Guidance

Annex: Run-off regime for EEA firms that currently passport into the UK under the Payment Services Regulations 2017 and Electronic Money Regulations 2011

Updated 7 August 2019

1. Background

The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 became law on 19th November 2018. This legislation established a ‘temporary permissions regime’ (TPR) for EEA payments and e-money firms, enabling EEA payment and e-money firms currently operating in the UK via a passport to continue their EMR-regulated and PSR-regulated activities in the UK for a limited period after exit day.

2. Purpose

The Financial Services Contracts (Transitional and Saving Provisions) (EU Exit) Regulations 2019, which was first announced on 20 December 2017, establishes a regime to allow for the orderly wind down of the UK regulated activities of firms that do not enter the TPR or those that leave the TPR without full UK authorisation. The regime is designed to minimise the disruption faced by EEA payment and e-money firms and their UK businesses and consumers due to the loss of passporting rights arising from EU withdrawal. It will ensure that firms that do not gain full UK authorisation after or in place of the TPR can continue to carry out business to the extent necessary to run off pre-existing contractual obligations to customers in the UK, but not to undertake new business.

The SI provides for automatic entry into the regime for firms that do not enter the TPR, and those that leave the TPR without full UK authorisation with residual contractual obligations. Within this regime, those firms with a UK branch and/or agents (currently operating under a freedom of establishment passport), and firms who enter the TPR but exit it without UK authorisation and residual contractual obligations, will be placed into a supervised run-off (“SRO”). Those firms without a UK branch (currently operating under a freedom of services passport) with residual contractual obligations that do not enter the TPR will be placed into a contractual run-off (“CRO”).

Most EEA payments and e-money firms that seek UK authorisation will be required to establish a subsidiary. It may be that some EEA firms will run off existing contracts in the SRO or CRO, alongside establishing a UK subsidiary which is fully authorised and able to contract new business.

3. The Supervised Run-off (SRO)

The SRO will work much in the same way as the TPR. Firms operating under the SRO will be within the UK regulatory perimeter and will be deemed authorised under the PSRs and EMRs for the purposes of winding down their UK regulated activities in an orderly manner. They will be regulated and supervised by the FCA similar to UK authorised firms, but they will only be allowed to carry out the regulated activities which are required to service their pre-existing contracts and wind down.

4. The Contractual Run-off (CRO)

Firms which enter the CRO may not have an existing relationship with UK regulators, because they will have been providing services in the UK via a passport but without establishing a presence in the UK. Under the CRO they will remain supervised by their home state regulators, as is currently the case. As with the SRO, providers will not be able to enter into new contracts with UK customers; they will only be allowed to carry out the regulated activities which are required to service their pre-existing contracts and wind down.

5. Moving firms between the SRO and the CRO

The SI gives the FCA the ability to move firms from the SRO to the CRO, and vice-versa. This is so that if, for example, a firm with significant UK exposure enters the CRO, but the FCA feel that their statutory objectives would be served better if this firm was supervised in the UK, they can move it to the SRO.

6. Regime Length

Payments and electronic money firms will be able to utilise this regime for up to five years after entry into the regime (whether they enter on exit day, or whether they enter after having been in the TPR for a period of time). This will allow the majority of contracts with UK customers to come to a natural conclusion, meaning there will be no significant impact for UK customers. Where providers have long-term contracts, five years will be sufficient time to allow them to take mitigating action by, for example, transferring their contracts to a UK entity, to ensure that any impact on UK customers is minimised.

The SI provides HM Treasury the power to extend the length of the regime in certain circumstances.

7. Consumer safeguarding

Under the second Payment Services Directive (PSD2) and the second Electronic Money Directive (2EMD), Payment Institutions, and Electronic Money Institutions providing payment services, have to safeguard client funds such that these funds are returned to their clients before any other creditors in the event the firm becomes insolvent. Currently, this is generally done by firms keeping their own funds separate from their clients’ funds. To protect consumers, the FCA will have the power to require SRO firms to demonstrate that they are safeguarding client funds as set out in PSD2 and 2EMD.

CRO firms will continue to be regulated under PSD2 and 2EMD, as implemented in their home state and enforced by the relevant competent authority in that state. However, dependent on their home state law, CRO firms may not be required to safeguard UK consumer funds in the same way as EEA consumer funds in the event of a no deal UK exit. Consumer risks in this scenario are mitigated by the power of the FCA to move these firms into the Supervised Run Off, or to cancel their exemption from the PSRs or EMRs altogether.