The UK formally left the EU under the terms of the EU-UK Withdrawal Agreement on 31 January 2020. The Withdrawal Agreement provides for a transition period (referred to as an “implementation period”) which is due to end on 31 December 2020. During the transition period, it is effectively “business as usual” for the UK payments industry (as well as other sectors). While any changes are undoubtedly subject to the negotiation between the UK and the EU on the future relationship, what is certain is that changes are coming.
As a general observation, there have been discussions and reports about possible equivalence arrangements between the UK and the EU for the financial services industry after the transition period. It is not clear what “equivalence” such reports refer to: whether it refers to the equivalence mechanisms expressly embedded in the relevant EU financial services legislation or whether it refers to a general concept that may or may not be underpinned by any legal provisions. However, it is worth noting that there are no legislative equivalence provisions or mechanisms under the Payment Services Directive (EU) 2015/2366 (“PSD2”) and the Electronic Money Directive 2009/110/EC (“EMD2”), the main legislation for the payments sector. Therefore, any equivalence arrangement for the payments industry (if being discussed or proposed) would have to be one that goes beyond the text of the primary legislation; the respective negotiation mandates published by HM Treasury (for the UK) and the Council of the European Union (for the EU) do not seem to mention such extended/general equivalence.
We summarise here some of the key changes that may affect UK payment service providers (“PSPs”), in the event that no deal on the future relationship is agreed between the UK and the EU after the transition period. It should be noted that, despite the current coronavirus crisis and subject to any future change, the UK government so far has said there will be no further extension of the transition period.
Authorisation requirements under PSD2/EMD2
After the end of the transition period, UK PSPs would no longer be able to “passport” their services into the EU, either on a cross-border basis (“service passport”) or by establishing a branch (“branch passport”). This means that a UK PSP would need to consider whether it would need to be authorised in the relevant EU member state; if its business involves multiple EU member states, it would need to assess the authorisation requirements in each of these member states.
Generally, in accordance with the current guidance of the Financial Conduct Authority (“FCA”), the FCA would not require a payment firm to be authorised in the UK if all that the firm does is to provide payment service or issue e-money into the UK through the internet from an establishment outside of the UK (i.e. without any physical presence in the UK). However, the position in other EU member states may differ and thus local advice would be needed.
Further, PSD2 and EMD2 allow a firm to carry on payment services through an agent or to distribute e-money through a distributor, respectively. The use of such an agent/distributor that is located in another EU member state currently triggers, depending on the circumstances, either the service passport or the branch passport.
After the end of the transition period, if e.g. a UK PSP would provide payment services through an agent in Germany, that German agent might cause the UK PSP to become subject to the German authorisation requirements (even if the UK PSP might not be carrying on business by itself physically in Germany).
In addition, it should be noted that if the local authorisation requirements apply, a UK PSP might have to establish a local subsidiary which in turn would have to have the required substance (i.e. it cannot be a “shell”).
Please see our previous article for further discussion on this topic which is available at https://www.bclplaw.com/en-GB/thought-leadership/brexit-potential-impact-on-the-payment-and-e-money-sector.html.
Surcharge ban under PSD2
PSD2 prohibits merchants from imposing additional charges on the use of a particular payment instrument that are not payable for using other payment methods. This is commonly referred to as the ban on surcharges (for using e.g. credit cards).
Broadly, this surcharge ban applies to consumer cards that are subject to the interchange fee cap (see below). However, after the transition period, the interchange fee cap would only apply to consumer card transactions within the UK. So, with respect to UK-EU cross border consumer card payments, the UK or EU merchants would have the ability to impose surcharges for using a particular type of card (although it is another matter whether or not merchants would actually choose to do so in practice).
While this would appear to be an issue mainly for consumers and merchants, there might be indirect impact on UK PSPs as well. For example, UK PSPs might need to consider whether any changes to internal or other operational processes would be needed including with respect to fee structures.
Wire Transfer Regulation (EU) 2015/847 (“WTR”)
The WTR requires PSPs in the EU to provide certain information on the payer when making electronic transfer of funds. This is primarily to ensure such transactions are traceable for anti-money laundering purposes. However, for transfers taking place entirely within the EU, only the account numbers of the payer and the payee are required.
After the transition period, with respect to money transfers from the UK to the EU (or to any non-EU country), UK PSPs would need to request more information from their customer (being the payer) including the payer’s name and one of the following: account number, address, official personal document number, customer identification number or date/place of birth. UK PSPs would also need to verify the accuracy of such information obtained. With respect to money transfers from the EU (or any non-EU country) into the UK, the UK PSP (its customer being the payee) would need to have procedures and systems in place so as to detect whether the above required information on the payer is included in the transfer message.
UK PSPs are currently subject to these requirements with respect to money transfers between the UK and a non-EU country. After the transition period, UK PSPs would need to ensure the relevant systems and controls are in place to comply with these requirements for transfers between the UK and the EU as well.
Cross-Border Payments in Euro Regulation (EC) 924/2009 (“CBPR”)
The CBPR essentially sets out the rule that the charges for euro cross-border payments and euro national payments must be the same. This is known as the principle of equality. The CBPR has been amended by Regulation (EU) 2019/518 (“CBPR2”). Under the CBPR2, the principle of equality has been extended so that charges for euro cross-border payments must be the same for corresponding national payments either in euro or in a non-euro currency of a member state (e.g. pound sterling). This new requirement has applied since 15 December 2019. Therefore, as the CBPR/CBPR2 are EU “Regulations” (i.e. they apply without having to be transposed into local law), UK PSPs are currently subject to this rule.
The CBPR2 also adds new provisions that require PSPs to disclose certain currency conversion charges. These disclosure requirements apply from 19 April 2020. Accordingly, for part of the transition period, UK PSPs would be subject to these disclosure requirements (note that the FCA said on 16 April that it would take a “reasonable approach” to enforcing compliance with these new disclosure rules, to avoid introducing non-essential risks to firms in the present pandemic crisis).
The CBPR regime is to be revoked on “exit day” (i.e. 31 December 2020) by the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019. Notwithstanding, it is not entirely clear whether any provisions of the CBPR/CBPR2 would be retained in some other form, e.g. disclosures on currency conversion charges which are closely connected with PSD2.
Interchange Fee Regulation (EU) 2015/751 (“IFR”)
The interchange fee refers to the fee paid by the card acquirer to the card issuer for each transaction. Such interchange fees are passed on by the acquirer to the merchant that in turn passes to the end consumers. The IFR caps the interchange fee at fixed levels (0.3% for a credit card transaction and 0.2% for a debit card transaction, of the transaction value). The IFR caps apply to consumer cards only (e.g. a typical corporate expense card would not be subject to these caps).
After the transition period, the relevant UK legislation “onshores” the IFR such that the caps would apply only to card payments taking place entirely within the UK. This means that interchange fees may be able to be increased for cross-border card payments between the UK and the EU.
While this would seem to be largely an issue affecting consumers, there might be impact on the UK PSPs as well. For example, any changes to the interchange fee levels might result in amendments to relevant internal or processing procedures to capture such changes.
Single Euro Payment Area (“SEPA”)
The European Payments Council (which oversees the operation of the various SEPA schemes) approved on 7 March 2019 that the UK could continue to be a SEPA participating country after Brexit. This means that after the transition period, the UK will continue to be a SEPA member country.
However, UK PSPs would need to obtain more information when processing SEPA payments. For example, with respect to SEPA Credit Transfers, SEPA Instant Credit Transfers and SEPA Direct Debit, UK PSPs would need to provide full address details of the payer/payee and provide both the IBAN and the BIC codes (which they are not required to do at the present).
Payment Accounts Directive 2014/92/EU (“PAD”)
Under the PAD, UK banks are required to assist a customer if the customer wishes to open an account in another EU member state and such assistance includes provision of specified information free of charge and taking relevant actions (e.g. transferring positive balance to the new account if requested).
After the transition period, such legal obligations would disappear (the relevant Brexit “onshoring” legislation has removed the legal obligation to assist from the UK Payment Accounts Regulations 2015 which implemented the PAD). In practice, UK banks would likely still wish to provide such assistance, albeit that would then primarily be on the basis of best commercial practice rather than express legal obligations. However, where a UK bank decides not to provide such assistance, it may need to consider the general FCA regulatory principle of treating customers fairly.
