On September 5, 2018, the UK government proposed amendments to the UK Payment Services Regulations 2017 (PSRs), the UK Electronic Money Regulations 2011 (EMRs) and the EU Single Euro Payments Area (SEPA) Regulation (260/2012) (the SEPA Regulation) as it will be incorporated into UK domestic law when the UK leaves the EU (Brexit). The PSRs and the EMRs transpose the revised EU Payment Services Directive (2015/2366) (PSD2) and the revised EU Electronic Money Directive (2009/110) into domestic law in the UK. In contrast, as an EU regulation, the SEPA Regulation currently has direct effect in the UK.
The proposed amendments will be made under two statutory instruments pursuant to the UK European Union (Withdrawal) Act 20181 and will take effect on March 29, 2019, when the UK leaves the EU. One of the relevant statutory instruments also provides for temporary permissions regimes to enable payment institutions (PIs) and electronic money institutions (EMIs) incorporated in other member states of the European Economic Area (EEA) to continue to provide regulated services in the UK post Brexit in the event the UK and EU do not agree and ratify a withdrawal agreement with transitional arrangements before Brexit. EEA banks that provide regulated services in the UK will be able to use a separate temporary permissions regime under the UK Financial Services and Markets Act 2000.
How Will the Proposals Change the Territorial and Currency Scope of the PSRs?
Requirements under the PSRs that currently apply where both the payer and payee’s payment service provider are located in the EEA will generally only apply where (i) both payment service providers are located in the UK or (ii) one of the payment service providers is located in the UK, the other is located in the EEA and the transaction is in euro. In other words, the territorial scope of obligations on a UK-authorized PI, EMI or bank (including a UK-authorized branch of a non-UK EMI or bank) will be retracted in certain circumstances.
Further, the requirement under the PSRs on a payee’s payment service provider to ensure that funds are at the payee’s disposal immediately after they are credited to the payment service provider’s account (regulation 89(3)) will no longer apply where the payment transaction involves a currency conversion by the payee’s payment service provider involving an EEA currency other than euro.
In practice, some UK payment service providers may choose to apply the relevant requirements post Brexit as if the current territorial and currency scope continued to apply, particularly if they have non-UK EEA customers or UK customers that regularly send or receive payments to or from other EEA member states. However, other payment service providers may wish to review their internal policies and procedures and customer documentation in light of the proposed changes, particularly if they are making other changes to these in preparation for Brexit.
Why Are Different Arrangements Being Proposed for Payments in Euro? The UK government has stated that the proposed amendments to the territorial scope of the PSRs and the retention of the SEPA Regulation in UK domestic law are intended to maximize the prospects of the UK remaining within SEPA post Brexit. SEPA enables payments in euro to be made across EEA member states and with certain non-EEA countries that meet its access conditions at relatively low costs. Such access conditions include having to apply certain provisions under the SEPA Regulation and PSD2 to cross-border payments in euro.
The draft statutory instruments would also give the UK’s finance ministry, HM Treasury, powers to remove the SEPA Regulation from the UK statute book and to narrow the territorial scope of the PSRs in relation to transactions in euro in the event UK payment service providers are unable to continue to participate in SEPA on the same terms as EEA payment service providers.
What Happens to the Rules on Safeguarding Customer Funds? A UK PI or EMI is required to safeguard certain funds relating to payment services and electronic money. The most common means for firms to fulfill such requirement is to deposit the funds with a third-party bank. Under the current rules, any such bank must be authorized as a credit institution in the EEA. However, under the proposed amendments to the PSRs and the EMRs, UK PIs and EMIs will be able to fulfill their safeguarding obligations by depositing relevant funds with certain non-EEA banks, in addition to UK and most EEA banks. As is the case under the current rules, the bank must not be a group affiliate of the PI or EMI.
What Happens to the Technical Standards Under PSD2?
Powers to make binding technical standards under PSD2 that currently have direct effect in the UK will be transferred from the European Banking Authority and the European Commission to the UK Financial Conduct Authority (the FCA). These include standards relating to strong customer authentication and third-party access to payment accounts that are available online. The FCA could propose changes to such standards as they apply in the UK post Brexit, so firms should look for announcements and consultations from the FCA on its use of these powers over the coming months.
How Will the Temporary Permissions Regimes Work? The temporary permissions regimes for EEA PIs and EEA EMIs will be in place until March 29, 2022, unless extended by the UK government. However, any such institution wishing to continue to provide regulated services in the UK after this period (either itself or through an affiliate) must notify the FCA of its intention to do so by March 29, 2020. An institution must also notify the FCA within a reasonable time of any change in intention previously notified.
The FCA has the power to set an end date for new business covered by the temporary permissions regimes and broad powers to cancel an institution’s temporary permissions, including where the institution fails to meet certain standards or if the FCA considers this necessary “in order to protect the interests of consumers.” The power to set an end date for new business is presumably how the FCA will enforce the time periods (or “landing slots”) it has said it will assign to institutions to submit applications for full authorization. That said, the explanatory note to the draft statutory instruments states that “the EEA entity will continue to be able to provide services using its temporary permission while the UK subsidiary [i.e., its UK PI or EMI affiliate] becomes operational, for up to three years from [March 29, 2019],” subject to conditions under the regime.
What Happens Next? The UK government has said it intends to lay the statutory instruments before the UK parliament in autumn 2018. If Parliament approves them, they will be passed into law. The FCA will then update its rules and guidance and review the relevant technical standards under PSD2 before these are incorporated into UK domestic law. The government has stated that a draft statutory instrument for retaining the EU Interchange Fee Regulation (2015/751) will follow “at a later date.”