Three months have passed since the referendum on June 23rd that set course for the UK, the EU’s second largest economy, to leave the European Union. Yet there is still considerable uncertainty on how this event will impact the payments industry and payment facilitators.
In this article, we look at the key considerations for U.S. PFs with an existing UK presence or those looking to set up a EU company to expand into European markets.
Much depends on the so called ‘passporting’, which is the ability to sell financial services, including payment services, to the single European market. Before Brexit a PF could set up a legal entity and obtain a Payment Institution license in the UK, or any EU country, and be able to sell cross border into the other 28 member states.
After the Brexit process is triggered that passporting right will have to be negotiated. So could the boat really capsize and the UK lose its passporting rights for financial services?
French and Irish lobbyists have already seized on the potential to bring some of the 700,000 finance jobs in the City of London to Paris and Dublin, taking an opportunistic approach to London’s continued status as the major European financial center outside the EU. However, the more nuanced response of Frankfurt and current moves by the major U.S. banks seem to indicate that this risk is being managed and some workable compromise could be negotiated.
So, what is the current advice for UK based PFs? Craig Rattray, Payments Partner at UK law firm Gateley Plc, says “there is no need to panic or rush to judgment on the outcome of the passporting right issue, as the status quo will stay for some time. However, it is essential that you assess the impact on your business if the passporting right is lost and have a clear strategy in place that you can implement at short notice.”
If the UK does lose its passporting rights, current payment services and e-money firms regulated in the UK will need to fundamentally re-think their approach towards the EU market. This may involve retaining their UK Financial Conduct Authority (FCA) authorization and then incorporating in another EU member state to get their EU Payment Institutions (PI) licenses approved by the local regulator. Ireland is currently being discussed as the fallback option for many firms, with its proximity to London and other cultural and taxation advantages.
What about for U.S. PFs currently considering a European set up? Nadja van der Veer at PaymentCounsel, a payments focused law firm in Amsterdam, says, “Many financial services firms in the UK are relying upon their passporting rights and unless these rights are maintained through new trade agreements, the UK may take a big hit. The industry is set for a considerable period of uncertainty before it learns the outcome on the Brexit negotiations. Many companies looking to enter the European market have been using the UK as their European hub, but this practice is already proven to be under scrutiny following the vote. There are several initiatives by the market to preserve their single access to the European market as the stakes are high. But with this, the UK financial services sector is also not putting all eggs in one (European) basket as it is looking to build more trade with other (emerging) markets.”
So for new businesses Brexit has caused PFs to think again about the choice of the country where they establish their European legal entity and obtain their PI license, in order to have best access across the European market.
Fred Tyler is the vice president of strategic partnerships at Credorax Bank