Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

Lord Bates Excerpts

Tuesday 6th November 2018 Lords Chamber

Moved by

[Lord Bates]

That the draft Regulations laid before the House on 9 October be approved.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, these statutory instruments form part of the work being delivered to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. In this instance, they will fix deficiencies in UK law relating to the regulation of e-money institutions, payment institutions and account information service providers, and make transitional provisions.

The approach of the European Union (Withdrawal) Act is to maintain existing legislation at the point of exit, to provide continuity. While the fundamental elements of current financial services legislation will remain the same after exit, it still needs to be amended to ensure that it works effectively once the UK has left the EU. This is the approach that has been followed here.

EU directives on payments and electronic money, implemented in the UK through the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 respectively, as well as the EU’s directly applicable credit transfer and direct debits in euro regulation, collectively create the regulatory regime applying to payment institutions, electronic money institutions and account information service providers, and set the rules for facilitating payments and issuing electronic money for these institutions. Given that the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework in a no-deal scenario, the existing legislation needs to be updated to reflect this, and amended to ensure that its provisions work properly in this scenario.

Furthermore, in a no-deal scenario, the UK will no longer automatically maintain participation in the single euro payments area. The single euro payments area—hereafter abbreviated as SEPA—enables efficient, low-cost euro payments to be made across EEA member states and non-EEA countries which meet the governing body’s participation criteria. As such, it represents a key enabler of trade between the UK, other current EEA member states and non-EEA participants. The Government therefore intend to retain relevant EU law in such a way that it maximises the prospects of the UK maintaining participation in SEPA in a no-deal scenario.

These SIs therefore will make amendments to retained EU law related to the Payment Services Regulations 2017, Electronic Money Regulations 2011 and the EU’s credit transfer and direct debits in euro regulation, to ensure that they continue to operate effectively in the UK once the UK has left the EU, and to maximise the prospects of the UK maintaining participation in SEPA.

In setting out the Government’s approach to these issues, I will first outline the approach taken in the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. I will then outline the approach taken to the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. I will finally set out the interaction between the UK’s future participation in SEPA and the provisions made in both SIs.

The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018, which amend the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, make the following principal amendments. First, this SI creates a temporary permissions regime for payments firms. If the UK leaves the EU without a deal, there will be no agreed legal framework on which the passporting system for EEA payments firms, implemented under the payment services regulations, can continue to function. As a result, any references in UK legislation to the EEA passporting system would become deficient at the point of exit, and firms from the EEA would not be legally able to operate in the UK. To correct this deficiency, this SI would create a temporary permissions regime akin to that contained within the EEA passporting rights SI for firms regulated under the Financial Services and Markets Act.

Secondly, this SI makes changes to ensure the continued effective safeguarding of consumer funds. The Payment Services Regulations require payment institutions and electronic money institutions to safeguard consumer funds—to protect consumer funds—if an institution becomes insolvent. If the payment institution or electronic money institution enters insolvency, the consumer funds would be paid out in priority to other creditors.

The most prevalent method used to safeguard funds is for the firm to hold them in a segregated account with a credit institution. A significant number of UK firms hold safeguarding accounts in the rest of the EU. These firms will still be able to do so once the SI comes into force, but they will also have the option of using safeguarding accounts based elsewhere in the world, subject to adequate guarantees of consumer protection. This is in line with existing practices for protecting client assets in investments.

Thirdly, this SI removes current provisions which require supervisory co-operation with EU authorities. In a no deal scenario, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or co-operate with EU authorities. As such, current provisions requiring co-operation and information-sharing with the EU have been removed. However, this will not preclude UK authorities from sharing information with EU authorities if appropriate, as the existing domestic framework for co-operation and information-sharing with countries outside the UK already allows for this on a discretionary basis.

Finally, the electronic money, payment services and payment systems regulations transfer functions currently carried out by EU authorities to the appropriate UK bodies. Under the payment services directive, implemented by the Payment Services Regulations, the responsibility for drafting regulatory technical standards currently sits with the European Banking Authority. In line with the Government’s cross-cutting approach on the transfer of functions, this SI ensures that these functions are transferred to the appropriate UK body. In this case, that is the Financial Conduct Authority. Once the SI comes into force, the FCA will update its handbook and relevant binding technical standards to reflect the changes introduced by this SI and address any deficiencies due to the UK leaving the EU.

I turn to the Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. I propose that we consider the SI, which makes amendments to the retained EU credit transfer and direct debits in euro regulations 2012. This SI makes the following principal amendments. First, it introduces the concept of a qualifying area to which the SI applies. This qualifying area comprises the EEA and the UK. This means that the SI will apply to UK payment service providers’ euro-denominated transactions in the UK and EEA. This qualifying area is broadly aligned to the geographical scope of SEPA. It does not, however, include three existing non-EEA country participants within SEPA: Switzerland, San Marino, and Monaco. This is because the EU law does not include these three countries and therefore it is not possible to include them in UK law under the European Union (Withdrawal) Act.

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[Lord Tunnicliffe]

I thank the noble Lord for that.

The Minister knows exactly what I am going to say. On page 6 of the Explanatory Memorandum, paragraph 12.6 and beyond states:

“An Impact Assessment will be published in due course on the legislation.gov.uk website … The Treasury’s decision to publish the regulations without a final Impact Assessment aims to ensure that industry and regulators have as much time as possible to familiarise themselves with the regulatory changes”.


The reason the Minister and I are familiar with those two paragraphs is that they have appeared in every Explanatory Memorandum on Treasury SIs so far; and on every SI so far, the Treasury has failed to produce an impact assessment, despite the fact that it is promised in the body of the document. For the life of me, I cannot see why it would bother, given that we will have approved the SI by the time it arrives.

Let me turn back to the good news for the Minister. We are certainly not going to challenge this SI. I echo the view of the noble Baroness, Lady Kramer: it is good to see, as far as one can because of the sheer complexity of it, that it sticks with the Government’s commitment to make only the necessary changes to have a smooth transition. I cannot detect any effort from the Government in this SI to try to introduce any policy changes.

[Lord Bates]

My Lords, I thank noble Lords for their questions and their scrutiny. The noble Lord, Lord Tunnicliffe, is typically assiduous, as he is on all these matters—he has even gone through the 1,569 pages of the FiSMA, which is some achievement. We appreciate that, and we appreciate the noble Baroness, Lady Kramer, stepping in for the noble Baroness, Lady Bowles, at such short notice. Let me start by dealing with as many of the questions for which it is possible to get immediate answers, and I will then review the debate and write to noble Lords if necessary.

All three noble Lords who contributed commented on what is happening with the impact assessments. Five impact assessments have been prepared across the financial services SIs. Noble Lords will be familiar with the process for this: they go before the Regulatory Policy Committee, which is the non-departmental public body under BEIS, and it assesses the impact of the regulations. What we are trying to do is save British consumers and businesses the costs that would come into effect were we to leave with no deal and not have these statutory instruments in place. That would imply a cost. We are not being as bold as to say that the effect of the SI is to make a saving, but that is the reason why the attempts to quantify this have been challenging. However, they are under way, as I said.

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[Baroness Kramer]

The point that I was trying to understand is that we have two entities—company Y and subsidiary company Y—dealing with the same customer base, the same transactions and the same business. Is a mechanism included to enable a smooth transfer from one to the other, or do we have a potential hiccup of significance in place?

[Lord Bates]

We are trying to address that through the whole strategy of enhanced equivalence, which seeks to make sure that our regulations that we are introducing here are as compliant and consistent as possible with those that already exist and that we have transposed into UK law from the European Union. So we hope there would not be the potential for the hiccup that the noble Baroness referred to.

The noble Baroness also asked whether we could keep the cross-border payments regulation. The CBPR sets limits on charging for cross-border euro transactions. Were the CBPR to be automatically retained in UK law, it would be inoperable. Applying the CBPR to UK payment service providers making cross-border euro payments to the EEA would place obligations on them which they could not fulfil. These SIs are for a no-deal scenario. They do not prejudge the outcome of any future agreement.

On the safeguarding front, we believe that the most prevalent method used to safeguard funds is for firms to hold them in a segregated account with a credit institution. A significant number of UK firms hold safeguarding accounts in the rest of the EU and they will still be able to do so once this SI comes into force.

The noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, asked what happens if an EEA passporting payments firm does not apply to enter the temporary permissions regime. Firms should enter the temporary permissions regime which will allow them to continue to carry out their business as before, writing new contracts and servicing existing contracts. This will enable them to obtain UK authorisation and transfer business to a UK entity as necessary.

My noble friend Lord Kirkhope asked about the geographic scope of the SI. It is broadly in line with the geographic scope of SEPA. However, it does not include three existing non-EEA country participants within SEPA: Switzerland, San Marino and Monaco. This is because EU law does not include those three countries and therefore it is not possible to include them in UK law under the EU withdrawal Act.

The noble Baroness, Lady Kramer, and my noble friend Lord Kirkhope asked what the criteria are for participating in SEPA as a non-EEA country. A number of the provisions are here but I will not go into all the detail about the tests. However, for the record and in response to the specific questions, they will cover areas such as the capital requirements directives, the money laundering directives and the Rome convention on the law applicable to contractual obligations. Finally, they must demonstrate that all United Nations Security Council financial sanctions are implemented to the same extent as they are implemented and regulated within the EU itself

My noble friend Lord Kirkhope asked about the justiciability of part 2 statements. Part 2 statements made about these instruments are statutory requirements under the EU withdrawal Act and are intended to assist the House in considering the proposed exercise of the powers under that Act.

The noble Lord, Lord Tunnicliffe, asked what would happen to these SIs for a no-deal scenario in the event of a deal. I think I have covered that. The Government White Paper on the EU withdrawal agreement Bill states that provision may be needed to defer, revoke or amend SIs and that is likely to be included in the withdrawal agreement Bill.

My noble friend Lord Kirkhope asked me to explain the consequences of the sunset clause referred to in paragraph 7.4 of the Explanatory Memorandum. The power in the EU withdrawal Act to fix deficiencies in retained EU law falls away two years after exit day. This was debated during the passage of the Bill—now the Act—but instruments made during that two-year period will remain in force after it ends.

The power to revoke was addressed by my noble friend Lord Kirkhope and the noble Lord, Lord Tunnicliffe. This relates to the credit transfers and direct debits regulations. The entirety of credit transfers and direct debits in euro regulation would be revoked in those circumstances. The relevant articles of the Payment Services Regulations could be revoked via the negative procedure by statutory instruments.

I turn now to the question of the noble Lord, Lord Tunnicliffe, about what will happen if the UK is unsuccessful in its application to SEPA. I mentioned that UK Finance has submitted an application. SEPA enables efficient, low-cost euro payments to be made between participants. In the unlikely event that the UK does not maintain participation in SEPA, UK consumers would face higher transaction costs and longer transaction times when making euro payments. That is why we want these provisions in the event of no deal, but it remains the firm resolve of Her Majesty’s Government to seek a deal so that these no-deal scenario provisions are not required.

The noble Lord, Lord Tunnicliffe, asked about the criteria for participating in SEPA as a non-EEA country. I mentioned the criteria earlier in terms of capital requirements and anti-money laundering et cetera.

The noble Lord then asked about impact assessments. I began by explaining the situation there and where we are coming from. I would just add that we have prepared an impact assessment and hope to publish it shortly.

On the whole, these SIs will reduce significantly the costs to businesses in the event of a no-deal scenario; without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would disrupt their businesses substantially. In making these changes, we have attempted to minimise the disruption to firms and their customers, as well as maintain continuity of service provision. That is the purpose of the SIs. I beg to move.

Motions agreed.