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

Baroness Kramer Excerpts

Tuesday 6th November 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am afraid your Lordships have the reserve team from these Benches, since my noble friend Lady Bowles was the intended lead on this series of statutory instruments. However, with the change in the timing of the debate in the House today, she has had to go to the Economic Affairs Committee, so I am a very last minute stand-in. I am grateful to the noble Lord, Lord Kirkhope, for asking some of the most insightful questions, and I look forward to the Minister’s answers.

Underlying this, we appreciate that the Treasury is trying to do this, and do it sensibly and properly. At one time there was a fear that the Treasury might try to use these SIs as an opportunity to extend powers in a way not intended. It is not doing that, and we on this side very much appreciate it. It is also necessary to say that payment services are absolutely core to the financial life of this country, so getting this right is critical, and we appreciate that range of issues.

To return to SEPA, which the Minister described and the noble Lord, Lord Kirkhope, raised, I too am trying to understand the implications of allowing Monaco, San Marino, and possibly Andorra into that club. Whether or not that is a template for a third country to remain involved in SEPA, I understand that there are underpinning monetary agreements between the EU and those entities. Can the Minister enlighten us as to the characteristics of those entities, which presumably we would need to echo if we were to have third-country membership? We would find that extremely helpful. I also underscore that the only way we will get reciprocity in our arrangements in this area is if we are a player within SEPA, so it is exceedingly important for both individuals and businesses in the UK.

I will also pick up the issue of transitional—temporary—permissions and their extendability. I understand that the initial temporary permission can be extended, but I am slightly unclear whether it involves Parliament in any way. It appears from reading these documents that this is a decision of the regulator combined with HM Treasury. Can the Minister enlighten us on how that issue is to be handled and whether it would be appropriate for Parliament to have some sort of engagement or oversight on something pretty fundamental to the economic life of the country?

We have also noticed in the reading of the temporary provisions for European entities that receive such permissions—these are intended to last through the transitional or implementation period, or whatever one chooses to call it—that this is not intended to be a long-term arrangement. The implication is that entities with branches in the UK—I give just one example—would need to create subsidiaries instead, a far more costly and burdensome approach, which many have suggested they would not be willing to take. However, it suggests they will have to create subsidiaries and I believe the SI allows for that. However, it does not deal with how to prevent a disruption when moving from a temporary permission—under the branch arrangement, for example—to the new entity that would come in as a subsidiary. Presumably, any kind of hiccup would be of real concern. How is the SI intended to deal with those issues in a relatively short period, as we might soon be facing that set of problems?

I also want to look at safeguarding and the “keeping money safe” regime. As the Minister said, given our current membership of the Single European Payments Area, UK banks are able to keep clients’ money safe in accounts anywhere within the EU. In fact, this may be outside SEPA; it might relate to EU membership—I am not entirely clear, as my noble friend Lady Bowles would have been. In any event, the regime of keeping clients’ money safe anywhere within the EU is now to be extended globally, provided consumer protections are in place.

One of the fundamentals of the regime of permitting UK banks to keep those deposits—which are cash deposits—anywhere within the EU is that there is a common jurisdiction making it possible to act to ensure that money is kept genuinely safe. The arrangement of just recognising that another country has suitable consumer protection is a far weaker standard. The Minister compared it to the rules that apply to invested assets, but those can be tracked and identified in a way that cash never can. There is always a good deal of anxiety about cash sitting in deposits that can disappear and be untraceable. Can he comment on that regime and whether there are concerns and risks embedded in the change of which, frankly, we should be aware?

I shall make a couple of further points. HM Treasury was kind enough to give us an electronic link to its policy guidance associated with these SIs. In that—it was not in the Explanatory Notes—we identified that cross-border payments regulation is not included in the new arrangements. If I understand correctly, that is because this is a cross-border issue. Obligation to the EU end cannot be ensured and therefore the rationale is that there should be no cross-border payments regulatory scheme at the UK end. I hope that good sense and discussion will make sure that we keep cross-border payments regulation, in which case is the SI missing the relevant powers for the UK end or is there some other mechanism by which they can be introduced? That is important because, as the Minister will know, we have cross-border payments regulation to prevent unhealthy price competition driving deposits out of one country and into another.

--- Later in debate ---

On the point raised by the noble Baroness, Lady Kramer, about whether EEA firms would be required to set up a subsidiary, the electronic money and payment services SI provides powers to the Financial Conduct Authority to create a temporary permissions regime that will enable EEA payment services providers who currently provide payment services under financial services passports to continue providing services in the UK for a limited period after exit. An EEA payment firm will be required to set up a subsidiary on leaving the temporary permissions regime if it wishes to continue providing payment services, as it would then be a third-party country for those purposes.

[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.