Guidance

'Draft Payments and electronic money (Amendment) (EU Exit) Regulations’ and ‘The Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018': explanatory information

Updated 8 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime.

These SIs are part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in these SIs will not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SIs are intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instruments are still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SIs

What does the underlying EU regulation and UK law do?

EU legislation on payments and e-money (implemented in the UK through the Payment Services Regulations and Electronic Money Regulations) creates the regulatory regime for payment institutions (PIs), electronic-money institutions (EMIs) and open banking firms such as registered Account Information Service Providers (rAISPs). It sets rules for making payments and issuing e-money for these institutions and banks (all together Payment Service Providers – PSPs). It also applies some of the conditions for membership of the Single Euro Payments Area (SEPA, which allows for the fast and cheap execution of euro payments within its geographical scope).

Another piece of legislation – the Cross-Border Payments Regulation (CBPR) – sets rules on the pricing of cross-border euro payments, limiting the cost of a cross-border euro payment to that of a domestic euro payment.

The government is not publishing the draft SI for retaining the Interchange Fee Regulation (IFR) at this time. This will follow at a later date.

3.1 Deficiencies these SIs remedy

These SIs will make amendments to retained EU law related to the Payment Services Regulations (PSRs), Electronic Money Regulations (EMRs) and SEPA Regulation, to ensure that they continue to operate effectively in the UK once the UK has left the EU.

In addressing the deficiencies in this retained EU law the government seeks to:

Maximise the prospect of the UK maintaining access to SEPA

The Single Euro Payments Area – SEPA – enables efficient, low cost euro payments to be made across EEA Member States and with third-countries who meet the governing body’s third-country access criteria. SEPA represents a key enabler of trade between the UK, EU, and existing third-country members, and the government therefore intends to retain relevant EU payments law in such a way that it maximises the prospects of the UK remaining in SEPA. This entails:

• retaining the SEPA Regulation, while fixing a number of deficiencies which result from accessing SEPA as a third-country rather than an EU Member State

• amending the PSRs such that transactions in Euros with another member of the SEPA area (“the qualifying area”) are treated as ‘two-legs in.’ This means that Part 7 of the PSRs will continue to apply in full to transactions in Euro within SEPA, including intra-UK Euro transactions

To cater for the scenario where the UK is unable to continue to participate within SEPA, and PSPs are therefore unable to fulfil the above regulatory obligations, the government is proposing a power to enable it to remove the SEPA Regulation from the statute book and to reduce transactions in Euro to a SEPA member to a ‘one-leg’ transaction (where Part 7 of the PSRs only applies to the part of the transaction carried out in the UK).

Create a temporary permissions regime for payments firms

The passporting system relies upon domestically implemented EU legislation – in the UK, the PSRs. If the UK leaves the EU without a deal, there will be no agreed legal framework upon which the passporting system can continue to function. As a result, without a deal, any references in UK legislation to the EEA passporting system will become deficient at the point of exit. To correct this deficiency, this SI seeks to create a Temporary Permissions Regime (TPR) akin to that contained within the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 for FSMA regulated firms.

Further detail on the FSMA TPR is set out in the policy note for the above Regulations. The payments TPR will differ from these in two key areas:

1. FSCS does not apply to services provided by payment or e-money institutions under the PSRs/EMRs and will not apply to these institutions in the TPR. Instead, payments and e-money institutions in TPR are required to comply with requirements to safeguard UK customer funds under the PSRs/EMRs.

2. Many payments and e-money firms participating in the TPR will have to establish a UK subsidiary in order to offer new business in the UK after the end of TPR.^{[footnote 1]} The UK subsidiary may take some time to become fully operational post-authorisation. Given this, the EEA entity’s temporary permission will not fall away automatically upon the authorisation of the subsidiary. Instead, the EEA entity will continue to be able to provide services using its’ temporary permission while the UK subsidiary becomes operational, for up to 3 years from exit day, subject to the TPR conditions.

Ensure access to segregated safeguarding accounts

The EU PSRs require payment institutions and e-money institutions to safeguard consumer funds to protect consumers’ funds in the event of insolvency. The most prevalent method used to safeguard funds is for the firm to hold them in a segregated account with a credit institution. If the payment or e-money institution experiences an insolvency event, then these customer funds will be paid out in priority to other creditors.

A significant number of UK institutions hold safeguarding accounts in the rest of the EU. To avoid a cliff-edge for these firms, the government is proposing to allow institutions to hold safeguarding accounts anywhere in the world, providing the institutions meet specific criteria. This is in line with existing practices for protecting client assets in investments.

Ensure UK PSPs are not disadvantaged on pricing of Euro transactions

The EU’s Cross-Border Payments Regulation (CBPR) sets limits on charging for cross-border euro transactions. Were the CBPR to be automatically retained, it would be inoperable: cross-border transactions will not be regulated under the default approach to retained EU law (where regulation is UK-only, and not accounting for legislation required for SEPA access). Alternative options – such as applying CBPR to UK PSPs making cross-border Euro payments to the EEA - would place obligations on UK PSPs which they could not fulfil, as these obligations would require co-operation from PSPs in the EEA. The government has also confirmed that CBPR is not a requirement for third-country membership to SEPA. As such, the government is proposing not to retain CBPR.

Negotiations regarding CBPR2 are currently ongoing, and the UK will examine the final version to ascertain whether the above position continues to be the best approach.

Supervisory Cooperation

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in these SIs requiring cooperation and information sharing with the EU have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

3.2 Relevant Handbook and Binding Technical Standard changes

Should these SIs come into force, the FCA will be updating their Handbook and relevant Binding Technical Standards to reflect the changes introduced through these SIs, and to address any deficiencies due to the UK leaving the EU. Details of the FCA’s approach can be found here. The FCA has confirmed its intention to consult on these changes in the Autumn.

3.3 Stakeholders

These SIs will be of relevance to all Payment Service Providers – banks, payment institutions, e-money institutions and registered Account Information Service Providers.

In a no deal scenario, most payment and e-money institutions which are currently passporting into the UK will need to establish a UK subsidiary in order to access the UK market. The government has mitigated the impact of this through the introduction of the temporary permissions regime.

For UK PSPs, the narrower scope of the PSRs will require systems changes for example if PSPs want to process payment transactions between the EEA and the UK marked with an OUR or BEN charging marker.

The Electronic Money, Payment Services and Payment Systems (Amendment) (EU Exit) Regulations includes provisions that will be necessary to ensure Gibraltarian payment institutions and electric-money institutions continue to be able to access UK markets in line with the UK government’s Statement in March 2018.

4. Next steps

HM Treasury plans to lay this instrument before Parliament in the autumn.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

Read the FCA’s role in preparing for Brexit.

Read Payment Systems Regulator’s approach to financial services legislation under the European Union (Withdrawal) Act.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.

1. This requirement applies to e-money institutions providing services unrelated to e-money issuance, and payment institutions. ↩