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Application of Regulation 2560/2001: An Empirical Study of the Latvian Banking System

JOHN J.A. BURKE Rector and Professor of International Commercial Law, Riga Graduate School of Law, Latvia

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This paper identifies the practical application of Regulation 2560/2001 on cross-border payments in euro in the Member State of Latvia.1 The Commission issued a Consultative Document on the application of Regulation 2560/2001 on October 19, 2005,2 and requested interested parties to submit comments by January 6, 2006.3 This author submitted a comment based on a review of 10 Latvian banks, suggesting that Latvia was not in full compliance with the Regulation.4 This article elaborates on the initial comment by undertaking a study of all banks, operating as of February 3, 2006, in Latvia regarding cross-border credit transfers in euro. It analyses the industry practice against the objectives of the Regulation and discusses the effectiveness of achieving low-cost cross-border payments in euro through the instrument of legislation. The scope of the paper is limited to an analysis of funds transfers. Where problems in practice are identified, the paper examines whether the proposed New Legal Framework for Payments in the Internal Market provides solutions.5 The empirical data is drawn from price lists for services published by credit institutions in Latvia.6 That data is current to February 3, 2006. 1. [2001] O.J. L344/13. 2. European Commission, Consultative Document to contribute to the Preparation of a Report on the Application of Regulation (EC) No 2560/2001 on Cross-border Payments in euro, available from http://europa.eu.int. 3. Comments received on the consultative document, available from http://europa.eu.int. 4. John J.A. Burke, Rector, Professor, LV, Comment, available from http://europa.eu.int. 5. Proposal for a Directive of the European Parliament and of the Council on payment services in the internal market and amending Directives 97/7/EC, 2000/12/EC and 2002/65/EC, available from http://europa.eu.int. 6. The price lists are published on the banks’ websites. The empirical data on which this article is based is on file with the author. Latvia was selected for review because the author

Introduction The European Commission and the European Central Bank want to create a single payment area based on the euro within the Member States.7 If realised, the Single Euro Payments Area (‘‘SEPA’’) would cover euro payments among 29 European countries.8 The primary instrument used to achieve this objective is legislation, and the co-operation of private organisations with government, not market forces or business demand.9 The Commission acknowledges, based on several empirical studies, that Europe lacks a predictable, fast and cost-efficient payment system, particularly for non-cash payments, even with the adoption of the euro in 12 Member States.10 The European Commission is actively pursuing a plan to remedy this defect and has introduced a draft Directive on a New Legal Framework for Payments in the Internal Market. In conjunction with industry efforts, the plan is to establish pan-European payment systems, consolidate and rationalise the law of payments, and reduce the transaction costs of crossborder payments. This article focuses on one aspect of the payment system in Europe: Regulation 2560/2001, and on one aspect of that Regulation: cross-border credit transfer of funds. In addition, this article examines, from an empirical perspective, the implementation of the Regulation by 23 banks in the Member State of Latvia. The purpose is to identify the objectives of the Regulation, to analyse how banks in a single Member State have shaped their pricing policies in reaction to the Regulation, and to examine the merits lives and works in Latvia. This article is not intended to single out Latvia as the only Member State in non-compliance with the Regulation. 7. The European Central Bank has defined SEPA in the following terms: ‘‘For citizens in the euro area, a real SEPA will be achieved when they can make payments throughout the whole area from a single bank account, using a single set of payment instructions, as easily and safely as in the national context today. For the customer it should make not make any difference where or with which bank in the euro area this account is held. The Eurosystem’s vision for SEPA, hence, is that all euro are payments should become domestic and reach a level of safety and efficiency at least on par with the best performing national payment systems today’’. European Central Bank, Towards a Single Euro Payments Area—Third Progress Report, 2 December 2004. 8. ‘‘The creation of SEPA will result in an area in which all payments denominated in euro are considered domestic.’’ Capgemini, ABN-AMRO and EFMA, World Payments Report 2006 (2006), p.9. 9. In response to deliberations on the creation of a Single Payment Area, the EBA has created large value and low value payment systems in the euro area to achieve the long term goals of the Commission. More important, the EPC, created by the EBA following the Lisbon Accord 2002, has developed a blueprint for SEPA called the EPC Roadmap 2004–2010.It also is in the process of establishing the infrastructure, framework, and rulebook to implement the SEPA. On March 8, 2006 the EPC published a document entitled The SEPA Credit Transfer Scheme Rulebook, (Doc: EPC125-05). 10. See Reinhard Steennot, ‘‘The Single Payment Area’’ [2003] J.I.B.L.R. 481–487 for a general article discussing the regulatory initiatives to realise a Single Payment Area.

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of achieving economic efficiency in the payments system through the legal means selected by the European Commission. In other words, the question answered is whether the Regulation has established the principle of equality of charges for payments made within a Member State or across borders. Latvia has 22 credit institutions and three branches of foreign banks established under Art.43 (freedom of establishment) of the Treaty on European Union.11 Latvia has a consolidated financial regulator, the Financial and Capital Market Commission (‘‘FCMC’’).12 Those with qualifying holdings in Latvian banks may be local or foreign, including people from Estonia, Lithuania, Russia, Denmark, Ukraine, Ireland, Iceland, Sweden and Germany. The branches of foreign banks are Nordea Bank Finland, GE Money Bank and Skandinaviska Banken AB. Since Latvia’s accession to the European Union in 2004, the FCMC has received 113 notifications from foreign institutions to provide financial services into Latvia. The largest Latvian bank is Parex Bank, which has exercised its rights under EC law to branch into Member States. It has also acquired a Swiss bank as a subsidiary and has several representative offices in major world financial capitals. Europe has three primary community level instruments for the harmonisation of payments: Recommendation 97/48913 providing for the protection of customers using electronic payment verification instruments; • Directive 97/514 facilitating cross-border credit transfers in establishing common customer’s protection requirements; and • Regulation 2560/2001 on cross-border payments eliminating the difference in price between crossborder and national payments. •

Arguably, Regulation 2560/2001 is the most important of these instruments as it is mandatory and pre-empts the relevant field from the Member States. The Regulation is directly applicable in all Member States. Therefore, since 1 May 2004, the Regulation has applied directly to Latvian credit institutions since Latvia’s accession Treaty with the European Union neither contained an exemption nor provided a phase-in period for the Regulation. 11. At the time of writing, only one bank, Nordea Bank Finland PLC Latvia, was operating in Latvia as a branch under Art.43; as of September 30, 2006, two additional banks have exercised their right of establishment: SKANDINAVISKA ENSKILDA BANKEN AB R¯ıgas filiale and GE Money Bank AB Filiale Latvija. See www.fktk.lv. This article does not cover the two latter banks. 12. The FCMC was established by the Law on the Financial and Capital Market Commission with effect from July 1, 2001 (see www.fktk.lv for the text of the Law and extensive information about the FCMC and Latvian financial institutions). 13. [1997] O.J. L208/52. This Recommendation is soft law and has not resulted in voluntary compliance to harmonise bank contracts in this area. 14. Directive 97/5 on cross-border credit transfers [1997] O.J. L43/25.

Analysis of the Regulation The Regulation is an important measure in the creation of an internal market of payments for Europe. It rests on the assumption, stated in Recital 6, that ‘‘the level of charges for cross-border payments continues to remain higher than the level of charges for internal payments’’ and ‘‘therefore . . . constitutes an obstacle to the proper functioning of the internal market’’. The scope of the Regulation is broad as it ‘‘covers payments in euro in the European Economic Area’’.15 The Regulation is triggered by the currency in which the payment order is given, even if the institution is located outside the Eurozone.16 Therefore, it applies to countries that have not adopted the euro such as Sweden, Denmark and the United Kingdom, as well as the 10 new Accession States. Professor Van Empel has described the origin and purpose of the Regulation as follows: ‘‘The Regulation was adopted on the eve of the introduction of the chartal euro (i.e. cash), and meant to force the banks to ‘internalize’ the cost differences between similar retail payment operations, crossborder as compared to domestic. This was done by imposing a ‘non-discrimination’ approach in that for payments up to euro 12,500 charges made by the bank concerned in respect of cross-border electronic payment transactions (as from 1 July 2002) and for crossborder credit transfers (as from 1 July 2003) should be the same as the charges levied by the same bank for similar transactions within the same Member State.’’17

While the scope of the Regulation is broad, its application is circumscribed to low value, crossborder retail payments in euro, up to ¤12,500 from July 1, 2002 and up to ¤50,000 from January 1, 2006. Consistent with its assumption, the Regulation contains two principal objectives: (1) an institution making a payment in euro is required to charge its customer an identical fee for the service whether the payment is domestic or cross-border; and (2) an institution is required to publish fee schedules in writing and, to promote understanding, provide the fee schedules in an easily comprehensible form for users of low value payment systems. In short, the Regulation seeks to achieve an efficient and transparent system for low value cross-border payments and to efface differences in cost between domestic and non-domestic payments to create a single European payment area. The Regulation applies to three different types of cross-border payments. First, Art.2(a)(i) applies to cross-border credit transfers, a subject already governed by prior Directive 97/5.18 Secondly, Art.2(a)(ii) 15. Consultative Document, fn.2 above, p.6. 16. See European Commission, Note on Practical Implementation of Article 3 of the Regulation Nr. 2560/2001, MARKT/2902/2002. 17. Martijn Van Empel, ‘‘Retail Payments in the EU’’ (2005) 42 C.M.L.Rev. 1425, p.1436. 18. To the extent of any inconsistency, the Regulation repeals provisions of the Directive. In a credit transfer, a

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applies to cross-border electronic payment transactions. This term refers to two types of payments: those made by an ‘‘electronic payment instrument’’, and those made by an ‘‘electronic money instrument’’. Regrettably, the definitional scheme of the Regulation is convoluted, requiring cross-references to understand certain terms. For example, the meaning of ‘‘electronic payment instrument’’ requires reference to Art.2(b) defining a ‘‘remote access payment instrument’’ and to Art.2(d) as it covers both a ‘‘remote access payment instrument’’ and an ‘‘electronic money instrument’’. Under Art.2(c), a ‘‘remote access payment instrument’’ is any instrument allowing the holder to access funds in its account to make a payment at the point of sale upon submission of the instrument and proof of identity or to withdraw funds from the account at an ATM. Under Art.2(d), an ‘‘electronic money instrument’’ is a reloadable payment instrument in physical or non-physical form. An example of the former is a plastic stored-value card; an example of the latter is a PayPal account.19 Thirdly, Art.2(a)(iii) applies the Regulation to cross-border cheques defined in the Geneva Convention, but does not apply the principle of uniform charges to them.20 Articles 3 and 4 are the heart of the Regulation. Article 3(1), effective July 1, 2002, applies the principle of non-discrimination in pricing between domestic and cross-border electronic payment transactions in euro up to ¤12,500. The price charged for a crossborder electronic payment in euro cannot exceed the price charged for ‘‘corresponding payments in euro transacted within the Member State in which the establishment of that institution executing the crossborder electronic payment is located’’. Similarly, Art.3(2) applies the principle of non-discrimination in pricing to all cross-border credit transfers in euro up to ¤12,500 using the same benchmark: the price for the cross-border transaction cannot exceed the price charged for ‘‘corresponding credit transfers in euro transacted within the Member State in which the establishment of that institution executing the cross-border electronic payment is located’’. The regulation applies to payments and transfers in amounts up to ¤50,000 as of January 1, 2006. Article 4 requires institutions covered by the Regulation to publicise their fees in readily comprehensible form. The requirement is designed to induce customer called the originator orders its institution to pay a certain sum to a beneficiary. If the originator and the beneficiary maintain accounts at the same institution, the transfer is executed virtually immediately and settlement takes place the same day. However, if the originator and the beneficiary have accounts at different institutions located in different jurisdictions, the payment process may involve several inter-bank transactions, take days to complete, and involve a complicated settlement procedure. 19. The proposed PSD provides for the authorisation of a payment institution such as PayPal to compete in the market for payment services. 20. Respecting cross-border cheques, the relevant provisions of the Regulation are Arts 4 and 6. The Geneva Convention is the uniform law for cheques of March 19, 1931 that has not been widely adopted within the Community.

the user to shop comparatively and, through competition, drive down the cost of cross-border fees for payments and for cross-border credit transfers. Article 4 also applies to charges related to cross-border cheques and to currency conversion fees. Article 5 encourages banks to issue international bank account numbers and bank identifier codes to customers. The use of IBAN and BIC numbers makes it easier for the customer to order the payment or transfer by reducing the amount of information supplied to the bank: name, IBAN, amount, and Swift Code. Lastly, Arts 6 and 8 merit mention. Article 6 relieves institutions from reporting, for purposes of balance of payments statistics, cross-border payments up to ¤12,500, and to omit any information that prevents automation of payment execution. Article 8 is the review clause requiring the Commission to submit a report to the European Parliament and Council on the performance of the Regulation. The Commission is actively engaged in the review process.

The subtle complexity of the Regulation On its face, the regulation seems straightforward, easy to apply, and easy for financial regulators to monitor compliance. However, the exact opposite is the case. This hidden complexity stems from four factors: (1) the principle of SHARE upon which the Regulation is presumably based; (2) the interpretation of the terms ‘‘institution’’ and ‘‘corresponding payments in euro’’; (3) the stunning variety of products developed by banks that offer cross-border payment services; and (4) the lack of effective and inexpensive clearing systems for low value cross-border transactions in euro.21

The “SHARE” principle and notion of “corresponding payment” When the Regulation was prepared and adopted, the principle of SHARE was the only available option at the national level for the then existing 15 Member States, except Spain. Arguably, the code SHARE was selected implicitly as the underlying basis for the Regulation because in a purely national transfer, inter-bank fees are generally inapplicable to low-value domestic transfers; hence either the originator or the beneficiary pays its bank’s fees and the entire amount of the transfer arrives at the account of destination. Subsequent to the adoption of the Regulation, the European Payments Council (‘‘EPC’’), a private organisation, developed two conventions: CREDEURO and ICP. CREDEURO is ‘‘a 21. Noteworthy is the fact that the Regulation does not mention any of the inter-bank codes such as SHARE. Therefore, even though the drafters of the Regulation may have prepared the Regulation based upon the principle of SHARE, the accepted methods of legal textual interpretation do not necessarily lead to the same limitation.

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standard payment scheme’’ for low cost execution of cross-border credit transfers within the monetary amounts covered by the Regulation. The convention is not legally binding but comes into effect through contractual commitment by individual banks, and it covers only the obligations of the originating bank. CREDEURO accepts credit transfers only with the charging option of SHARE.22 The ICP convention ‘‘is a set of rules for interbank charging’’. It also is based on the SHARE charging option and prohibits an intermediary bank from taking a beneficiary deduction. However, interbank charges will be set bilaterally outside the convention. Latvian banks, unlike 14 of the original 15 Member States, offer payment services based on several codes introduced as inter-bank standards allocating charges related to cross-border payments between the originator and the beneficiary. The codes are: (1) all charges are borne by the originator (‘‘OUR’’); (2) all charges are borne by the beneficiary (‘‘BEN’’); and (3) charges are shared between the originator and beneficiary (‘‘SHARE’’). The codes are designed primarily for cross-border credit transfers, but, in Latvia, they are used domestically as well. The question therefore arises: does the construction by private organisations, primarily the EPC, of a low value payment system limited to the charging option of SHARE ineluctably lead to the conclusion that the term ‘‘corresponding payment’’ used in Regulation 2560/2001 is limited to the charging option of SHARE? The answer must be an unequivocal ‘‘no’’. First, statutory interpretation starts with an examination of the plain meaning of the text based on the natural definition of its words. The definition of ‘‘corresponding’’ is similar; there is no bank term of art known as ‘‘corresponding payment’’. Nowhere in the Recitals or text of the Regulation is it indicated that the term ‘‘corresponding payment’’ must be construed narrowly to exclude BEN and OUR transactions when they are available domestically and internationally. Secondly, a teleological interpretation provides further support for this position. The objective of the Regulation—to provide low cost cross-border credit transfers and open the market to consumer choice—is ill served by a narrow construction of the Regulation. Were a narrow construction accepted, banks are given the opportunity to portray BEN and OUR charging options as ‘‘value added’’ high cost services. Thirdly, the EPC is not an institution capable of making legal rules: CREDEURO and ICP are not law, they are payment systems based on voluntary contracts. While commercial practice may illuminate the meaning of a term in a legal text, it does not follow that it is determinative of the issue. Further, CREDEURO and ICP are predicated on the assumption that banks do not offer BEN and OUR in national credit transfers, an assumption that does not hold true for the Latvian banking system. 22. EPC, CREDEURO and ICP Conventions Information Package, April 2003.

Further support for this argument is found in the Commission’s Note of March 2004, eradicating any notion that uses of different codes affect the nature of the service provided.23 The Note first clarifies Art.7(1) of Directive 97/5 which provides: ‘‘The originator’s institution, any intermediary institution and the beneficiary’s institution, after the date of the acceptance of the cross-border credit transfer order, shall each be obliged to execute that credit transfer for the full amount thereof unless the originator has specified that the costs of the cross-border credit transfer are to be borne wholly or partly by the beneficiary.’’

The Note maintains that the objective of Art.7(1) was to limit double charging and to lower the costs of cross-border credit transfers.24 In the context of SHARE, the entire amount of the transfer would reach the destination account without deduction of inter-bank fees, as the originator and the beneficiary would share charges, and presumably the banks in the chain would not deduct fees due to the low value of the transfer. In the context of OUR, the originator would bear all charges; in the context of BEN, the beneficiary would bear all charges related to the transfer. The distinction in codes implies that banks may charge higher fees for transfers executed under the options of OUR and BEN. The Note explicitly states, ‘‘The basic principle of the Regulation is that charges have to be the same irrespective of the payment being national or crossborder’’. The Note then adds: ‘‘It is nevertheless necessary to ensure that the full amount is transferred, and that no deductions are made by intermediaries in the payment chain’’. In the event that a Member State offers different modalities of payments for domestic transfers, the ‘‘charges levied for cross-border credit transfers should be the same as for the corresponding modality at the national level’’. Moreover, ‘‘whatever the repartition of charges chosen by the customer for a cross-border credit transfer, its corresponding payment should be the national standard’’. The Note clarifies two points regarding credit transfers. First, the choice of OUR, BEN or SHARE does not change the nature of the service provided to the customer. It is always a transfer of funds from one account to another. Therefore, no matter how banks structure the allocation of charges, the transaction is subject to the regulation. Secondly, the concept of ‘‘corresponding payment’’ should be the national standard, if one exists, or the equivalent modality used for a purely national transfer. More important, ‘‘[t]he interpretation of the notion of corresponding payment in Article 3 should be based on the principles and objectives of the Regulation’’. 23. European Commission, Note on the Practical Aspects of the Implementation of Article 3 of Regulation 2560/2001 and the Notion of ‘‘Corresponding Payments’’ for Credit Transfers, Brussels, March 10, 2004. The Note acknowledges that it is subordinate to any subsequent decision of the European Court of Justice. 24. ibid., p.3.

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These principles and objectives not only include the principle of non-discrimination in pricing, but also the goal of fast, cheap and reliable low value funds transfers. In this respect, the Regulation overrules Directive 97/5 as regards charging. Hence, the Note clarifies that ‘‘corresponding payment’’ covers BEN and OUR charging options where they are available in a national system, as they are in Latvia. The repartition of charges between the originator and beneficiary does not determine the applicability of the Regulation. It can be argued that the Regulation is a ‘‘blunt instrument’’ and should be changed to reflect the infrastructure being built for low value payments. But that argument is irrelevant to the interpretation of the existing Regulation. Creation by private organisations, even with the support of the European Central Bank, of a payment system limited to the charging option of SHARE to support the argument that the term ‘‘corresponding payment’’ used in the Regulation refers only to SHARE, is legal interpretation by fiat. Read literally, BEN means that ‘‘all charges’’ related to the transaction are to be borne by the beneficiary. Presumably, the originator would pay zero. However, a review of any bank price list demonstrates that while a BEN transfer is priced lower than an OUR transfer, the originator pays a bank fee. That charge flies in the face of the literal reading of a BEN transfer. In an OUR transfer, the originator agrees to pay ‘‘all charges’’. Presumably the total amount of the payment should arrive in the beneficiary’s account without any deduction for any charge—including correspondent banks’ fees and a beneficiary bank fee, if applicable. Whether this is true would require an additional empirical study beyond the scope of this article, but nevertheless an important scientific study is needed.25 Subsequent to the time of writing this article, the EPC has continued its efforts to introduce SEPA. The system it has built rests upon uniform regulations, rules and standards. A SEPA-compliant bank has no option but to accept these institutional rules to access the system. For cross-border credit transfers, the EPC designated SHARE as the mandatory and only available option. Therefore, bank customers lack economic incentive to use a mode other than SHARE since BEN and OUR transfers that cannot use the supposedly inexpensive SEPA settlement and clearing system must be priced higher than SHARE. While the EPC decision does not settle the interpretation of the Regulation, it is a fait accompli, opening the door for banks to claim that BEN and OUR transfers are added value services subject to higher charges. Members of 25. In international transfers between the US and Latvia, the author can provide anecdotal evidence that an OUR designated transfer originating in a New York bank does not result in full payment credited to the beneficiary account. When the author inquired of the beneficiary bank, the latter denied any deduction. The question posed is where in the ether of the correspondent banking system was part of the transfer deducted. Consumer protection should permit access for a fee without a mark-up of an audit trail of the transfer.

the EBA Working Group on SEPA Compliance do not contain a single bank from the 10 accession countries, nor a consumer representative.26

Diverse bank products Legal rules are one thing; business development of products and services is another. This observation is evident in many areas, including the services provided by banks to make cross-border credit transfers in euro. The empirical study was made of the Latvian banking system respecting the types and costs of services offered to customers to make noncash payments in euro across borders. The study revealed that there is no single pattern followed by banks in Latvia. Rather, each institution has adjusted its practices to the Regulation differently and some banks appear to ignore the prescription entirely. The diversity is positive from the point of view of competition. However, it is negative from the point of view of monitoring compliance with the Regulation as questions of legal interpretation arise. The complexity of services, and the amount and variety of data provided by credit institutions, also make it difficult to determine whether the objectives of Art.4 are achieved: an easy method of cost comparison of prices. In this regard, it must be remarked that it is unlikely that a customer selects its primary institution based on its pricing policy for cross-border credit transfers. More likely customers select their financial institutions based on convenience of location and bank rates for savings accounts and mortgage lending.

The empirical data Twenty-two credit institutions and one branch of a foreign bank27 operate in the Republic of Latvia which has a population of approximately 2.3 million people. The financial centre is Riga, the capital. The legal currency is the Latvian lat (LVL), but banks operate with multiple currencies and typically offer accounts in three currencies: LVL, EUR and USD. It is common for a consumer to have multiple currency accounts with a single institution. As noted, the FCMC is the consolidated regulator for credit institutions, insurance companies and the stock exchange. The Bank of Latvia, the Central Bank, is not responsible for bank supervision, but is responsible for monetary policy and price stability. The Central Bank is now a member of the European System of Central Banks, and the Governor of the Bank Ilmar Rimsevics is a member of the Governing Council of the European System of Central Banks. According to the Bank 26. ABE-EBA, Banks Preparing for SEPA: Issues to be Addressed to Achieve SEPA Compliance (Version 2.0, 1 October 2006), p.21. 27. See fn.11 above.

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of Latvia, the decision not to join TARGET before joining the European Monetary Union was due to lack of a business case.28 Latvia has decided to join TARGET2 at the end of 2007. In an effort to determine the application of the Regulation in Latvia, empirical data was gathered from the websites of each credit institution respecting their pricing schedule for credit transfers with specific concentration on payments made in euro. The data was obtained from 23 credit institutions and is set out at Appendix I to this article.29 The following discussion is based on that empirical data current as at February 3, 2006.

What the data reveals The data displays a tremendous disparity of pricing and price options for credit transfers in euro that mean a single sweeping conclusion is difficult to make. Some banks offered all three modalities of payment, such as Latvia Business Bank; others such as Parex Banka offered primarily OUR and SHARE. Three preliminary observations may be made: (1) a cross-border credit transfer in euro was not necessarily cheap and, unless an expensive pricing option for an expedited transfer was selected, it was not necessarily fast; (2) seven banks did not yet seem to meet the requirements of the Regulation as to the breadth of its application to cover payments up to ¤50,000, and some of these banks appeared to be in violation of the Regulation per se; (3) some banks discounted prices based upon the destination of the payment to an affiliated bank or bank within a designated group. The latter option raises the legal question of whether this practice is permitted by the Regulation or not. The data on which the survey is based indicates that eight of Latvia’s 23 banks apparently did not meet the requirements of either Art.3(2) or (3) of the Regulation as of February 3, 2006.30 They were: Hansabanka, 28. TARGET (Trans-European Automated Real-Time Gross Settlement Express Transfer System) is designed primarily for large value payments; however other payments may be effected through TARGET. See European Central Bank Guideline on TARGET (2006/21/EC), December 30, 2005, Art.5(3)(1). 29. The data carries the risk of becoming outdated as banks may change their price lists unilaterally at any time. The data was retrieved from the banks’ published websites and is current to February 3, 2006 unless noted otherwise. Data on which the empirical study is based is on file with the author. 30. Intermittently, since the date the table was composed, the websites of the banks have been revisited. In some instances, the banks have altered pricing fees; in others the information remains the same. No full scale study has been undertaken since the initial creation of the table. In any event, changes made subsequent to February 3, 2006 do not alter the fact that the above institutions appeared to have been in violation of the Regulation as discussed in this article because the Regulation became effective in Latvia at the time of accession in May 2004.

Latvijas Biznesa Banka, Baltic Trust Bank, Baltikums, Lateko, Multibanka, Baltic Trust Bank, and Latvijas Tirdzniecibas Banka. This result constitutes a ratio of 34 per cent apparent non-compliance with either Art.3(2) or (3) of the Regulation in the Latvian banking system. While the majority of banks had adjusted their practices to conform to Community law, the rate of apparent non-compliance has led to a transfer of assets from customers to the banking system not contemplated by the Regulation. In addition, the time period to execute a standard payment involved a float period between the time of order and time of payment execution from which banks may have gained an economic benefit. The variety of options presented to the customer, particularly as to speed, is a desirable banking product, but may have been a potential source of significant revenue to banks and defeats the concept of the Regulation leading to inexpensive euro transfers. Law is not a hard science based on hypotheses supported by evidence that can be tested and verified. Rather, it is a system of authority.31 The meaning of legal texts and whether industry practices comply or do not comply with legal principles is left to the interpretation of authorities empowered to make legal judgments, such as the national courts of Member States or the European Court of Justice. The observations contained in this article are based on the author’s best interpretation of the Regulation and applicable secondary sources. The observations are then measured against the published price lists of Latvian banks at the relevant date to draw the conclusions set forth in the study.

Broad deviations from the Regulation The empirical study indicates that the published price lists of Hansabanka,32 Latvijas Biznesa Banka,33 31. Richard A. Posner, The Problems of Jurisprudence (1990), pp.7–40. 32. Subsequent to February 3, 2006, Hansabanka revised its price list (see www.hbl.lv). As at July 8, 2006, the cost of euro funds transfers depended first on the nature of the service, i.e. whether performed by the customer using internet banking or performed by the customer at a branch. The cost was then further differentiated depending upon the mode: whether OUR or BEN. The bank charged a flat fee of 5 LVL for an economic electronic transfer of euro to another bank in Latvia and charged a flat fee of 6 LVL for a branch-initiated economic transfer of euro to another bank in Latvia. The bank charged different fees for standard and express transfers depending upon channel used and mode selected. If the euro transfer was cross-border, then a different plan of fees was applicable. The bank charged 5 LVL for an electronic economic BEN transfer and 6 LVL for a branch-initiated BEN transfer. Higher fees applied to OUR transfers and faster transfers. The revised price list complied with the Regulation provided the modes (BEN and OUR) are regarded as not coming within the phrase ‘‘corresponding credit transfers’’ levied by the same institution. Unlike Multibanka, see fn.35 below, as at July 8, 2006 Hansabanka did not levy different charges based on the destination point in Europe. 33. The price list was retrieved prior to February 3, 2006 and also retrieved on July 8, 2006 from www.lbb.lv. As at

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Multibanka and Baltic Trust Bank34 did not appear to comply with Art.3(2) of the Regulation. Two banks are selected to provide an illustration of how the published prices charged by the above banks deviated from the Regulation’s requirements and set the stage for discussion based on the empirical evidence presented. The published price list of Hansabanka as of February 3, 2006 provided a clear violation of Art.3 of the Regulation as its pricing distinguished between domestic and non-domestic payments, and the charge for a domestic transfer (unless BEN) was cheaper than a charge for a non-domestic transfer within the financial range covered by the Regulation. Hansabanka differentiated between a credit transfer in euro to another bank in Latvia denominated in euro—Active tariff—and a credit transfer in euro to EU countries up to ¤50,000—Economic-Active tariff. The price of the domestic transfer, which did not have an upper monetary limit, was 5 LVL (OUR) and 5 LVL (BEN). By contrast, a non-domestic transfer of euro up to ¤50,000 was 16 LVL (OUR) and 5 LVL (BEN). The apparent violation took place as follows. The charge was levied by the same institution—Hansabanka. The modality of payment was corresponding in two respects. First, in both examples, the credit transfer was called the ‘‘economic, active tariff’’ or the cheapest tariff. Secondly, the inter-bank code was either OUR or BEN. Since Hansabanka charged its customer 5 LVL for an internal OUR credit transfer in euro and charged its customer 16 LVL for an external OUR credit transfer, Hansabanka did not appear to comply with Art.3 of the Regulation.35 Based on the empirical data, Multibanka might provide another illustration of a violation of Art.3 of the Regulation, but on different grounds. The price discrimination took place primarily between credit transfers made within Latvia or externally to Germany, and from Latvia to other countries within and without the European Union. For standard, urgent or express credit transfers up to ¤50,000, to another bank in Latvia or Germany, Multibanka only offered OUR as the modality of payment. The July 8, 2006, the bank had not revised its price list for funds transfers. 34. The price list retrieved on July 8, 2006 from www.btb.lv reflected that Baltic Trust Bank remained, at that date, in apparent violation of Art.3(3) of the Regulation. Paragraph 2.3.2 regarding transfers in euro applied only to the limit of ¤12,500, not the required upper amount of ¤50,000. The higher charge listed in para.2.3.7.1 would have applied to any cross-border euro payment above ¤12,000. In addition, for OUR transfers, the price list stated in para.2.3.7 that ‘‘extra payment [is imposed] if and when Client wishes to cover banking charges of Correspondent Bank and Payee’s Bank’’. Hence, as at July 8, 2006, the price list did not provide the actual cost of any particular OUR cross-border credit transfer in euro. This may have constituted a violation of Art.4(1) regarding transparency and may have violated the basic principle of equality of charges. 35. This author can confirm the 16 LVL charge levied for a cross-border credit transfer from Latvia to Belgium under which the author made a payment of ¤120. The charge of 16 LVL (approximately ¤23) represents 19% of the total amount of the payment.

prices respectively were 6, 12 and 18 LVL plus ¤5. For an identical transaction to Finland, Multibanka charged its customer respectively LVL 6, 12, 18 plus ¤10. For an identical transaction to Greece, Multibanka charged its customer prices respectively LVL 6, 12, 18 plus ¤25. Charges levied for crossborder credit transfers in euro were obviously not equivalent in price to corresponding payments made within Latvia. The pricing scheme was based upon country of destination. Charges levied by Multibanka for cross-border credit transfers within the European Union depended upon the Member State location of the account. Clearly, this price list conflicted not only with Art.3 of the Regulation but also with the development of a single European payment area designed to provide cheap, reliable and fast transactions for low value payments. The new price list effective June 5, 2006 did not seem to provide a cure.36

Non-compliance with applicable amounts Baltikums, Baltic Trust Bank, Latvijas Biznesa Banka and Lateko expressly did not appear to comply with Art.3(3) of the Regulation by failing to have adjusted their prices for credit transfers according to the requirements of the Regulation. Article 3(2) applied to cross-border credit transfers up to ¤12,500, effective July 1, 2003. Article 3(3) raised this limit to ¤50,000, effective January 1, 2006. Baltic International Bank illustrated aptly non-compliance with the financial provisions of the Regulation. Customers were charged for transfers up to ¤12,500 as follows: ¤15 (OUR); ¤10 (SHARE); and ¤10 (BEN). This pricing policy became invalid as of January 1, 2006. In addition, Baltic International Bank appears 36. On June 5, 2006, JSC Multibanka announced a change in its price list for services (see www.multibanka.com). Information regarding funds transfers was found on pp.6, 7 and 16. There was no specific reference to cross-border euro payments; rather, the bank in para.4.4.16 referred to transfers ‘‘in other countries currency (exception, CIS countries currency and USD)’’. Hence a cross border payment in euro was included in this category. In a BEN order, the prices were: 6 LVL+ standard, 12 LVL+ urgent, and 18 LVL+ express. The same charges applied to OUR transfers. To determine the actual cost of the transfer, it was necessary to refer to p.16 listing the varying costs incurred in the correspondent banking network used by Multibanka. For euro transfers, four categories of correspondent commission rates were listed depending upon the country of destination of the payment. The costs of transfers within Latvia and to Germany were less expensive than transfers to other EU Member States. This price list, therefore, did not escape the language of Art.3(2) and (3). The argument that payments were not corresponding because different correspondent banks were used depending upon beneficiary destination would nullify the entire objective of the Regulation. This statement is bolstered by the fact that Multibanka offered a more favourable rate to transfers to Germany, presumably due to better pricing conditions of its German correspondent. That argument must therefore be rejected and the Multibanka pricing system still regarded, as at July 8, 2006, as an instance of non-compliance with the Regulation.

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24 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

not to have complied with the financial prescriptions of the Regulation in two additional ways. Customers were charged different fees for transfers between ¤12,500 and ¤25,000, and more than ¤25,000. The fees were respectively: ¤30 (OUR); ¤15 (SHARE and BEN); ¤50 (OUR) and ¤20 (SHARE and BEN).

Other potential violations The published price lists of Baltic Trust Bank and Latvijas Tirdzniecibas Banka (‘‘LTB’’) raised a potential violation of the Regulation as their then pricing differentiated between residents of Latvia and non-residents of Latvia. Take for example LTB prices that were charged to residents for transfers below ¤12,500. For standard, urgent and express transfers, the prices were available only for the payment modality of OUR and were set in LVL: 5.5, 7.5 and 12. By contrast, for an identical transaction a non-resident was charged in the payment modality of OUR in LVL: 17, 27 67, plus an unspecified additional commission. In addition, a non-resident was charged for payment by the modality of SHARE in LVL: 17, 27, and 67. For transfers below ¤12,500, residents were not offered SHARE or BEN as options. While the Regulation does not speak in terms of resident/nonresident differentiation, the practice was directly contrary to the apparent principles of the Regulation. Moreover, no Commission document, including the new draft Directive on a New Legal Framework for Payments in the Internal Market, contemplates this practice. Moreover, the banks did not explain the reason, or economic justification, for charging a nonresident a higher fee. In addition, a separate possible violation existed for credit transfers that receive a discount depending upon whether the originator and beneficiary maintained accounts in ‘‘related’’ institutions, not necessarily the same bank. This practice was widespread in the Latvian banking system. For example, SEB Unibanka provided substantial discounts to its customer ordering the transfer if the beneficiary had its account at certain banks. For example, an ordinary euro transfer to another bank in a EU Member State or Norway was priced at 4 LVL and offered only as SHARE. However, if the beneficiary had its account in SEB branches in Estonia and Lithuania, the charge for an OUR modality transfer was 1 LVL; if the beneficiary had its account in other SEB group banks, then the charge for an OUR modality transfer was 1.5 LVL and for a SHARE modality payment, it was 1 LVL. Moreover, if the beneficiary had its account in Hansabanka, Nord L/B, Parex Banka and Baltrust Bank, banks that are located in Latvia and elsewhere, the charge for an OUR transfer was 5 LVL. The Regulation does not address questions of discount pricing or pricing related to banks that may have established special relationships regarding transfers in euro. Transfers taking place within a single institution, including its branches located in another Member State, appear consistent with the

Regulation since there is no transfer to another institution. However, the same reasoning does not apply to transfers taking place among different banks that have established specific pricing regulations. If we assume that transfers to Hansabanka, Nord L/B, Parex Banka and Baltikums Bank were domestic transfers, then technically, SEB did not offer a corresponding payment to cross-border credit transfers in euro since the former was available only in OUR and the latter was available only in SHARE. Therefore, there was no violation. However, if we take the Commission Note literally that ‘‘[t]he choice of OUR, BEN or SHARE does not change the nature of the service offered to the customer . . .’’ and that ‘‘[c]redit transfers denominated as OUR, BEN or SHARE are not different services, but the same services with a different sharing of charges between the originator and the beneficiary’’, then the argument may be taken that this practice of charging special rates dependent upon the location of the beneficiary’s account with a designated bank possibly violated the Regulation.

Evaluation of cost The data reveals what appears to have been a wide price variation on regular payments and on the speed of the payment expressed generally as urgent and express. Five pricing patterns emerge: (1) cost dependent on speed; (2) special distribution channels, i.e. internet executed versus branch executed; (3) mode of payment—OUR, SHARE, BEN; (4) amount transferred affects relative cost of credit transfer; and (5) ‘‘comparison shopping’’ difficulty stemming from banks’ apparent custom of charging in different currencies—LVL, EUR or USD. In general, the cost of a cross-border credit transfer was expensive if the amount of the transfer was modest. For example, Hansabanka, which was seemingly in direct violation of the Regulation, assessed a charge of 16 LVL for an OUR designated transfer. If the amount of the transfer was ¤100, the percentage cost of the transfer was almost 25 per cent. The same result would have occurred if the formula for an OUR transfer was used through Baltikums, a bank in compliance with Art.3(2) of the Regulation. It would cost ¤25 to send ¤100. The cost for this transfer was expensive in relation to the total amount transferred. It was a disincentive to use the bank credit transfer system for low value payments at the lowest end of the scale. The small and micropayment issues thus were neither addressed by the law nor the industry. Thus, the system ran contrary to the objectives of the Regulation, if the object is cheap, fast and easy methods of credit transfers. However, if the amount of the transfer is ¤10,000, then the percentage cost of the transfer may have been considered inexpensive, but the percentage difference depended on the bank. Using the same pricing option to transfer ¤10,000 from Hansabanka, the rate (the cost remained at 16 LVL) is only 0.002

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per cent. Using the same pricing option to transfer ¤10,000 from Baltikums, the rate (the cost was ¤90) was 0.009 per cent. The cost of both transfers was inexpensive in relation to the amount transferred. Hence, the results demonstrate that micro-payments and all payments below ¤1,000 were subject to expensive fees, while the cost of the service was correspondingly lower as the amount of the transfer increases. This conclusion held true even for banks such as Paritate that charged a percentage of the amount transferred but limited the maximum amount of the payment and established a minimum payment. The above analysis does not factor in the effects of the ‘‘float’’ period and the potential economic benefits banks receive by keeping funds within the interbank system for a period of time. The value of this money will be maximised and is therefore an important component of actual cost to banks of credit transfers.

Compliance with Article 4 Article 4(1) governs transparency of charges. It states: ‘‘An institution shall make available to its customers in a readily comprehensible form, in writing, including, where appropriate, in accordance with national rules, by electronic means, prior information on the charges levied for cross-border payments and for payments effected within the Member State in which its establishment is located.’’

In addition, Art.4(3) specifies that institutions must state currency exchange rates when converting a noneuro currency into the euro. The data reveals that credit institutions in Latvia made available the costs of charges for cross-border and domestic credit transfers to their customers. The question remains whether the information was effective in permitting the retail customer to understand and evaluate the options of payment with which they were confronted. For example, in an OUR transfer from Sampo Bank, the customer was told the cost is 10 LVL plus the cost of the intermediary bank commission. On its face, the customer would not have known the total cost of the charge. A further inquiry would have needed to have been made as to what was the fee of the intermediary bank. This fee may have varied (or not) depending upon the particular service requested. Nevertheless, the price list was not readily transparent, based on the empirical evidence we have drawn. Significantly, when the information from all credit institutions was gathered and tabulated, it presented a complex portrait of charges difficult to assess in terms of the best price and the best service. However, information provided by individual banks generally appeared to meet the standard set forth in the regulation. The problem stems from the fact that the retail customer is placing trust in its institution to adhere to legal requirements as to the charges levied. The analysis previously set forth has established that,

in several instances, certain institutions may have overcharged customers.

A comparison of the empirical study and the Bank of Latvia’s comments submitted to the Commission The above empirical data conflicts with certain statements made by the Bank of Latvia regarding the impact of the Regulation upon Latvian banks. For example, the Bank of Latvia states: ‘‘In general prices for domestic and cross-border transfers in EUR are equal. Nevertheless some banks charge less for payments in euro to the ‘Parent banks’ or ‘Foreign branches’ than to other banks in the EEA.’’

While these statistics are true for a majority of banks as indicated by the empirical study, it appears not to be the case for a significant minority of banks in Latvia. The Bank also states that all provisions related to consumer information have been implemented in Latvia. While all Latvian banks publish price lists, and therefore this statement is technically true, the charging system reviewed in the empirical study was complex and was probably not understood by the average user. There is a difference between publication of data and meaningful explanation of that data so that the user may make informed choices. The table contained in the Appendix below containing the relevant data is a daunting display of pricing information that may or may not comply with the objective of the Regulation. The Bank of Latvia even admits that the pricing system is obtuse when it states: ‘‘Consumers are not adequately informed that despite the fact the beneficiaries receive the EU regulated payments in full, beneficiaries are charged for these incoming payments by separate transactions’’. In other words, the beneficiary does not receive the full amount of the payment as a fee may be deducted by the beneficiary bank or by an intermediary bank in the transfer system. The Bank of Latvia states that ‘‘[t]here is no competent authority for settlement of disputes related with application of the Regulation in Latvia’’. The Bank then goes on to refer to the ‘‘Ombudsman at the Association of Commercial Banks’’ and the ‘‘Consumer Rights Protection Bureau’’. Two remarks suffice. First, the institutions referred to may lack the skill and incentive to determine a violation and to order an appropriate penalty. Secondly, Latvia has a consolidated financial regulator that would have the inherent power to make banks comply. Article 6 of the Law on the Financial and Capital Market Commission provides that the FCMC has the ‘‘authority to control compliance with regulatory requirements and directives issued by the Commission, to regulate activities of financial and capital market participants’’. The FCMC implements the acquis communautaire in the field of financial services; therefore it has the power to compel

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26 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

compliance. In some instances, the data suggests that the consumer appears to have been overcharged for the service. The total amount of non-complying charges may have been insignificant. Nevertheless, even if the percentage of cross-border payments in euro was not large by comparison to national payments, industry practices may have run against the Commission’s concept to create a single low cost payment area and to stimulate cross-border purchases of goods and services.

The settlement system for euro payments in Latvia Latvia naturally does not have a payment and settlement system for euros as the national currency is the lat and Latvia is not expected to adopt the euro until 2008. Latvia also decided not to join the TARGET as commercial banks were apparently satisfied with their correspondent banking relationships and did not want to undertake the financial and technical costs to join the TARGET system of payment. Hence domestic and cross-border payments in euro are settled outside Latvia. Evidence indicates that some Latvian credit institutions settle their euro obligations with large correspondent credit institutions in other EU Member States.37 For purposes of illustration, assume Latvian banks use correspondent accounts with banks in Germany to clear euro payments. The German bank then uses three primary methods to clear the transactions: (1) use TARGET as a pass through system38 ; (2) use local German correspondent banks; or (3) use a private system created by the European Bank Association, such as Step 1, Step 2 or Euro1. The following schematic diagram illustrates the process: The European Banking Association (‘‘EBA’’) has developed payment systems for large value and low value payments.39 In the cross-border context, EURO 1/Step 1 is designed for large value payments in euro. However, by contrast, and significant for the instant discussion, Step 2 is a pan-European automated clearing house for low value payments in euro, including cross-border payments. The system currently processes retail payments of up to ¤50,000 per transaction, and therefore facilitates the goal of Regulation 2560/2001 provided the payment 37. See Bank of Latvia Comment 1.3 where it is stated that ‘‘as Latvia is not in the Euro zone . . . national euro transfers are still processed through correspondent banks in Euro Zone’’. It follows therefore that cross-border payments in euro are settled in the same manner. In addition the only Latvian member of Step 1 and Step 2 is SEB Unibanka. 38. See fn.27 above. 39. The EBA ‘‘was founded in 1985 by 18 commercial banks and the European Investment Bank, with the support of the European Commission DG2’’. G. Lichter, EBA–ECB Conference on retail payments (2001), p.1. The EBA first established the payment system for the private ECU; then, later launched EURO 1/Step 1 and subsequently Step 2 (low value payments settled through EURO1/Step1).

TARGET Large Value

Latvian Bank German Bank

Local Clearing Facility or Correspond ent Bank

Step 1, Step 2, Euro 1 [EBA]

Destination

Figure 1: Schematic Illustration of cross-border euro payment ordered from Latvian credit institution instruction bears the correct data: IBAN of the beneficiary and BIC number of the beneficiary’s bank. There are currently 97 direct participants and 1,500 indirect participants of the system; more than 200,000 transactions per day are sent through the system. The research reveals that the only Latvian bank that was a direct member of Step 2 was SEB Unibanka. Nevertheless, as previously indicated, Latvian banks appear to have indirectly used the system through their correspondent networks.

The proposed Payment Services Directive: effect on pricing of credit transfers The proposed Payment Services Directive (‘‘PSD’’)40 introduced by the Commission in 2005 is designed to establish a harmonised legal framework to implement an integrated payments market in the European Union. It has several salutary objectives: (1) opening the payment market to institutions that act purely as money transmitters to achieve a level playing field; (2) harmonisation of transparency and information requirements for the benefit of customers; (3) regulation of execution time with an aim toward achieving D+1 for all credit transfers; (4) setting liability consequences for defective execution and limiting liability of the user for misuse of the payment instrument; and (5) full refunds for revocation. The PSD maintains the framework of Regulation 2560/2001 and therefore does not directly affect the mechanics of the Regulation except for Art.8 as to reporting transactions for balance of payment statistics. If the PSD were adopted, it could reduce the cost of cross-border credit transfers by further harmonising the legal rules of the market and therefore likely forcing the economic supporting structures to fall into line. Nevertheless, the PSD, 40. See fn.5 above.

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as reported by the EPC, contains areas of concern that hinder modernisation and simplification of a payments code: (1) the decision to allow Member States to exercise considerable discretion thereby leading to fragmentation; (2) transactions having one leg outside the European Union may expose the banks to excessive liability; and (3) failure to harmonise existing legislation related to payment services, for example the Distance Selling Directive,41 the Distance Marketing Directive42 and the E-Commerce Directive.43

Conclusion Regulation 2560/2001 is not a price control mechanism per se, since it does not specify a price at which domestic and cross-border credit transfers must clear. It merely states that the price for similar services, whether performed within the Member State or outside the Member State, must be identical. Nevertheless, the Regulation assumes that the cost of a foreign credit transfer in euro is more expensive than a domestic credit transfer to banks and therefore the difference in price was preventing the flow of interMember State business and creating excess demand for a product most customers could not afford or were unwilling to pay. Neither the Regulation nor its Recital provides enough information to verify this assumption. However, assuming that a foreign credit transfer does impose more cost on banks, then the bank theoretically is forced to internalise this cost or raise the cost of its domestic service. If the cost is internalised the bank either incurs a loss or books a reduced gain. If the price of the domestic service is increased, then the Regulation has back-fired. The EPC estimates that the cost for banks of establishing a common payments infrastructure is in the range of US$10–15 billion and involves a loss of revenue in the range of ¤13–29 billion. Banks ultimately may reduce their actual costs of credit transfers because of a common payments infrastructure, automation and standardisation. The degree of cost and loss leads to several observations. The European law-makers made it clear to the banking industry that regulatory measures would be used to impose a structure upon the market at the bank’s expense that the banking industry may not have favoured. In other words, the threat of burdensome regulation has induced banks to undertake the building of the common payments system. Secondly, there is a gap between the political vision of a unified Europe and economic reality. If there were a demand for cross-border credit transfers 41. Directive 97/7 on the protection of consumers in respect of distance contracts [1997] O.J. L144/19. 42. Directive 2002/65 concerning the distance marketing of consumer financial services [2002] O.J. L271/16. 43. Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market [2000] O.J. L178/1.

of low value, institutions would have responded by producing a product based on free market principles. Thirdly, the segmentation of Europe into small nation states with ossified business practices requires lawmakers to use coercion to break down barriers to the internal market. Fourthly, the legal regime of Europe lacks open texture and inhibits the development of business ventures that are capable of providing services customers want at an equilibrium price. Consequently, the question posed in the introduction is answered: Community level instruments are required to repair market failure. The Regulation appears to have partially achieved its objectives in Latvia. As at the date of the study, more than 66 per cent of the banks comply with the requirements of the Regulation.44 However, the data demonstrates that the Regulation had not induced a system of inexpensive fund transfers for cross-border payments in euro. Third, individual consumers that may be victims of overcharging, lack incentives to file complaints against banks due to the limited amount in dispute. Fourth, a Community level revision of the Regulation should address the market reality of the complex pricing patterns including: BEN, OUR and SHARE mode transfers, discounts to associated groups of banks that are not branches of a single institution, and the effect of the CREDEURO and ICP conventions. Any revision should also remove any ambiguity of language stemming from interpretations of the terms ‘‘same institution’’ and ‘‘corresponding payments’’. These arguably ambiguous terms leave a large margin of discretion for banks to implement the Regulation in a non-uniform manner contrary to the objective of establishing a single payment market. Finally, a revised Regulation should address the question of requiring banks to provide audit trails of transfers based on the actual cost of producing the document. At the national level, authorities must address the question of providing a remedy for violations of the Regulation resulting in overcharging. In Latvia, the study has demonstrated that, in certain instances, banks may have charged consumers rates based on price lists in apparent violation of the Regulation.

Afterword The EPC claims that SEPA is a ‘‘High-Level take-away for banks’’ and states, ‘‘SEPA affects all banks operating in Europe. All of them must comply with the requirements defined by the relevant European legislation and with the new self-regulatory documents of the European banking industry’s decision-making and coordination body on payments.’’ The mandatory charging option is SHARE for cross-border credit transfers and EPC has removed the ¤50,000 ceiling 44. As noted previously, the compliance rate as of July 8, 2006 was higher as several banks had aligned their practices with the Regulation’s requirements.

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for payments. These commercial practices, expected to be implemented, raise a question of whether existing European legislation regarding cross-border payments is consistent with the ‘‘new’’ commercial

reality of SEPA, and thereby requires a review of existing legislation to make certain that law and commercial reality are consonant and that the law provides a comprehensive payments code.

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Appendix I: Credit institutions in Latvia: price for transfers in euro45 OUR

SHA

BEN

Aizkraukles banka

15

8

simple

LVL

21

14

Urgent

12

5

Electronic simple

18

11

Electronic urgent

Baltikums

15 EUR + 0.1% (min. 10 EUR, max. 75 EUR)

15

15

Standard

EUR

25 EUR + 0.1% (min. 10 EUR, max. 75 EUR)

25

25

Urgent

50 EUR + 0.1% (min. 10 EUR, max. 75 EUR)

50

50

Express

Baltic International Bank

15

10

10

up to 12,500

EUR

30

15

15

12,500 to 25 000

50

20

20

more than 25 000

Baltic Trust Bank

—

7

—

Payments to other bank in LV re: foreign currency—ordinary—to bank in LV with correspondent relations [for residents of LV]

LVL

—

5

—

Payment to other bank in LV re: foreign currency—electronically to bank in LV with correspondent relations [for residents of LV]

—

6

To EUR countries in amount up to 12,500—ordinary [for residents of Latvia]

4

To EUR countries in amount up to 12,500—electronically [for residents of LV]

15

To EUR countries in amount up to 12,500—express (ordinary) [for residents of LV]

13

To EUR countries in amount up to 12,500—express (electronically) [for residents of LV]

46

45 The

three aforementioned modalities of payment (OUR, BEN and SHARE) are available in Latvia, as evidenced by the data for credit transfers in euro. The default modality is not a national SHARE as presumed by the Regulation and its drafters. In fact, a dominant modality of payment does not emerge from the data but depends on the individual bank offering the service. In addition, it must be noted that while Latvian credit institutions make credit transfers in a variety of currencies, the Bank of Latvia has a clearing and settlement system only for LVL called SAMS, a real-time gross settlement system for large value payments. As stated, the data was accurate as of February 3, 2006. 46 BTB divided payments into ‘‘ordinary’’ and ‘‘electronically’’ and distinguished between residents of Latvia (‘‘LV’’) and non-residents. [2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

30 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

Appendix I: Continued OUR

SHA

BEN

0.2%, min. 15, max. 45

—

—

—

10 EUR

—

15 EUR

—

Non-resident transfer of EUR in amount up to 12,500—personally or by fax

Hansabanka

5

—

5

EUR—to other bank in LV—Active tariff

LVL

6

—

6

EUR—to other bank in LV-electronic basic tariff

18

—

10

EUR—to other bank in LV—Standard—Active tariff

20

—

12

EUR—to other bank in LV—Standard—electronic basic tariff

30

—

15

EUR—to other bank in LV—Express—Active tariff

35

—

20

EUR—to other bank in LV—Express—electronic basic tariff

16

—

5

EUR—to EU countries up to 50,000—Economic—Active tariff

18

—

6

EUR—to EU countries up to 50,000—Economic—electronic basic tariff

18

—

10

EUR—to EU countries up to 50,000—Standard—active basic tariff

20

—

12

EUR—to EU countries up to 50,000—Standard—electronic basic tariff

30

—

15

EUR—to EU countries up to 50,000—Express—active tariff

35

—

20

EUR—to EU countries up to 50,000—Express—Electronic basic tariff

Appeared to override charge of 6 LVL for SHA to EUR payment to EU countries Non-resident transfer of EUR in amount up to 12,500—electronically

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Appendix I: Continued OUR

SHA

BEN

Latvijas Biznesa banka47

15

8

8

EUR—to other bank in LV—Standard

LVL

12

6

6

EUR—to other bank in LV—Standard—if internet or Client Bank system used

20

12

12

EUR—to other bank in LV—Urgent

18

10

10

EUR—to other bank in LV—Urgent—if internet or Client Bank system used

30

20

20

EUR—to other bank in LV—Express

28

18

18

EUR—to other bank in LV—Express—if internet or Client Bank system used

15

8

8

EUR—to bank abroad—Standard < 12,500

12

6

6

EUR—to bank abroad—Standard < 12,500—if internet or Client Bank system used

25

8

8

EUR—to bank abroad—Standard > 12,500.01

20

12

12

EUR—to bank abroad—Urgent < 12,500

18

10

10

EUR—to bank abroad—Urgent < 12,500—if internet or Client Bank system used

30

12

12

EUR—to bank abroad—Urgent > 12,500.01

28

10

10

EUR—to bank abroad—Urgent > 12,500.01—if internet or Client Bank system used

30

20

20

EUR—to bank abroad—Express 12,500.01

bank’s literature also indicated that there was an additional charge of ¤15 if the beneficiary’s account number was provided without IBAN and if the account was held by a EU Member State bank. 47 The

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32 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

Appendix I: Continued OUR

SHA

BEN

40

18

18

EUR—to bank abroad—Express > 12,500.01—if internet or Client Bank system used

Lateko banka48

7

—

—

Standard up to 12,500—electronic form

USD

9

Standard up to 12,500—paper form

9

—

—

Urgent up to 12,500—electronic form

12

—

—

Urgent up to 12,500—paper form

15

—

—

Express up to 12,500—electronic form

20

—

—

Express up to 12,500—paper

20

—

10

Standard over 12,500

30

—

15

Urgent over 12,500

50

—

40

Express over 12,500

Latvijas hipoteku un zemes banka

10 LVL + 10 EUR

Standard up to LVL 50,000 or equivalent for EUR up to 20,00049

LVL + EUR

10 LVL + 25 EUR

Standard up to LVL 50,000 or equivalent for EUR up to 50,000

10 LVL + 40 EUR

Standard up to LVL 50,000 or equivalent for EUR 50,000 and above

Latvijas Krajbanka

16/18

7/9

Standard business/standard tariff

LVL

18.6/21

18.6/21

Urgent business/standard tariff

24/28

24/28

Express business/standard tariff

Latvijas Tirdzniec¯ıbas banka

5.5/7.5/12

Standard/urgent/express below 12,500 EUR—resident

LVL

7.5/11.5/15

Standard/urgent/express over 12,500 EUR—resident

48

The bank’s literature did not differentiate between OUR, BEN or SHARE for transfers up to 12,500; it is presumed that the charge was the originator’s cost. 49 ‘‘For considerable sums (above LVL 3000 or equivalent) the client has rights to agree with bank dealer about better rate.’’ By telephone the bank stated that for transfers below LVL 500 the commission was LVL 1 and for transfers above LVL 500 the commission was 0.5% of the amount, without any distinction between OUR, BEN or SHARE.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R. 33

Appendix I: Continued OUR

SHA

BEN

5/6.5/10

Standard/urgent/express below 50,000 EUR—resident

8/9.5/14

Standard/urgent/express over 50,000 EUR—resident

17/27/67+ additional commission

17/27/67

Standard/urgent/express —non resident

SEB Latvijas Unibanka

—

8

—

Ordinary foreign currency to other bank in LV

LVL

14

—

—

Ordinary foreign currency to other bank in LV

—

4

—

Ordinary EUR to bank in EU countries and Norway up to 50,000

—

13

—

Fast USD or EUR50

18

—

—

Fast USD or EUR

—

16

—

Express USD or EUR51

35

—

—

Express USD or EUR

1

—

—

Beneficiary had account in SEB branches in Estonia and Lithuania

—

1

—

Beneficiary had account in SEB group other banks

1.50

—

—

Beneficiary had account in SEB group other banks

5

Sampo banka LVL

Beneficiary account was in Hansabanka, Nord/LB, Parekss banka and Baltic Trust Bank 10

10 + inter. Bank Comm. 20 + inter. Bank Comm. 5

Standard—other bank in LV Standard—other bank in LV

20

Express—other bank in LV To Hansabanka LV, SEB Unibanka & Latvijas Krajbanka

50 The

bank’s literature did not make a distinction on destination inside or outside Latvia with regard to FAST in USD or EUR. 51 ibid.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

34 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

Appendix I: Continued OUR

SHA

2–6

To Sampo in Finland [charge depended on same account, different account and private or corporate] 10

10 + inter. Bank Comm.

Multibanka52

20 + inter. Bank Comm.

LVL

BEN

Bank abroad—standard Bank abroad—standard

20

Bank abroad—express Bank abroad—express

6

Standard

12

Urgent

18

Express

LVL 6 /12/18 + 5 EUR

Standard/Urgent/Express —Transfer up to 50,000 EUR to other bank in LV or DE

LVL 6/12/18 + 50 EUR

Standard/Urgent /Express—Transfer of more than 50,000 EUR to other bank in LV or DE

LVL 6/12/18 + 10 EUR

Standard/Urgent /Express—Transfer up to 50,000 EUR to bank in CH, DK, EE, FI, FR, IE, LT, MC, NL, SE, UK53

LVL 6/12/18 + 75 EUR

Standard/Urgent /Express—Transfer of more than 50,000 EUR to bank in CH, DK, EE, FI, FR, IE, LT, MC, NL, SE, UK

LVL 6/12/18 + 25 EUR

Standard/Urgent /Express—Transfer up to 50,000 EUR to bank in AD, AT, BE, CY, CZ, GR, HU, IT, LI, LU, PL, PT, TR, SM, SP, VA

LVL 6/12/18 + 0.3% EUR

Standard/Urgent /Express—Transfer of more than 50,000 EUR to bank in AD, AT, BE, CY, CZ, GR, HU, IT, LI, LU, PL, PT, TR, SM, SP, VA

52

Multibanka’s literature did not provide prices in terms of OUR, BEN or SHARE; rather prices were available for correspondent commissions dependent on destination of payment. 53 ‘‘MC’’ is Monaco.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R. 35

Appendix I: Continued OUR

Nord/LB56

LVL

SHA

BEN

LVL 6/12/18 + 0.2% EUR54

Standard/Urgent /Express—Transfer up to 50,000 EUR to bank in other European States and outside Europe

LVL 6/12/1855 + 0.2% EUR

Standard/Urgent /Express—Transfer of more than 50,000 EUR to bank in other European States and outside Europe

—

—

7 or 4 [correspondent fee commission not stated]

Economy to other bank in LV; Note payment through branch or through iNord and Uznemuma banka resulted in different charge57

—

—

12 or 7

Standard to other bank in LV

—

—

0.1%, min.20, max. 100 or 0.08% min.16, max. 80

Express to other bank in LV under conditions same as above

—

—

4

Payments to bank abroad EU regulated payment up to 50,000—Standard [only though iNord] not available at branch

0.1%, min. 20, max. 100

Express EUR to bank abroad; note if transaction done through Internet price is Recipient—0.08% min 16, max 80; Remitter 0.08% min 16, max 80 + 15

0.1%, min 20, max 100; 0.1% min 20, max 100 + 15 [at branch]

10 + 15 or 5

Payments to bank abroad EU regulated payment up to 50,000—Standard

54 Min.

40 EUR. 40 EUR. 56 The Nord L/B pricing list was extremely difficult to interpret; results shown are best efforts of author. There was a discrepancy in the literature: in one section entitled payments abroad (in LVL or foreign currency) with specific reference to EU regulated payment the fee was 4 LVL; in another section entitled ‘‘Payments abroad’’, there was no fee charged. The author is using the former variant in the table. 57 Literature did not use the terms OUR, BEN or SHARE; rather it used the terms recipient and remitter and divided pricing as to who pays the correspondent bank commission. 55 Min.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

36 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

Appendix I: Continued SHA

BEN

VEF Banka

1558

OUR

—

—

Interbank transfer in EUR standard—no upper or lower amount indicated

LVL

12

—

—

Interbank transfer in EUR for VEF Internet or Customer-Bank system users

—

—

12

Interbank transfer—BEN

Parex banka59

0.10

To account held with Parex—electronic

EUR

0.20

To account held with Parex—other [Inese complete]

5

—

—

To banks with direct clearing—electronic

7

—

—

To banks with direct clearing—other

3

—

—

To banks holding accounts with Parex, including Parex Lithuania and AP Anlage & Private Bank AG (Switzerland)—electronic

5

—

—

To banks holding accounts with Parex, including Parex Lithuania and AP Anlage & Private Bank AG (Switzerland)—other

—

9

—

To other banks if correspondent fees were paid by beneficiary [payment defined as share]—electronic

14

To other banks if correspondent fees were paid by beneficiary [payment defined as share]—other

0.1%, min.12, max. 50 +9

—

To other banks—electronic

—

—

To other banks—other

—

14

—

Urgent transfer—electronic

0.1%, min.18, max. 75 + 14

20

Urgent transfer—other

58 Note

that VEF did not indicate that the charge was OUR; for purposes of this analysis, it was assumed. 59 Parex bank offered slightly different information on its Latvian and English language sites; information here was taken from Latvian language site. [2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R. 37

Appendix I: Continued OUR 0.1%, min.18, max.75 + 14 0.1%, min.27, max. 115 + 20

SHA

BEN

—

—

Urgent transfer—electronic

—

—

Urgent transfer—other

2

To Parex bank Lithuania—electronic

2

To Parex bank Lithuania—other

3 CHF

To AP Anlage & Privat Bank AG Switzerland—electronic

5 CHF

To AP Anlage & Privat Bank AG Switzerland—other

Paritate bank60

—

—

15

Regular—No distinction made to destination

EUR

—

—

25

Urgent—No distinction made to destination Regular61

0.1%, min.10, max. 60 + 10

0.1%, min. 20, max. 70 + 10

Urgent

Rietumu Banka

0.2%, min.20, max. 45

—

—

Wire transfers

EUR

—

—

10

Wire transfer

SEB Latvijas Unibanka

—

8

—

Ordinary foreign currency to other bank in LV

LVL

14

—

—

Ordinary foreign currency to other bank in LV

—

4

—

Ordinary EUR to bank in EU countries and Norway up to 50,000

—

13

—

Fast USD or EUR62

18

—

—

Fast USD or EUR

—

16

—

Express USD or EUR63

35

—

—

Express USD or EUR

1

—

—

Beneficiary had account in SEB branches in Estonia and Lithuania

—

1

—

Beneficiary had account in SEB group other banks

60

Note Paritate Bank offered Moneygram transfers in EUR with a completely different price list than for transfers noted in this table. 61 Charges were deemed ‘‘OUR’’ based on best interpretation of table of fees; Table indicates that in a ‘‘SHA’’, the beneficiary paid fees of third banks.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS

38 BURKE: APPLICATION OF REGULATION 2560/2001: [2007] J.I.B.L.R.

Appendix I: Continued OUR 1.50

SHA

BEN

—

—

5

Sampo banka LVL

Beneficiary account was in Hansabanka, Nord/LB, Parekss banka and Baltic Trust Bank 10

10 + inter. Bank Comm. 20 + inter. Bank Comm.

Beneficiary had account in SEB group other banks

Standard—other bank in LV Standard—other bank in LV

20

Express—other bank in LV

5

To Hansabanka LV, SEB Unibanka & Latvijas Krajbanka

2–6

To Sampo in Finland [charge depended on same account, different account and private or corporate] 10

10 + inter. Bank Comm. 20 + inter. Bank Comm.

Bank abroad—standard Bank abroad—standard

20

Bank abroad—express Bank abroad—express

62 The

bank’s literature did not make a distinction between destination inside or outside Latvia with regard to FAST in USD or EUR. 63 ibid.

[2007] J.I.B.L.R., ISSUE 1  SWEET & MAXWELL AND CONTRIBUTORS