The European passport for financial services is one of the pillars of London’s status both as the preeminent global financial hub and the flourishing hub of UK FinTech.
Passporting in one form or another has been around in the EU since 1987 and the Second Banking Directive. The underlying logic is that a bank regulated in one country should be able to offer products and services throughout the EU based on a license granted in the bank’s home member state.
With the Electronic Money Directive and the Payment Services Directive, the principle of passporting has been extended to a wider variety of financial services. That mechanism has become increasingly important as the EU expanded from 15 members to now 28 members. It has meant that a market larger than the US can now be serviced with only one licence.
Thus, passporting enabled FinTech companies in the UK to roll-out their products to the whole of the EEA, comprising the EU 28 plus Iceland, Liechtenstein and Norway. This generated the scale required for their continued relevance and success, without the need for additional and sometimes lengthy licensing procedures in other member states.
Brexit changes this. It may mean – and given what we hear from the UK Government, it will mean – that we won’t be able to passport from the UK into the rest of the EEA and vice-versa. Payments businesses based in the UK will already be working on alternative homes for their post-Brexit EAA business. Non-UK businesses will be preparing applications for UK-only licences provided their business cases justify the costs and efforts of setting up and maintaining a licensing structure for that one market.
Brexit contingency planning requires, first of all, a decision on where to apply for a new license. Prior to making such a decision, a thorough assessment of all regulatory, legal, tax, operational and business implications of being established in a particular EEA jurisdiction must be undertaken. Whilst the latest guidance on authorisation under PSD2 by the EBA will lead to further standardisation and harmonisation on licensing requirements across the EEA, the supervisory practice of the competent authorities may still vary from country to country in many aspects and will therefore require careful consideration. This is even more true in areas where we see less harmonisation at European level, e.g. AML regulations or taxation.
From an operational perspective, aspects like local infrastructure, suppliers, banking partners and availability of qualified staff need to be considered when choosing a new home in the EEA. Not to forget, the shift of parts of the licensed business under a new licensing umbrella also creates operational complexity in relation to consumer and merchant customers, contracts and the use of data.
All in all, it will be a challenging process and require considerable time and effort to define and establish the best post-Brexit setup.
Larger payments businesses – and I include Paysafe in this category – will be able to deal with such challenges, as will the international banks (many of whom already have licensed entities across the EU), to ensure the continued service to customers in both the UK and the EEA.
Smaller FinTechs may, however, find such an exercise uneconomic, both from the perspective of setup costs and having to run two parallel businesses. They may choose the continent over the UK to base their businesses and get licensed. This would be a disappointing outcome for innovation and for the future of FinTech in the UK.
About Dr. Hartwig Gerhartinger
Dr. Hartwig Gerhartinger, Vice President, Group Regulatory & Governmental Affairs at Paysafe Group, is an expert in payment services and e-money regulation as well as in anti-money laundering legislation. Hartwig advises Paysafe on all regulatory matters, AML and gambling regulation, and also chairs Paysafe’s Regulatory Committee. He has additional responsibility for governmental affairs, representing Paysafe with politicians and regulatory authorities globally. He is a Director of the Prepaid International Forum (PIF) and Chairman of the PIF AML Working Group, focusing on the 4th Anti-Money Laundering Directive (4AMLD) and its impact on the prepaid industry and the recent developments on its revision at European level. He holds a doctorate in law and is currently a guest lecture for e-payments law at Danube University. He is the author and co-author of numerous publications.
About the hot topic briefing ‘Passport to the Regulators’
Find out more at the Emerging Payments Association’s exclusive hot topic briefing ‘Passport to the Regulators‘ on 3rd October at K&L Gates. This one-day event will consist of keynote presentations from EU regulators of six different countries – Cyprus, Denmark, Lithuania, Luxembourg, Malta and Spain. Book your seat here.