The proposals have been drawn up with a view to establishing a level playing field between prospective issuers of e-money, whether banks or other firms.

Commenting on the consultation paper, David Strachan, director of deposit takers at the FSA says: "The regime we are proposing is intended to encourage innovation. We believe it will help to build consumer confidence in a new and relatively untried means of payment."

The industry watchdog believes e-money can offer consumers a flexible, secure and convenient way of making low value transactions, for example on public transport or in carparks. Regulators believe that e-money may complement credit card use by providing an alternative means of conducting small scale transactions over the Internet. It could also be an attractive payments alternative for consumers who do not possess credit cards or bank accounts.

However, the UK government has indicated that the Financial Services Compensation Scheme will not apply to e-money issuers. Customers will have no access to compensation should an e-money issuer become insolvent.

The FSA has, therefore, sought to put in place appropriate protection for consumers:
* e-money issuers must set a limit on the amounts of money that may be held in individual e-money ‘purses’, thereby restricting individual loss should consumers lose their purses or should the issuer fail;
* customers must have access to relevant and comprehensible information and guidance on information about redemption rights including any fees payable on redemption;
* full disclosure of the risks associated with the product must also be made including the liability of holders for any loss arising from misuse, loss, malfunction, theft of, or damage to, their e-money purses or any electronic device on which e-money may be held; and
* e-money issuers will be included within the scope of the Financial Ombudsman Service and must also have their own procedures for dealing with customer complaints.

In addition, there will be a minimum capital requirement for issuers - at least two per cent of outstanding e-money liabilities, and all funds held in exchange for the issue of e-money must be invested in high quality liquid assets. Issuers must also comply with the FSA's money laundering requirements.

The watchdog will be empowered to grant waivers from regulation to small or locally based firms, although these will still have to submit periodic information about their businesses.