Regulations Regarding The Operating License Of Payment Institutions And Their Corporate Governance

Introduction

The Law on the Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions[1] (“Law on Payment Services”) and the Regulation on Payment Services and Electronic Money Issuance and Payment Institution and Electronic Money Institutions[2] (“Regulation on Payment Services”) regulates the procedures and principles regarding payment services and electronic money issuance, as well as the activities of payment institutions and electronic money institutions that operate within Turkey. The regulation of payment services is of vital importance in a world where information systems develop each day. Turkey, in order to remain in sync with current developments, has set forth legal regulations on payment services. The Regulation on Payment Services regulates, in detail, transactions that are subject to operating permits, regulations regarding funds, corporate governance of, and agreements concluded by payment institutions. This article specifically examines operating permits granted, and the corporate governance principles that payment institutions abide by.

Payment Services and Payment Institutions

In accordance with Art. 12 of the Law on the Payment Services, (i) all transactions that are required in order to operate a payment account, including services which enable cash to be placed in, and withdrawn from, a payment account, (ii) execution of payment transactions, including the transfer of funds to and from a payment account with the user’s payment service provider, direct debits, including one-off direct debits, payment transactions through a payment card or a similar device, credit transfers, including standing orders, (iii) issuing or acquiring payment instruments, (iv) money remittances, (v) execution of payment transactions, where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital, or IT device, and the payment is made to the telecommunication, IT system, or network operator, acting only as an intermediary between the payment service user and the supplier of the goods and services, and (vi) corresponding services that enable bill payments, are considered as payment services.

As set forth under the Law on the Payment Services, institutions that may provide payment services are limited to those institutions listed under Art. 13 of the Law. Accordingly, institutions other than the banks, electronic money institutions, and payment institutions may not provide payment services.

Conditions to be Fulfilled by the Institutions

Institutions that seek to provide payment services must satisfy certain conditions. These conditions are stipulated under Art. 14 of the Law on Payment Services. Accordingly, the payment institution is required to (i) be established as a joint stock company, (ii) meet the bank founders’ eligibility criteria as set forth in Banking Law No. 5411 for shareholders who hold ten percent or more shares in that payment institution’s capital, and which have control over the said payment institution, (iii) have shares issued against cash, and which are fully registered in its name, (iv) have a paid-up capital that is comprised of cash and free from all kinds of fictitious transactions, and which is not less than one million Turkish Liras for payment institutions that provide corresponding services, which provide bill payments, and not less than two million Turkish Liras for other payment institutions, (v) have sound and prudent management, adequate personnel, and the technical equipment to perform payment services transactions within the scope of the Law on Payment Services, and to establish necessary units for complaints and objections, (vi) take necessary precautions for the continuity of the activities to be conducted within the scope of Law on Payment Services, and for the security and confidentiality of the payment service user’s funds and information, and (vii) have a transparent and clear partnership structure and organizational system that does not prevent supervision of the Banking Regulation and Supervision Agency (“Agency”).

Institutions that fulfill such conditions may apply for an operating license in order to conduct payment services. Institutions whose operating license application has been granted are entitled to act as payment institutions, and the decision that grants an operating license is published in the Official Gazette.

Application for Operating License

Payment institutions that seek to provide payment services within Turkey are required to apply to the Agency for an operating license. The documents that must be submitted to the Agency are listed in detail under Art. 8 of the Regulation on Payment Services. Documents must be submitted both for the company applying for the operating license, as well as for the real and legal shareholders of the company who hold, directly or indirectly, ten per cent or more shares in the company. These documents generally confirm that the company is not bankrupt, does not have any tax or premium debt, has not been found to be guilty of certain crimes, and, as well, provides the documentation that sets out the capital of the company.

Moreover, the Regulation on Payment Services regulates specific documents if the shareholders who hold, directly or indirectly, ten per cent or more shares in the company who are applying for an operating license, and the controlling shareholders that are banks or financial institutions established abroad. In this case, the documents required by the relevant legislation are limited due to the fact that the shareholder is a bank established abroad, thus being required to abide by the international principles that are established for banking.

As per Art. 8/4 of the Regulation on the Payment Services, if any deficiencies in the information and documents relating to the operating license are not cured within six months as of the date of notification by the Agency, the application for the operating license shall be rendered invalid.

Principles regarding the Corporate Governance of Payment Institutions

Payment institutions must have a developed management network due to their activities. Accordingly, Articles 16-21 of the Regulation on Payment Services sets forth the corporate governance of payment institutions. The board of directors of payment institutions may not be comprised of less than three persons, including the general manager. The board of directors is responsible for determining strategies and policies with respect to the activities of the internal control and risk management units of the payment institutions, determining policies with respect to the management of information systems and determining, managing, monitoring and reporting the relevant risks. The Regulation of Payment Services establishes special conditions for general managers. In accordance with this regulation, a general manager must have at least 7 years of professional experience in management or finance, and have an undergraduate education in the related field.

Moreover, the members of the board of directors and the general manager must satisfy certain conditions in order to be eligible to sit on the board of directors of a payment institution. The members of the board of directors and the general manager must submit the documents listed under Art. 18 of the Regulation on Payment Services, as well as providing certain undertakings.

Internal controls constitute an important part of corporate governance in payment institutions. In order to carry out activities effectively, and procure unity between systems, an internal control system must be established. Another system to be established along with internal controls is the risk management system. The risk management system aims the identification, measurement, supervision, control and reporting of all risks that the payment institutions may be exposed to in line with the scope and structure of the activities of the payment institutions.

In this regard, one of the most important regulations that the payment institutions are subject to are inspections which are conducted by the Agency. The Agency is entitled to conduct on-site inspections and distant surveillance of the payment institutions. This provision aims to control the activities of the payment institutions, as well as to procure the regular performance of activities.

Conclusion

In line with the developing technology, payment systems that have varied and new payment services have come to light. In this regard, the Law on Payment Services and the Regulation on Payment Services that have entered into force regulates the establishment conditions of payment institutions, the operating license which they are subject to, as well as their corporate governance. With this legislation in effect, it may be concluded that the development of payment services is intended.

[1] Published in the Official Gazette dated 27 June 2013 and numbered 28690.

[2] Published in the Official Gazette dated 27 June 2014 and numbered 29043.