The Brexit transition period ends at 11pm UK time on 31 December 2020. From this point many payment providers will no longer have the right to provide regulated services from the UK into the EEA. As firms finalise their Brexit plans, the UK’s Financial Conduct Authority has repeated its warning to firms that customers should be treated fairly throughout the process.

What Brexit means for payments firms

The passport

EEA firms which are licensed to provide certain financial services in their home EEA State may provide these services throughout the EEA. This right is known as the financial services passport and covers payment services under the Payment Services Directive and the issuance of e-money under the Electronic Money Directive.

Loss of EEA-UK passporting rights

The UK left the EU (and, by extension, the EEA) at the end of January 2020 but then immediately entered a transition period. During this time, passporting between the UK and the rest of the EEA has still been possible. At the end of the year, however, the transition period ends and so too will any cross-Channel passport rights.

Temporary permission for EEA firms

As we discussed in our latest payments podcast, EEA payments firms which passport into the UK at the end of the transition period may participate in the UK’s temporary permissions regime. This regime treats those firms as if they were authorised in the UK for a temporary period. This is effectively a unilateral extension of the transition regime for these firms and allows them more time to prepare for the impact of Brexit, which may involve applying for UK authorisation. EEA firms that want to benefit from the temporary permissions regime must notify the FCA before 30 December 2020, if they have not done so already.

Preparing for life outside the EEA

There is no EEA-wide, or EEA national, equivalent of the UK temporary permissions regime. And so for UK payments firms the “cliff-edge” impact of the loss of EEA licence will be felt at the end of this year.

Some UK payments firms have responded by setting up an appropriately licensed entity in the EEA. This entity could then continue to provide payment services throughout the EEA post-Brexit. In many cases this has involved providing customers with new contracts to move them across to the EEA entity. In a recent speech, Nausicaa Delfas (FCA Executive Director of International) reiterated that the FCA expects all firms to treat customers fairly throughout the Brexit process.

Others intend to wind down their EEA operations. However, this also requires careful planning and customer communications. In a letter sent to payments firms earlier this year, the FCA warned that it would be a “poor outcome” if firms suddenly stopped servicing customers in the EEA.

The impact on UK payments regulation

Revocation of identification certificates

In a recent press release, the European Banking Authority has reminded firms that eIDAS certificates issued to UK third party payment service providers (TPPs) will be revoked at the end of this year. These certificates are used for identification purposes. TPPs rely on them to access customer account data and initiate payments, which are important elements of Open Banking.

Changes to UK Open Banking

In response, the FCA has amended identification requirements for TPPs under UK law. A recent FCA policy statement confirms that UK account servicing payment service providers (ASPSPs, which are often banks) must accept an alternative form of identification as long as it meets certain criteria.

ASPSPs need to start implementing the change in the rule in their systems and tell TPPs what alternative certificate they will accept. TPPs will need to seek alternative certificates which comply with the revised rules.

To give firms some more time to prepare, the FCA is allowing certificates which do not meet the revised requirements to be used in some cases for a temporary period. This arrangement will end on 30 June 2021.

Access to euro payments schemes

Ongoing participation

Electronic payments in euro rely on payments schemes known collectively as SEPA. Helpfully for UK payment providers, the European Payments Council has confirmed that the UK will continue to participate in the SEPA schemes after Brexit.

Changes to messaging

UK-based participants in SEPA will, however, need to update their processes to reflect their new role as non-EEA firms. Notably they must update their processes to reflect changes in the information they need to provide when operating via SEPA. Not including the additional information about their payment transactions could lead to those transactions being rejected.

What happens next?

Firms on both sides of the Channel are continuing to implement their Brexit plans. We have recently been helping clients stress-test their planning. Please get in touch if you would like to discuss.

Looking further ahead, both the EU and the UK are developing new regulatory policy for the payments sector. The EU has already set out its plans in its retail payments strategy, whilst the UK government is currently working through feedback received on its payments landscape review. We will continue to keep you updated on the latest developments in this blog.