Brexit impact on UK-based financial institutions

Let us now look at the post-Brexit scenarios which, to some extent, will impact on institutions who are licensed in the UK to provide payment services and who also do business in the EU, thanks to their passport licences.

The current PSD2 provides that a payment or electronic money institution that has applied for and obtained authorisation from its home Community country may operate as a “Community payment institution” (or “Community electronic money institution”) in other countries of the European Union:

  • through the opening of branches;
  • via Agents (or “contracted entities” as far as only electronic money institutions wishing to distribute and redeem electronic money are concerned);
  • in pursuant to the freedom to provide services or the freedom of establishment.

The cross-border operation of EU institutions is guaranteed by the so-called “passporting rules” defined in the current Payment Services Directive. It follows that all payment and e-money institutions that had applied for and obtained a licence in the United Kingdom, thus avoiding the possibility of permanently losing their cross-border licence, will still have to review the agreements, terms and conditions of use relating to the provision of the services offered in the territory of the Union.

On the beginning of 2021 the total number of payment and e-money institutions in the United Kingdom, authorised by the FCA (Financial Conduct Authority, i.e. the competent authority in the UK), registered in the EBA public register [11] is represented by the following evidence:

  • 177 electronic money institutions (about 48% of the total);
  • 387 payment institutions (about 38% of the total);
  • 70 TPP AISP payment institutions providing only the Account Information service (about 68% of the total);
  • 54 TPP PISP payment or electronic money institutions providing the Payment Initiation service (approximately 39%).

Each of these entities can (or could, or perhaps will still be able to…) potentially operate in the territory of the European Union operating across borders, thanks to a passport licence.

Cross-border operation envisaged for Community payment institutions and electronic money

In relation to the new regime for cross-border operations for payment and e-money institutions under PSD2, it should be noted that in the case of “Community” institutions, i.e. those entities operating in a Member State other than their home Member State where they have applied for and obtained authorisation, there is provision for the use of precautionary measures, the content of which cannot in any way be compared with that expressed in PSD1.

Of importance is the introduction of the so-called “host Member State control” in addition to the so-called “home Member State control” – already provided for in the previous Directive – in respect of which the host Member State may require Community institutions to appoint a central contact point in their territory in order to facilitate the competent authorities’ supervision of networks of agents and, in urgent cases, where immediate action is necessary to address a serious threat to the collective interests of payment service users in the host Member State – e.g. large-scale fraud – the Competent Authorities of the host Member State may take precautionary measures, in the context of cross-border cooperation between the Competent Authorities of the host and home Member States and pending the adoption of measures by the Competent Authorities of the home Member State.

That said, it should be possible to better understand the impact of post-Brexit PSD2 on FCA-approved institutions (including TPPs) in the UK, given the underlying complexities.

What is ‘passporting’ and why does it matter?

The EU passporting system for banks and financial services companies enables firms that are authorised in any EU or EEA state to trade freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services.

There are nine different passports that banks and financial services providers rely on in order to provide core banking services to businesses and customers across the EU. To have the benefit of each passport a Member State signs up to and applies a particular regulatory regime into national law. Each of these passports is embedded in a particular EU Directive or Regulation establishing the basic rules for that activity. So, for example:

  • Payments services: Both bank and non-banks based in the UK use the Payments Services Directive (PSD) passport to provide payments services to EU customers.
  • Non-UK EU banks using the UK as a hub: Many non-UK EU banks also provide similar services to the above using an operation in the UK to serve clients in their home market or across the single market. To do this they depend on their own passports.
  • These passports are based on the single EU rulebook for financial services and are therefore not available for firms based in countries outside of the EU and the EEA. Non-EU firms face significant regulatory barriers to providing cross-border banking and investment services to customers and counterparties in many EU Member States.
  • Certain EU legislation provides for ‘third country‘ regimes which allow non-EU based firms to offer a limited number of services into the EU if their home country regulatory regime is accepted by the EU as being ‘equivalent’ to EU standards. However, these regimes only apply to a handful of banking services, and are much more limited in scope and in general much less secure than the passporting regime. As a result, they cannot be relied upon to allow non-EU banks to meet all their customers’ needs in the EU.
  • Once the UK has left the EU and the EEA it would become a “third country” and these limited regimes may in principle be available.

Passporting enables firms that are authorised in any EU or EEA state to trade freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services.

Why does passporting matter?

While each passport covers a separate kind of activity, to enable banks to service the needs of customers and businesses, many modern banking services involve activities covered by more than one passport (see Box 2: Providing Capital to EU businesses).

These passports are the basis of the single market in financial services and are used to enable a steady flow of trade in financial services across the EU. Many banks and financial services businesses in the UK have based their business models on the rights conferred by EU legislation to ‘passport’ their services across the EU and the EEA. They are especially important for the UK, which is the largest exporter of financial services inside the single market, exporting over £20 billion of services to customers in the rest of the EU in 2014 and helping provide hundreds of billions of euros in finance.

How does passporting work?

The passporting system is built on the assumption that banks and financial services firms authorised anywhere in the EU will have met the same standards, and thus should in effect be treated as if they were locally authorised. This is reinforced by a very high level of regulatory cooperation between national supervisory authorities in the EU, including the merging of some supervisory functions for EU states participating in the banking union. This is the basis of two important features of passporting:

  • It enables banks and financial services firms to sell products and services across EU borders on the same basis as if they were present in the market of sale. This is important for areas such as corporate, investment and private banking, where the customer may be in one EU country, and the bank providing the service in another;
  • It enables banks to establish branches in other EU states on preferential terms.

What does the loss of passporting mean?

Once outside the EU, a UK based bank has no ‘passport rights’. Instead it must apply for a licence for each EU country:

  • A licence is not available in many EU countries.
  • The range of licenced banking services is much more limited.
  • The licence is usually limited to one country at a time (i.e. no cross- border rights).
  • Duplication and substantial additional costs.

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