Brexit Bulletin: What does ‘no-deal’ Brexit mean for CAP Payments?
In preparation for the UK officially leaving the European Union on 29 March 2019, the Department for Exiting the European Union issued a series of technical notices outlining who and what may be affected in the event of the UK leaving the EU with no deal in place.
The first batch of technical notices, issued by the government to assist individuals and businesses with any necessary preparations in the lead-up to Brexit, included the briefing note: Banking, insurance and other financial services if there’s no Brexit deal. This notice forms part of the government’s hard Brexit “scenario” planning.
Regulation in the financial sector
The UK financial services sector is heavily regulated, and the majority of this legislation is derived from EU legislation. Post-Brexit, current EU legislation regulating UK financial services will be transferred into UK law. The UK Government will then have the power to amend the existing laws to ensure the regulatory framework in place, at the date of exit, is fully functional.
Passporting and the UK as a third country
Currently, firms, financial institutions and funds that are authorised within the European Economic Area (EEA) can carry out financial activities in other EEA countries without requiring authorisation or supervision from the local regulatory body, otherwise known as “passporting”.
Once the UK has left the EEA, UK firms will lose the ability to passport into other EEA countries, and will instead have to be authorised and regulated by the regulatory body in the country in which they are operating.
The UK has committed to introducing a Temporary Permissions Regime (TPR), allowing EEA firms that are currently passporting into the UK to continue to do so for up to three years from the date of exit while they apply for UK authorisation.
Following Brexit, the UK Government has confirmed it will, in the majority of cases, treat EEA states and firms as it currently treats other third countries and firms, although there will be situations in which this approach is not applied in order to minimise disruption, protect the existing rights of UK consumers and ensure financial stability.
This includes the TPR and further legislation that the UK Government has committed to introducing that will ensure that contractual obligations between EEA firms and UK based customers that do not fall under the TPR can continue to be met.
UK firms’ position in respect of EEA countries will be determined by the rules of that country and any overarching EU rules that apply universally to all third countries.
What does a ‘no deal’ Brexit mean for UK customers?
The majority of UK-based customers using services provided by UK-based institutions are unlikely to be affected, and any changes that may occur will be as a result of that firm’s individual Brexit preparations.
Customers and businesses who regularly process euro payments are expected to face increasing costs and slower processing times, although the UK Government is seeking to negotiate a compromise to allow it to remain part of central payment infrastructures.
The cost of card payments made between the UK and the EU is also likely to rise and may become subject to surcharges. Currently, there is a surcharging ban in place preventing businesses from charging customers for using a specific payment method; however, this will cease to apply following Brexit.
UK customers who use EEA firms that are currently passporting into the UK will not be immediately affected by the change; given these firms will still be able to operate within the UK for up to three years from March 2019.
What does a ‘no deal’ Brexit mean for EEA customers?
If there is no Brexit deal, customers – including UK expats – who use UK firms that are passporting into the EU may lose the ability to access existing lending and deposit services, as well as insurance contracts such as life insurance and annuities, as a result of UK firms losing their right to passport into the EEA.
The UK Government has committed to working to resolve these issues as far as is possible from the UK side, yet is not fully able to mitigate all the potential risks to EEA customers as a result of UK firms losing their passporting rights.
A number of UK-based financial services firms who currently passport into the EEA, have now taken steps to ensure post-Brexit operational continuity by establishing new EU-authorised subsidiaries, though there is no certainty the 27 remaining EU member countries will accept this approach, and applications will need to be made to each member state.