Brexit Implementation Period and Beyond: Key Points for the Payments Sector

What is the Implementation Period?

On January 23, 2020, the UK passed the European Union (Withdrawal Agreement) Act 2020, ratifying the UK’s agreement with the EU on the terms of its departure (the Withdrawal Agreement). The Withdrawal Agreement is expected to be ratified by the EU by January 30, 2020. Assuming this is the case, the UK’s departure from the EU will be subject to the terms of the Withdrawal Agreement.

Under the Withdrawal Agreement, the UK’s departure from the EU marks the start of an implementation period due to end at 23:00 GMT on December 31, 2020 (the Implementation Period). During the Implementation Period, EU law will generally continue to apply in the UK. This means that UK firms will continue to be subject to applicable EU Regulations and that UK and EEA firms will be able to continue to rely on regulatory “passport” rights under EU financial services Directives, including the Capital Requirements Directive (for banks), the Electronic Money Directive (for electronic money institutions) and the Payment Services Directive (for payment institutions).

On this basis, UK firms will generally be able to continue to provide regulated payment services and issue electronic money to, and accept deposits from, EEA customers during the Implementation Period as long as the firm has the relevant UK regulatory permissions to provide such services. The same applies for EEA firms with UK customers as long as the firm has the relevant regulatory permissions in its home EEA member state.

Will the UK Temporary Permissions Regime (TPR) Still Apply?

The TPR was established to allow EEA firms to continue to provide certain regulated financial services, including payment services, in the UK in the event the UK were to leave the EU without an Implementation Period. Assuming the Withdrawal Agreement is ratified by the EU by January 31, 2020, the Implementation Period will supersede the TPR, and the TPR will not take effect.

Certain EEA member states have passed legislation providing for analogous national transitional regimes for UK financial services firms providing services in their territory. These will generally also be superseded by the Implementation Period.

What Happens at the End of the Implementation Period?

There are four main possible scenarios following the end of the Implementation Period on December 31, 2020:

• Scenario 1: EU-UK Trade Agreement Covering Financial Services
  
  The EU and UK plan to negotiate a trade agreement governing their relationship after the Implementation Period. This may include provisions on financial services. However, UK and EEA financial services firms, including payment service providers, are unlikely to have the same levels of access to the EEA and UK markets (respectively) as under the Implementation Period. For example, UK firms wishing to provide financial services to EEA customers could be subject to certain conditions and additional regulatory requirements (and vice versa). Firms would need to adapt their policies and procedures accordingly.

• Scenario 2: Extension of the Implementation Period
  
  The EU and UK may be unable to agree a trade agreement by December 31, 2020, and, if they do, any terms governing financial services may not remove regulatory barriers such as local authorization requirements (as EU regulatory passport rights do). In such cases, it is possible that the EU and UK could agree to extend the Implementation Period. However, the UK government has made clear that it intends for the Implementation Period to end on December 31, 2020. Further, any extension would require approval by the UK parliament, and the EU process for approving an extension is unclear.

• Scenario 3: A New TPR
  
  In the event the EU and UK are unable to agree a trade agreement, or a trade agreement is agreed but it does not limit regulatory barriers to trade in financial services, it is possible that the UK government could reinstate the TPR from January 1, 2021, to enable EEA firms to continue to provide services to UK customers while they obtain any necessary UK regulatory authorizations. However, this is not currently provided for in the relevant UK legislation, which would therefore need to be amended.
  
  It is also possible that certain EEA member states could reinstate analogous national transitional arrangements for UK firms. However, this would depend on the relevant national arrangements and political appetite to accommodate UK firms.

• Scenario 4: A “Cliff Edge”
  
  In the absence of Scenarios 1-3 above, the most likely outcome would be an end to the Implementation Period as planned on December 31, 2020, and no other substantive arrangements put in place to replace EU regulatory passport rights in respect of financial services provided between the EEA and UK. For a UK firm providing financial services in the EEA, this would generally mean the firm would no longer be permitted to provide the relevant services unless it has obtained local regulatory authorization in the relevant EEA member state or transferred the relevant business to an EEA affiliate with relevant local regulatory permissions and/or passports. UK firms that have not implemented such Brexit planning arrangements by December 31, 2020, may be required to cease providing the relevant services to EEA clients. Similar considerations would apply to an EEA firm providing financial services in the UK.

What Should a Payment Service Provider With EEA and UK Customers Do?

Payment service providers should plan for regulatory passporting between the EEA and UK to end on December 31, 2020, and make arrangements to obtain any necessary regulatory authorizations to continue servicing existing customers. For most payment service providers with customers in the EEA and UK, this is likely to involve executing existing Brexit plans. Certain firms may also wish to explore whether any exclusions or exemptions from regulatory authorization requirements could apply in the relevant jurisdictions, which is likely to depend on the scope and territorial nexus of their services and operations.