Payment and e-money institutions navigating the EEA after the transition period ends
At the time of writing, the hope of a UK/EU trade deal upon expiry of the Brexit transition period hangs in the balance. Whilst some retained a forlorn hope that financial services would be on the table, and that ‘passporting’ rights currently enjoyed by UK firms could be continued, such hope would seem now to be unlikely.
I was head of the Passport Notification Unit at the Financial Services Authority (FSA and predecessor to the Financial Conduct Authority) for a number of years. I worked closely with the European Commission’s Payments Committee in drafting and publishing passporting guidelines for payments and e-money institutions prior to the Second Payment Services Directive (PSD2) and the EU Regulatory Technical Standards (RTS). Therefore, I can speak on passporting matters with some degree of experience.
We have seen many clients and firms heed the warnings from the European Supervision Authorities, the Prudential Regulation Authority and the Financial Conduct Authority (FCA), and make plans for the UK’s departure from the European Union, to ensure the continuity of their businesses. Typically, this has involved setting up a separate legal entity in another European Economic Area (EEA) and obtaining the authorisation that would allow them to continue to operate in that jurisdiction and passport across the EEA. Where the firm was already established in that Member State, as a branch, the decision is easier. Where, however, the firm has no permanent, physical presence in the EEA and operates solely on a ‘cross-border’ basis it is, in my view, is questionable as to whether such action is necessary.
Were passports ever really needed?
The big question is, were some cross-border passports – or ‘notifications under the freedom to provide services’ – ever really needed? Now, I’m not suggesting that passporting was simply a cottage industry grown by the regulators, or that there were no genuine situations where notification was required. No, I’m simply challenging some of the core principles that have somehow been hidden over the years.
Let me take you back to 1997 and the publication of the European Commission Interpretative Communication on ‘Freedom to provide services and the interest of the general good in the Second Banking Directive’ (97/C 209/04). Whilst this is over 20 years old, the Commission has confirmed when publishing the Payment Services Directive (PSD), the Second Electronic Money Directive and PSD2, that the document is still relevant and, most importantly, to be read across to payment and e-money institutions. So, what does it say that is so interesting?
The Communication itself is concerned with the circumstances when a services passport notification might be made. I have set out below some relevant extracts:
“It is necessary, therefore, to 'locate' the place of supply of the future banking service in order to determine whether prior notification is required.”
“…in its opinion, only activities carried on within the territory of another Member State should be the subject of prior notification. In order to determine where an activity was carried on, the place of provision of what may be termed the 'characteristic performance' of the service, i.e. the essential supply for which payment is due must be determined.”
“This line of reasoning is aimed merely at establishing whether prior notification is necessary.”
“A bank may have non-resident customers without necessarily pursuing the activities concerned within the territory of the Member States where the customers have their domicile.”
“Lastly, the provision of distance banking services, for example through the Internet, should not, in the Commission's view, require prior notification, since the supplier cannot be deemed to be pursuing its activities in the customer's territory.”
“The Commission considers that the prior existence of advertising or an offer cannot be linked with the need to comply with the notification procedure.”
My summary is that where the supply of services takes place dictates whether a passport notification would have been required. So, if no passport was required, irrespective of whether one was actually made, then no authorisation of any kind should be required post-Brexit.
I’m not a lawyer, so feel free to challenge my logic. But it’s broadly reflective of the approach the FCA itself has adopted over the years, per PERG 2.4 and PERG 2.9.
Unfortunately, not every EEA Member State agrees with the ‘characteristic’ test favoured by the Commission, instead following a ‘solicitation’ test. Basically, if you reach out cross-border to ‘solicit’ a client in another EEA State then a passport notification would be required.
However, some transactions are capable of being initiated via reverse solicitation i.e. exclusively at the direction and discretion of a European client. This scenario is set out in the Markets in Financial Instruments Directive (MiFID II) rather than PSD2 but, whilst not explicitly stated, surely there should be some read across.
What to do now?
We have seen recent press coverage of UK banks notifying customers in certain jurisdictions of the closure of their accounts due to Brexit. I suspect that these jurisdictions are one where the solicitation test is applied. There is, unfortunately, no list of EEA Member States that records whether they favour the characteristic test or the solicitation test and, as a result, no clear indication whether firms would be able to (continue to) provide services on a cross-border basis. There is, though, at least some hope.
If you would like to discuss how this article further then please do get it touch.
Related resourcesAll resources
Payment Services Regulatory Compliance Forum 2023
Are you carrying out your new Consumer Duty obligations correctly?
Payments Newsletter - November 2023
A guide to effective fraud management – for Payment and E-money Firms