, and the Litetuvos bankas (the “Bank of Lithuania”) as the national regulator for financial services. The dispute resulted from the Bank of Lithuania revoking the Institution’s licence in April 2020, on the grounds that the Institution was issuing electronic money without having the required licence to do so.

One of the arguments brought forward by the Bank of Lithuania to justify its decision was that in carrying out its payment activities, the Institution had retained its clients’ funds for a period that is longer than the time limit set out in terms of law for the execution of payment transactions. The Bank of Lithuania noted six client accounts held by the Institution that were credited with incoming payments received by such clients without a specific payment purpose, and outgoing payments from such accounts took place several days or even months after the receipt of the incoming payments. In the opinion of the Bank of Lithuania, such activity amounted to the issuance of electronic money. The Institution rebutted this by arguing that it always advised its clients of the need for them to instruct the Institution to execute a payment transaction, and that if such instructions were not sent, the funds would eventually be returned to the clients.

In appealing the decision of the Bank of Lithuania before the Supreme Administrative Court of Lithuania (the “Referring Court”), the Institution noted that where an institution provides a payment service and is not concerned with the issuance or redemption of the par value of electronic money, the payment service provided cannot be deemed to constitute an activity related to the issuance of electronic money.

The Referring Court was faced with the question as to whether the actions of a payment institution, in accepting funds without a specific payment order to transfer them by the required time limit and leaving such funds in the payment account intended for carrying out payment transactions for a longer period than this time limit, would be considered to be:

• a part of a payment service or a payment transaction, as defined in Article 4(3) and (5) of Directive (EU) 2015/2366 (the “Payment Services Directive” or the “PSD2”); or
• the issuance of electronic money as defined under Article 2(2) of Directive (EU) 2009/110 (the “Electronic Money Directive” of the “EMD2”).

Consequently, the Referring Court referred this question to the CJEU, and the AG has provided his opinion on the matter before the CJEU proceeds to provide its ruling.

The AG’s Assessment

The first observation made by the AG in his opinion is that while the case-law of the CJEU on the Payment Services Directive is developing, the CJEU has only given one judgment interpreting the Electronic Money Directive to date. It was further noted by the AG that the fast pace at which technology is evolving, together with its impact on financial services, has in fact led to the Commission’s proposal, published on 28 June 2023, to repeal the Electronic Money Directive and replace it with a Directive which integrates payment services and electronic money activities.

In considering the Referring Court’s question as to whether the activities of the Institution should fall under the PSD2 or alternatively whether they should be classified as electronic money under the EMD2, the AG set out the basis of his assessment in referring to the relevant legal provisions. Primarily, the AG noted that although the PSD2 provides for the execution of payment transactions where the relevant funds are electronic money, payment service providers are as such not authorised to issue electronic money, as this would be an activity that is regulated under the EMD2.

• Time limit for the execution of payment orders

One of the requirements imposed on payment institutions under the PSD2, specifically in Article 83, in providing services to a client who is the payer in a particular transaction, is that of ensuring that the amount of the relevant transaction requested by such client is credited to the account of the payee by the end of the following business day. This period starts to run from the institution’s receipt of the ‘payment order’ (which refers to the client’s instruction to execute a payment transaction) from the client.

In this respect, the AG noted that the link between the period for execution of the payment transaction and the receipt of the payment order allows the client to transfer funds to their payment account without as yet submitting an accompanying payment order, and to keep the funds in the account for future payment orders. The AG here referred to direct debits, which necessitate the continuous availability of funds in the client’s account.

The Lithuanian Government and the Referring Court seemingly suggested that where an institution receives funds in a payment account and the account holder does not instruct the institution to execute transactions upon receipt of such funds, the receipt of such funds should be considered as the issuance of electronic money. In such case, the argument was that the institution should refund the client rather than hold them in the payment account.

This argument was however dismissed by the AG on the basis of the fact that such a conversion of funds into electronic money is not contemplated by the Electronic Money Directive. Whilst noting that the institution would be in breach of the PSD2’s requirements, it would remain within its scope when it does not execute payment transactions within the time limit stipulated by law. The AG opined that such inaction does not translate into a conversion of the funds into electronic money. It was in fact noted by the AG that the PSD2 provides for the obligation of payment institutions to safeguard clients’ funds when these are transferred to a payment account and are retained in such account for the purposes of executing future payment orders.

• Criteria applicable to the issuance of electronic money

The AG also addressed the criteria applicable to the activity of the issuance of electronic money in assessing the question at hand, and concluded that some of the essential criteria of such activity are not deemed to be met by the Institution’s holding of clients’ funds in this case.

Primarily, the issuance of electronic money entails the prior conclusion of contractual agreement between the client and the institution for the former to provide the latter with the funds necessary to carry out the relevant payment transaction. In applying this principle to the case at hand, the AG noted that there was no such agreement in place, whereby the clients expressed their wishes to the Institution to issue electronic money in return for the funds transferred by such clients to the Institution. The retention of the funds in the accounts was not tantamount to the expression of the clients’ wish for the Institution to issue electronic money.

The AG further assessed the element of control of the funds and noted that the Institution did not have control of the clients’ funds held in the payment accounts since this in fact lied with the clients. Should the Institution control the funds received from the clients in the form of electronically stored monetary value, it would be classified as an electronic money institution. The AG also noted that, according to the EMD2, the clients’ requests to redeem from their accounts the funds which have not been used would be subject to the conditions laid down in the agreement between the clients and the Institution, which may include the payment of fees in case of early redemption. The AG found that the evidence presented did not indicate that there was any such prior agreement and that clients were free to withdraw from their payment accounts any remaining funds.

Conclusion

The AG’s proposal to the CJEU is therefore to interpret the activity of a payment institution, in the absence of an agreement with the client, that consists of accepting funds from the client without a specific payment order and retaining such funds in the client’s payment account for more than the time limit stipulated by law for future payment transactions as an activity that is governed by the Payment Services Directive and not the Electronic Money Directive.

To date, this case is still in progress and the CJEU’s ruling on this matter remains pending.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.