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No-deal Brexit negative effect for Payment Service and E-money Institutions authorised in the UK

Recently we published news  on the survey that indicated that about a third of UK businesses are considering relocation due to Brexit. Many Authorised Payment Service Institutions and Authorised E-money Institutions based in the the UK also acquired licenses in the EU Member States and established subsidiaries or at least made applications. There are 17 days left before Brexit, while the extension could be granted. If you have not applied for authorization outside the UK or you want to get authorisation in the UK, you should be aware about the possible consequences of no-deal Brexit for your business.

No freedom of establishment and no freedom to provide services

It is a known fact that in the case of no-deal Brexit, Payment and E-money Institutions authorised in the UK will lose EU Passport rights. Hence, generally, they will not be able to provide services and establish branches in the EU Member States. It is a huge problem for all service providers operating at the EU market that consists of 500 million consumers and 22 million business. Financial Conduct Authority (FCA) explains that companies willing to operate after the UK withdraws from the EU will need to take steps to ensure continuation of operations.

There are no mitigation measures on the EU level

The UK regulators, recognising the need to provide for continuity and a smooth transition, will introduce a Temporary Permissions Regime (TPR) for EEA financial services firms, including EEA Payment Service and E-money Institutions operating in the UK under the EU financial services passports immediately before exit day. Generally, it will allow inbound firms to continue operating in the UK within the scope of their current permissions, e.g. fulfil existing contracts with UK customers and enter into new business, for a period of up to 3 years after exit day, while seeking full UK authorisation.

While the regime introduced by the UK imposes certain limitations and obligations, from the side of the EU there is no reciprocal arrangement for UK-based Payment Service Providers at all. Taking into consideration the negotiations between the UK and the EU and general attitude of the EU law to third-country financial services providers, it seems very likely that there might never be EU rules favourable for the UK retail financial service providers. The problem is that there is no equivalence regime for retail banking services that include payment services and e-money issuance. Even if there is an exception for the UK, the EU already expressed intention to be able to withdraw equivalence recognition unilaterally that does not completely satisfy the UK.

Payment Service and E-money Institutions will face a dilemma

If no clarifications are provided, service providers will need to choose between the lesser of two evils. From the one side, Payment Service and E-money Institutions have a duty to protect financial and payment systems and access for clients. On the other side, it may be prohibited to provide services to clients abroad, as some local authorisation may be required post-Brexit. For example, in France, it is considered that regulated payment services are provided “in” their territory and authorisation is needed as long as the customers are French residents, while in Germany whether or not a cross border Payment Service Provider (PSP) is considered to be conducting business “in” German territory, it may depend on what type of local customers the PSP deals with (corporate or retail).

Most unilateral Brexit measures of the EU Member States do not address Payment Service and E-money Institutions

While Italian and French central banks were sending letters to different PSPs requesting their post-Brexit plan, the German Federal Government had published a draft law that aims to preserve market access for UK companies offering banking business or financial services in Germany under the European passport regime for a transitional period in case of a no-deal Brexit. Hence, UK-based Payment and E-money Institutions will be able to continue their operations for a transitional period that can be revoked by BaFin, the German financial regulator, at any point in time.

The big problem is that other Member States did not follow the German approach towards Payment and E-money Institutions. In Italy the situation is unclear, as it would like to provide access to financial service providers after Brexit, but has completely specified which financial service providers, Sweden, Finland, Austria, France, and even Ireland ignore Payment Service Providers and are more focused on investment and other services, such as legal services (Austria). While also focusing on the investment services sector, the Netherlands is prepared to adopt measures that will make possible to change legislation promptly by non-legislative acts (this may be also used to address problems of Payment Service and E-money Institutions). It seems like other Member States maintain a "wait and see" approach.

Access to payment infrastructure

After no-deal Brexit, unless there are some arrangement, UK PSPs will immediately lose direct access to EU central payments infrastructure, such as TARGET2 and the Single Euro Payments Area (SEPA), including STEP2, meaning customers will face increased costs and slower processing for Euro transactions. This will have impact on all PSPs, which use UK banks for euro correspondent services, including non-bank PSPs, such as PIs and EMIs, which will have to open accounts with EU-based PSPs.

Technically, UK can be part of the SEPA, as there are non-EU countries that are part of the SEPA that fulfil the eligibility criteria of the European Payments Council (EPC), such as Iceland, Liechtenstein, Norway, Monaco, San Marino, Switzerland, and Andorra. While UK is maximising its prospect of the maintaining access to the SEPA, it not clear whether the access will be granted, and when. In any case, UK banks will have to make new Euro-clearing arrangements with the EU to get access to the infrastructure as soon as possible, which would involve rerouting transactions, indirect memberships via EU branches, Nostro setups, reviewing charging models, etc.

Other consequences

There are much more outcomes of no-deal Brexit that may affect Payment Service and E-money Institutions. Below are the most relevant one:

1. The UK and UK-based firms will be disconnected from EU databases, IT systems and other platforms for communication and information exchange.
2. A prolonged uncertainty about Brexit may cause significant fluctuations in the sterling exchange rate.
3. Data protection regime will be affected. In the UK, data flows from the UK to European Economic Area countries will be permitted, and only organisations that have data flows from the EEA to the UK will be affected. However, in case of no-deal, there may be no automatic equivalence granted by the EU Commission. After the UK finally leaves the EU, the Commission will go through an assessment process. Right now, nobody knows what will happen during such assessment and whether equivalence regime will be granted.
4. After Brexit, the movement of people, including high-skilled workforce, between the UK and the EU, will be subject to new immigration rules for UK and EU citizens. In 2018, it was hard to find sufficiently qualified staff for a Payment Service and E-money Institutions to get authorisation. After Brexit, the situation may become even worse. However, high-skilled immigrants from no-EU countries may mitigate the situation.

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Gustav Korobov

Gustav Korobov

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Advapay OÜ

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