Low Take-Up Of UK Temporary Permissions Regime By EEA Firms With UK Passports?

According to the FCA's figures in August 2016, the end of financial services passporting between the EEA and the UK was going to leave 5,476 UK finance firms potentially needing a new passporting 'hub' in one of the remaining 27 EU countries and 8,008 EEA firms potentially needing a UK base to cover their UK offerings. So, how many have acted?

There has definitely been a scramble by UK firms to set up in the EU27, although the figures are spread across multiple registers, and regulators do not disclose the numbers of applications that are still in progress. The Central Bank of Ireland claimed "well over 100" in September 2019, for example, with similar numbers thrown out by others. 

Not all firms might use their passports, of course. It's quite straightforward to take advantage of the passporting regime - a simple notification to your home state regulator, which then notifies the various host state regulators. And there's no obligation to actually use a passport. Many firms will have ticked the box for all EEA countries to avoid inadvertently committing an offence wherever their customers happened to reside. And the picture is perhaps distorted by non-EEA corporations who were using the UK as their passport hub, so their new Irish subsidiary would not count as an application by a UK parent.

There has been less pressure on EEA firms who operate under passports in the UK because the FCA offered a Temporary Permissions Regime (TPR) that allows them to continue trading for 3 years as if they were passporting. The registration deadline has been extended each time Brexit has been delayed, so the current deadline is 30 January 2020. However, it's likely that most, if not all, EEA firms that were intending to use the TPR option will have already registered, although some newly authorised firms could still squeeze in (e.g. new FinTech firms).

At any rate, the Financial Conduct Authority has responded to a Freedom of Information Act request with the news that 1,441 EEA-based firms had applied for the TPR by October 2019. Of those, 228 are based in Ireland, 170 in France, 165 in Cyprus and 149 in Germany. 

If this is to be considered a high take-up of the TPR option, then it would appear that only about 18% of EEA passports into the UK were actually being used. That's perhaps not unreasonable, given the tick-box approach to passporting to avoid inadvertently committing an offence in the UK in the event that they ended up with UK customers.

In any event, these 1,441 firms now have until 30 January 2023 to decide whether to set up offices in the UK and get authorised locally, to the extent they continue to serve the UK market.

E-commerce Marketplaces, Commercial Agents and PSD2

E-commerce marketplaces are now common in most sectors, enabling suppliers and consumers of all types of goods and services to find each other, contract directly, pay or be paid, arrange delivery and download their transaction data. But action being taken by some payment service providers (PSPs) suggests that many marketplace operators who offer this service in the European Economic Area may not have realised that the payment step needs to be structured in a way that avoids the need for the operator to be authorised by an EEA financial regulator as a payment institution or e-money institution under the Payment Services Directive or E-money Directive (depending on whether the supplier or customer is able to hold a balance in their 'account').

Some financial regulators, like the UK's Financial Conduct Authority, take the view that offering a payment service or e-money service has to be the operator's regular occupation or business in itself to fall within the scope of the PSD or EMD in the first place (the "business test"), although the payment step would need to be a small, ancillary part of the service offered and this is open to interpretation. But less pragmatic or experienced regulators around the EEA might apply the Directives simply because the operator is running a business of any kind. 

This means operators should err on the side of structuring their activities to avoid holding balances and to take advantage of an exclusion under the Payment Services Directive (e.g. for commercial agents authorised to negotiate or conclude contracts on behalf of either the payer or payee); or involve a PSP to handle the receipt and distribution of funds (or become the registered agent of a PSP). 

Other exclusions under the PSD or EMD may also be helpful. But even relying on an exclusion can be somewhat tricky because the interpretation of exclusions can vary from regulator to regulator across the EEA; and there is no 'passport' for one regulator's interpretation as there is for regulated PSPs who can offer their service across the EEA from under authorisation in their home member state. 

That means an operator should seek legal advice on how to structure its activities appropriately under the law of its home EEA member state; and if that involves relying on the local regulator's interpretation of the business test or an exclusion, the operator should check that analysis works under the law of each member state where the operator has a presence or significant numbers of participants (whether suppliers or their customers).  Acting on formal legal advice should also make it less likely that a regulator will take action for acts or omissions consistent with that advice, although it will not necessarily stop a regulator requiring a different structure going forward.

Use It Or Lose It: The UK Temporary Permission (Passport) Regime

The UK's Financial Conduct Authority has told firms based elsewhere in the European Economic Area who rely on a 'passport' to offer their financial services in the UK to notify the FCA if they intend to use the UK "temporary permissions regime" (TPR). The Prudential Regulatory Authority has issued a similar direction to the banks and other firms it regulates.

Notifications to the FCA must be made by submitting the Temporary Permission Notification Form containing the necessary information via the FCA's "Connect" system between 7 January and 28 March 2019.

Firms that have not submitted a notification during that period will not be able to use the TPR.

The FCA told Parliament in 2016 that there are 8,008 EEA firms holding 23,532 passports covering their UK financial services offerings. 

EU Warns Firms To Act On Loss Of Financial Services Passports

The European Union has today warned financial services firms that rely on EU passports to make alternative arrangements ahead of Brexit. Separate warnings were made to ratings agencies, investment firms, insurers and reinsurers,  banks and payment services firms, auditors, providers of post-trade services (settlement and clearing), and asset management. Warnings were also issued to participants in other pan-EU licensing schemes.

This is nothing new, as explained previously, and many firms have already activated their plans to move EEA-facing operations into one of the 27 remaining EU member states.

The warning is timely, however, in case any firms are distracted by UK government "assurances" concerning potential free trade arrangements following previous EU warnings in December, which the UK government has conceded the EU is legally entitled to issue. 

Such deals do not usually deal very extensively with services, and 'most favoured nations' obligations in existing EU trade deals with third countries mean that it is very unlikely that the EU will wish to - or realistically be able to - set any kind of precedent in a deal with the UK.

The UK government's insistence on the leaving the single market and the customs union effectively rules out the UK remaining a member of the EEA (like Norway). That means the only alternative to Brexit is remaining a member of the EU.

#PSD2: Bill Payment Services In Scope Of UK Regs?

The Treasury is currently consulting on regulations to implement the new Payment Services Directive (PSD2).  There is little commentary in the consultation paper and many old questions remain unanswered, with the regulations to go live on 13 January 2018.  Government policy is to simply gold plate 'copy out' EU directives, which creates a rod for the UK's own back leaves the FCA to say how it will interpret the new rules in a consultation paper it proposes to issue in Q2.  One issue is whether bill payment services are viewed as being in scope in the UK or other EEA member states. If so, providers will need to outsource the operation of the service to a duly authorised firm or its agent, or become authorised or the agent of an authorised firm. Timing for those options is now tight...

Bill payment services enable a customer to pay a supplier's bill by paying a third party, e.g. at the till in a local shop.  

The Financial Conduct Authority has said these services are not caught by the current Payment Services Regulations so long as the customer's payment to the third party discharges the customer's obligation to pay the supplier. In other words, in such a scenario the third party is the 'payee' or intended recipient of funds, not the supplier.

But the new Payment Services Directive (PSD2) instructs EU member states to treat these services as 'money remittance', unless they are treated as part of some other type of regulated payment service (recital 9).  And there is no word, yet, on whether or how the UK plans to deliver on this edict, which is critical to deciding which option existing providers should choose in the event their services are ruled in scope.  

An additional issue is that, even if bill payment services are ruled out of scope by the UK authorities, there is no way to 'passport' that interpretation to other member states in the EEA. So there is still the awkward possibility that a service provider offering the same type of service on a cross border basis from the UK (or from outside the UK) could find that another member state rules the service as being in scope of PSD2.  In that case, the same options would apply: outsource the service to a duly authorised firm or its agent, or get a local entity authorised or appointed as an agent in the relevant jurisdiction(s) - which might be useful when passporting disappears post-Brexit, in any event.  

Post-Brexit Outlook For Passported Financial Services

Well it's been a dismal six months watching the politicians shadow-box among themselves over what Brexit really means. There's no shared vision of the big picture, let alone any grip on the detail. What is clear, however, is that size matters in trade negotiations. So the larger trading partners like the EU will dictate their own terms in any deals. And while the application of logic seems to be prohibited in this 'post-truth' era, I intend to proceed on the basis that the UK will not even be a member of the EEA (or the Customs Union) - and that it certainly won't get a better trade deal with the EU than it has today. That means the only real job left for UK politicians is to figure out who gets pork-barrelled compensated by the UK taxpayer for being worse off for having to treat the EEA as a separate market (where they can't pass those costs onto their UK/EEA customers more).

While the car makers got in first, ejecting from the EU/EEA poses a very significant challenge, in particular, for the 5,476 of the UK firms relying on 336,421 'outbound' passports to avoid being authorised in every EEA member state. This works out at 61 passports per firm, which is somewhat strange given there are 31 EEA countries, but passports are counted for each separate directive that requires them (only one if a firm has several under the same directive). Brexit is also a challenge for the 8,008 EEA firms that hold 23,532 passports (about 3 each) to cover their UK offerings.

In essence, a total of 13,484 firms need to apply for 359,953 additional regulatory permissions over the next two years if they want to continue to make sure they can cover their existing markets.

Such applications don't come cheaply or quickly, and involve significant ongoing management and administration costs following authorisation. And because most of the work will be required abroad, the lion's share of the related fees and expenses will be charged outside the UK, worsening the UK's trade deficit even further. The UK can also kiss goodbye to the tax revenues on the earnings of each foreign firm, as well as the incomes of its management and staff...

But that's all water under the bridge (or out the English Channel, if you will).

During the next two years, any financial services firm based in the UK/EEA that relies on a passport for cross-border activities or ambitions involving the UK will need to pursue the following options, either organically or by acquisition: 

• Retain/obtain authorization for an entity established in the UK, if it wishes to serve the UK market;

• Obtain/retain authorization for an EEA-based entity to take advantage of the EEA passport regime for the remaining EEA countries;

• Seek to rely on any passporting arrangements that the UK may agree with non-EEA countries (these could only be formally agreed post-Brexit, but might be planned in the meantime);

• Obtain/retain authorisations in any non-EEA countries it wishes to target - as is the case today, but the cost/benefit of targeting some of these countries may now have changed, given the extra cost of authorisation to serve EEA markets, and perhaps jockeying among countries wishing to take advantage of the situation.

So where would you base your EEA-passport firm?

The relevant analysis, if not the outcome, will vary significantly depending on the type of financial services and markets involved. Most of the relevant passports relate to general insurance intermediation and trade in various securities/markets, but payment and e-money services represent the third most popular category with perhaps greater retail significance - here 350 UK firms rely on outbound passports and 142 EEA firms passport into the UK.  According to a report commissioned by the Emerging Payments Association, the 350 UK firms have six countries to choose from as a potential base for their EEA passport entity, based on criteria including the ease of making an application, supportive regulatory approach/attitude, ease of setting up and doing business, jurisdictional reputation and sovereign/political risk:

• Cyprus 
• Denmark 
• Ireland 
• Luxembourg 
• Malta 
• Sweden

While not wishing to disparage any of those fine jurisdictions, you will see from the commentary in the EPA report why the UK is walking away from a (literally) golden opportunity to continue its role as the preferred EEA passporting hub for financial firms (many of which are managed or staffed by people who moved to the UK for that reason).  Yet, while that commentary is very helpful and a useful lens through which to view options, I know from personal experience that it does not always reflect reality on the ground or capture all the criteria that are relevant to the decision for each firm - and the authors don't pretend that it does.

We are only at the beginning of a very long and expensive journey...