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SEPA end-dates: the challenges of compliance

Open an industry publication these days and you will find
articles, reports and comments lamenting the "SEPA end-date" of
February 2014. In just a few months' time massive changes will take place in
the payments industry in Europe, impacting banks, corporates, clearing houses
and consumers. The Single Euro Payments Area project (SEPA for short) will have
reached its end-date. What does all this mean?

Harmonization in payments

The European payments market is a very large market: the 17-country euro zone
alone comprises more than 330 million people, 16 to 18 million registered
businesses and approximately 8,000 banks. This market generates more than 55
billion electronic payment transactions per year. This payments market is
fragmented along national boundaries, however. Usage of payment instruments,
formats, standards and practices vary country by country. Making cross-border
payments has been complex, costly, took a long time and was fraught with
uncertainty and risk. In sum, although Europe had moved towards an internal,
single market in many areas in recent years, the single market in payments just
did not exist yet. SEPA aims to change all this.

Many years of effort

As early as 1999 the European Commission pointed out that significant economic benefits
could be achieved if the payments market were to be harmonized across national
boundaries. The banking industry responded by organizing itself in the European
Payments Council (EPC) and starting the SEPA project. Over the following years
the EPC developed common rules, standards and guidelines for payments ? an
enormous effort was expended. But soon the payments market operated with
duality: the new pan-European SEPA payment instruments had been developed and
were available for use, but not everyone was using them yet. In fact, banks and
corporates used both the "old" national payment instruments as well
as "new" SEPA standards. This duality was far from satisfactory: it
was costly and complex and did not achieve the desired harmonization.

In March 2012, the SEPA project moved from being a self-regulatory initiative
of the European banking industry to becoming a regulatory requirement. Credit Transfers and Direct Debits in Euro Regulation 260/212
(commonly called "SEPA End-Date Regulation") became effective for
euro payments in 32 countries in Europe.

The meaning of the end-date

The so-called end-date means that duality ends in February 2014: euro low-value
payments may only be effected if they follow SEPA standards, formats and rules.
For the 17 euro zone countries, the mandatory end-date is February 1, 2014. A
later time line ? October 31, 2016 ? is the regulatory end-date for the
non-euro zone countries. In sum, from 2016, there will be 32 countries in
Europe having harmonized their low-value euro payments traffic thus having
arrived at a Single Euro Payments Area.

Complying with the SEPA Regulation

An EU Regulation is a legislative act of the European Union that is directly
applicable and becomes immediately enforceable as law in all EU member states
simultaneously. Since March 31 2012, the SEPA Regulation has binding legal
force throughout the EU, on par with national laws. Despite many hopeful
comments that the regulators would allow for a grace period, or that the
regulation would somehow not be "binding", this just is not so: there
is no grace period, the deadline of February 2014 stands firm. In fact, the
regulators have been quite vocal about stating that there is only a Plan A
(i.e., achieving SEPA compliance by 1st February 2014. There is no Plan B. In
other words, non-compliance with the Regulation means breaching EU law.

The supervision of SEPA compliance and potential sanctions in case of
non-compliance is up to each individual member state. As country after country
has started naming its supervisory authority and publishing potential
sanctions, it is clear that applicable penalties can be quite hefty. It is
quite obvious then that the SEPA end-date regulation needs to be taken
seriously, implemented by the prescribed date, and fully complied with.

Compliance challenges

If SEPA has not been implemented yet within an organization, compliance staff
must ensure that their organization has set up a formal SEPA project, which is
funded, resourced, follows a detailed work plan and receives sufficient senior
management attention. Failure to comply with SEPA could mean that payments
cannot be made because the old formats for credit transfers will no longer be
accepted by counterparts. This could lead to salaries or invoices not being
paid. It could also result in payments not being received because the
organization has not implemented the new standard for direct debit, thus negatively
impacting cash flow and liquidity.

Experience has shown that the effort of moving one's payments business to SEPA
standards must not be underestimated: on average at least 6 to 12 months need
to be anticipated. If a firm is a heavy direct debit user, or has a
decentralized organization structure, or uses an in-house IT system the SEPA
project could take considerably longer. SEPA is not a simple IT project which
can be managed by making a few format changes on the payments platform shortly
before February 2014. SEPA rules are not an easy read: they must be thoroughly
analysed, their impact on the organization and its customers must be assessed
and applied.

All parts of an organization are affected by SEPA ranging from sales,
purchasing, product management, human resources, client service, legal,
accounting, marketing and communications, facility management, to the mail
room. Moreover, payments is a network business, i.e., it involves at least a
payor and a payee and usually a bank in the middle. Thus thorough testing
before February 2014 to ensure that the other part(s) of the payments chain can
receive SEPA payments is absolutely critical.

Help is at hand

Where does one go for help? Banks, consultants, and vendors have been
communicating the components of SEPA compliance for quite a while and are
available for information and practical guidance. Professional associations and
industry forums have started to hold seminars explaining how their members are
affected. And last but not least the regulators have stepped up their
communications efforts, both on a national as well as EU level.

Beyond February 2014

What will happen after February 2014, and will all be well? That's hard to say.
Many banks are in good shape having worked on SEPA compliance for a long time.
Large corporates have made great progress over the last year. Smaller
businesses, however, are the real laggards. And since they are the locomotive
of an economy this is where many risks lie. So one can expect a certain amount
of disruption in the payments market next year. SEPA will keep us busy for a
long time. Nevertheless, despite likely deficiencies, a major step towards
harmonization will have been achieved.

This is a contribution from Financial Services Club friend and contributor Edith Rigler.  

Edith Rigler is an independent payments
expert who advises banks, payment systems and payment institutions. She has
published extensively on payments issues and held senior positions at a number
of global banks. The views expressed are her own.

The article was previously published by Thomson Reuters on Complinet 

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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