Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018
(5 years, 5 months ago)
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Lord Bates
That the draft Regulations laid before the House on 9 October be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, these statutory instruments form part of the work being delivered to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. In this instance, they will fix deficiencies in UK law relating to the regulation of e-money institutions, payment institutions and account information service providers, and make transitional provisions.
The approach of the European Union (Withdrawal) Act is to maintain existing legislation at the point of exit, to provide continuity. While the fundamental elements of current financial services legislation will remain the same after exit, it still needs to be amended to ensure that it works effectively once the UK has left the EU. This is the approach that has been followed here.
EU directives on payments and electronic money, implemented in the UK through the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 respectively, as well as the EU’s directly applicable credit transfer and direct debits in euro regulation, collectively create the regulatory regime applying to payment institutions, electronic money institutions and account information service providers, and set the rules for facilitating payments and issuing electronic money for these institutions. Given that the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework in a no-deal scenario, the existing legislation needs to be updated to reflect this, and amended to ensure that its provisions work properly in this scenario.
Furthermore, in a no-deal scenario, the UK will no longer automatically maintain participation in the single euro payments area. The single euro payments area—hereafter abbreviated as SEPA—enables efficient, low-cost euro payments to be made across EEA member states and non-EEA countries which meet the governing body’s participation criteria. As such, it represents a key enabler of trade between the UK, other current EEA member states and non-EEA participants. The Government therefore intend to retain relevant EU law in such a way that it maximises the prospects of the UK maintaining participation in SEPA in a no-deal scenario.
These SIs therefore will make amendments to retained EU law related to the Payment Services Regulations 2017, Electronic Money Regulations 2011 and the EU’s credit transfer and direct debits in euro regulation, to ensure that they continue to operate effectively in the UK once the UK has left the EU, and to maximise the prospects of the UK maintaining participation in SEPA.
In setting out the Government’s approach to these issues, I will first outline the approach taken in the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. I will then outline the approach taken to the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. I will finally set out the interaction between the UK’s future participation in SEPA and the provisions made in both SIs.
The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018, which amend the Payment Services Regulations 2017 and the Electronic Money Regulations 2011, make the following principal amendments. First, this SI creates a temporary permissions regime for payments firms. If the UK leaves the EU without a deal, there will be no agreed legal framework on which the passporting system for EEA payments firms, implemented under the payment services regulations, can continue to function. As a result, any references in UK legislation to the EEA passporting system would become deficient at the point of exit, and firms from the EEA would not be legally able to operate in the UK. To correct this deficiency, this SI would create a temporary permissions regime akin to that contained within the EEA passporting rights SI for firms regulated under the Financial Services and Markets Act.
Secondly, this SI makes changes to ensure the continued effective safeguarding of consumer funds. The Payment Services Regulations require payment institutions and electronic money institutions to safeguard consumer funds—to protect consumer funds—if an institution becomes insolvent. If the payment institution or electronic money institution enters insolvency, the consumer funds would be paid out in priority to other creditors.
The most prevalent method used to safeguard funds is for the firm 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. These firms will still be able to do so once the SI comes into force, but they will also have the option of using safeguarding accounts based elsewhere in the world, subject to adequate guarantees of consumer protection. This is in line with existing practices for protecting client assets in investments.
Thirdly, this SI removes current provisions which require supervisory co-operation with EU authorities. In a no deal scenario, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or co-operate with EU authorities. As such, current provisions requiring co-operation and information-sharing with the EU have been removed. However, this will not preclude UK authorities from sharing information with EU authorities if appropriate, as the existing domestic framework for co-operation and information-sharing with countries outside the UK already allows for this on a discretionary basis.
Finally, the electronic money, payment services and payment systems regulations transfer functions currently carried out by EU authorities to the appropriate UK bodies. Under the payment services directive, implemented by the Payment Services Regulations, the responsibility for drafting regulatory technical standards currently sits with the European Banking Authority. In line with the Government’s cross-cutting approach on the transfer of functions, this SI ensures that these functions are transferred to the appropriate UK body. In this case, that is the Financial Conduct Authority. Once the SI comes into force, the FCA will update its handbook and relevant binding technical standards to reflect the changes introduced by this SI and address any deficiencies due to the UK leaving the EU.
I turn to the Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018. I propose that we consider the SI, which makes amendments to the retained EU credit transfer and direct debits in euro regulations 2012. This SI makes the following principal amendments. First, it introduces the concept of a qualifying area to which the SI applies. This qualifying area comprises the EEA and the UK. This means that the SI will apply to UK payment service providers’ euro-denominated transactions in the UK and EEA. This qualifying area is broadly aligned to the geographical scope of SEPA. It does not, however, include three existing non-EEA country participants within SEPA: Switzerland, San Marino, and Monaco. This is because the EU law does not include these three countries and therefore it is not possible to include them in UK law under the European Union (Withdrawal) Act.
Lord Kirkhope of Harrogate (Con)
My Lords, that all sounds terribly straightforward. I shall just make a short comment and ask my noble friend one or two questions. In the European Parliament I was involved in matters such as the SWIFT banking arrangements for fast transfer of funds, particularly across the Atlantic with our United States friends, so I have a little background in this. As my noble friend correctly said, the single euro payments area covers 34 entities at present: the EU members; the other EEA members; Monaco and San Marino, which he mentioned; and Andorra, which, unless I am mistaken, he did not. Within that area, those countries have a combination of institutional and commercial arrangements. Looking at the effects on providers, or those involved in transfers, my noble friend mentioned negotiations taking place without the institutional arrangements of being members of the EU or another European institutional situation, such as the EEA. Is it possible to have an arrangement to remain part of the single euro payments area even if we are not members of any of those European institutions?
On the temporary permissions regime that my noble friend talked about, again, I question this. A lot of the SIs we are now looking at with regard to the withdrawal agreement seem to refer to temporary provisions. However, here in the Explanatory Memorandum we are talking about the cut-off date for this set of provisions. Is that extendable? Perhaps my noble friend could clarify.
In addition, part 2 statements, which are always attached, as my noble friend knows, never really illuminate one at all. The part 2 statement attached to this first SI includes an appropriateness statement; the Minister clearly states that it is appropriate and, when asked to give good reasons, answers by saying, “I think it’s reasonable”. We never get any fuller justification at all. Is my noble friend of the opinion that part 2 statements are integral sufficiently within the SI to be justiciable? Is it in fact possible for these to be challenged in courts as either inadequate or in themselves questionable?
My noble friend mentioned a general point about all scenarios. In paragraph 7.3 of the Explanatory Memorandum, “all scenarios” are referred to. Are all the scenarios the ones he has set out today, or are there further scenarios that could occur in the event of our not reaching a satisfactory conclusion with the European Union?
Finally, paragraph 7.4 of the Explanatory Memorandum refers to a sunset clause and mentions consequences. Can my noble friend elaborate slightly for us on what those likely consequences could be in relation to the sunset clause itself? It says that the power,
“falls away two years after exit day”,
but that does not take us much further along the road, particularly through a transition period, which we anticipate for financial matters.
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.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for introducing these SIs. They are two of the 70 that we have to deal with and it is a rare privilege to do so in such a crowded Chamber. Normally, the noble Lord, Lord Bates, and I are allowed the privacy of the Moses Room along with one representative from the Liberal Democrats and no others. During debate on an earlier SI, I talked about the value of these meetings, because at the end of the day the Minister knows, as do I, that we will not oppose these statutory instruments. However, I made the point that they create a record that might help the people who use the regulations to understand them. However, so far this SI presents the biggest challenge when it comes to understanding, and my further comments might reveal that I have totally failed to understand it. I look forward to the tutorial in the Minister’s response.
My understanding is that the sorts of things we are talking about are BACS, CHAPS, LINK, the NICC, Mastercard and Visa Europe. I understand that these are regulated in the United Kingdom by the Payment Systems Regulator, which works to a set of standards, directives or frameworks that are the UK manifestation of EU directives and so on. Therefore, my first question is: who will set the standards after exit day? I think that the Minister said that it would be the FCA, but does that mean that effectively, wherever there is a reference to the EU, this SI takes it out and puts in the FCA?
Then we have the complication of who sets the standards for EU firms trading in the UK. Once again, I assume that that is a passporting issue that will die on exit day if we have no alternative agreement. Therefore, what does the instrument do for EU firms after exit day? The Minister says there is a temporary regime, but could he perhaps expand a little on what it does? As I understand it, the temporary regime is time-limited, so what happens at the end of the temporary period? I did not get the sense—as the noble Baroness, Lady Kramer, did—that it was extendable.
Turning now to SEPA, it seems that the Government’s aspiration is to retain membership of it, even if there is no deal, but this is slightly different from the pure no-deal situation, in the sense that it will require international agreements between the UK and other SEPA members. Could the Minister expand a little on how the SI facilitates such agreement? More importantly, could he explain the consequence of no agreement? It is, presumably, theoretically possible that we will not be able to achieve a third-country—or whatever the right term is—membership of SEPA. What will that mean, in practical terms, to UK citizens in their day-to-day lives and their desire to use various means of transport in EU countries?
I turn now to what I loosely call the big picture. If we get a Brexit deal, as I understand it, we do not need these SIs. They are essentially no-deal SIs, but I cannot see in them how they are revoked. Are there articles deep in these pages that allow the SIs to be revoked? The commencement paragraph actually specifies the time when they become active. I will now make my standard moan on these occasions: that there is no impact assessment. The value of impact assessments, quite apart from the actual numbers, is that they usually speak in fairly plain language about who is affected and the level of impact on those institutions. Can we try to ensure that the promised impact assessments for these SIs are available before we debate the instruments themselves?
Because I could not understand the SI in any depth, I worry if it really is just about translating three or four simple ideas into fact. I notice that it is 24 pages long. It strikes me that it is like a bit of computer software, with lots of lines. As we all know from our experience with Microsoft, every now and then it does not get it right. What systems do the Government have to assure themselves that these SIs actually work? While they seek to introduce a number of relatively straightforward ideas—I hope they are; I hope not to be told that I have none of it right—they take an awful lot of articles to do that. Is there a checking mechanism to make sure they work? They are going to have to work at a moment in time. If they do not, the chaos could be frightful.
I repeat my request, to which I have not yet had an answer from the last set of SIs, that those of us involved—I am sure my Liberal colleagues would agree—have a fully updated and amended copy of the Financial Service and Markets Act 2000. We are often told to go to commercial copies of these things. There is a commercial organisation—called Westlaw, I think—and I looked up the Financial Services and Markets Act in its system. Because it records every change since the year 2000, the document is 1,569 pages long. I put it to the Minister that that is not user friendly.
Finally, I echo the welcome for this SI from the noble Baroness, Lady Kramer—
Lord Kirkhope of Harrogate
I am sorry to intervene, but the noble Lord is making a point about an impact assessment. If he looks at page 27, he will see that there is a specific reference to an impact assessment. However, I will say that, when I tried to find it on the appropriate website this morning, it was not there.
Lord Tunnicliffe
I thank the noble Lord for that.
The Minister knows exactly what I am going to say. On page 6 of the Explanatory Memorandum, paragraph 12.6 and beyond states:
“An Impact Assessment will be published in due course on the legislation.gov.uk website … The Treasury’s decision to publish the regulations without a final Impact Assessment aims to ensure that industry and regulators have as much time as possible to familiarise themselves with the regulatory changes”.
The reason the Minister and I are familiar with those two paragraphs is that they have appeared in every Explanatory Memorandum on Treasury SIs so far; and on every SI so far, the Treasury has failed to produce an impact assessment, despite the fact that it is promised in the body of the document. For the life of me, I cannot see why it would bother, given that we will have approved the SI by the time it arrives.
Let me turn back to the good news for the Minister. We are certainly not going to challenge this SI. I echo the view of the noble Baroness, Lady Kramer: it is good to see, as far as one can because of the sheer complexity of it, that it sticks with the Government’s commitment to make only the necessary changes to have a smooth transition. I cannot detect any effort from the Government in this SI to try to introduce any policy changes.
Lord Bates
My Lords, I thank noble Lords for their questions and their scrutiny. The noble Lord, Lord Tunnicliffe, is typically assiduous, as he is on all these matters—he has even gone through the 1,569 pages of the FiSMA, which is some achievement. We appreciate that, and we appreciate the noble Baroness, Lady Kramer, stepping in for the noble Baroness, Lady Bowles, at such short notice. Let me start by dealing with as many of the questions for which it is possible to get immediate answers, and I will then review the debate and write to noble Lords if necessary.
All three noble Lords who contributed commented on what is happening with the impact assessments. Five impact assessments have been prepared across the financial services SIs. Noble Lords will be familiar with the process for this: they go before the Regulatory Policy Committee, which is the non-departmental public body under BEIS, and it assesses the impact of the regulations. What we are trying to do is save British consumers and businesses the costs that would come into effect were we to leave with no deal and not have these statutory instruments in place. That would imply a cost. We are not being as bold as to say that the effect of the SI is to make a saving, but that is the reason why the attempts to quantify this have been challenging. However, they are under way, as I said.
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.