By Craig James, CEO of Neopay
Over the years, it’s undeniable that for businesses operating within member states, the EU has created numerous opportunities and provided many commercial benefits. For the European financial services industry,one of the most valuable perks of membership is the ability to passport financial services on a single licence. So valuable, in fact, that a fifth of the UK’s banking sector’s annual revenue is made through the passporting regime and 75% of UK payment firms that have gained authorisation since 2009 have used the passport, as uncovered in the Freedom of Information (FOI) request we obtained from the Financial Conduct Authority (FCA).
But, with the UK’s departure from the EU looming,concerns have been raised that passporting rights could be lost in negotiations around Brexit. These fears were further compounded when the City of London lobbying group dropped its demands for the UK Government to fight to keep access to the financial passport at the start of the year.So, with acceptance growing that the UK could well lose its financial passporting rights, questions are now being asked as to just what the country’s payments and e-money landscape will look like once the Brexit deal has been ratified.
But first, how exactly does the EU’s financial passporting regime work?
The passporting regime is a system through which businesses can import or export financial services, as outlined in the EU’s Financial Services and Markets Act (2000). The financial passport can be used by companies that are based in the European Economic Area (EEA) to operate across other countries within the EEA, under the acceptance and fulfilment of local and European regulatory bodies’ requirements.
Under the rules of the passporting regime, firms only need to obtain a single licence, from one jurisdiction, with the only condition to meet being that they must notify the regulator that they will be passporting i.e. exporting their services, using said licence.
The importance and value of the EU financial passport
For businesses operating within the EU, or wider EEA, the value of passporting is three-fold; it massively reduces bureaucracy, it cuts costs and saves time as companies export their services across the EU and EEA without first needing authorisation in each jurisdiction. Through the passporting regime, businesses need to choose only one country in which to establish a legal company, produce accounts, set up a bank account and open offices in.This also delivers cost-savings to governments, financial regulators and ultimately the taxpayer as well.
The financial passport is alsoused to promote competition and bolster financial inclusion – both of which result in greater choice for consumers. By facilitating an outsourcing of regulation, passporting enables countries without a regulatory body of their own, or those developing European economies with only limited markets, to access products and services that are regulated elsewhere.
The value of the EU’s financial passport isn’t just economic though – it can also assist in tackling financial crimes such as money laundering, fraud and corruption. The passporting regime has also helped facilitate greater global security by improving communications and creating a better and wider dissemination of information between international agencies and regulators.
How will the UK’s e-money and payments landscape look post-Brexit?
Though the UK’s decision to leave the EU has dominated the news agenda since last June, very little detail has been confirmed about the framework in which Brexit will be delivered.
That said, as the UK is the fifth biggest economy in the world, it’s likely that it will remain an attractive destination for payments and e-money businesses to set up base in, or have access to. At Neopay, we’re of the opinion that deciding where to become regulated is more about where a business’ customers are based and less about the impact of Brexit. It would make little commercial sense to stop providing a service or offering a product if it is popular in the UK just because of the country’s decision to pull out of the EU.
In the event of the UK losing access to the financial passporting regime, it’s likely that a system of equivalence will be agreed upon, or dual-authorisation – that is gaining authorisation in more than one jurisdiction – will rise in popularity.That said, as an internationally-facing payments and e-money specialist, Neopay is offering Brexit Insurance, and will continue to work with companies wanting to become authorised – whether that’s in the UK, continental Europe or the United States.
Realistically, the UK’s decision to end its membership of the EU could lead to the loss of access to the single market and spell the end of passporting rights, but failing to replace these with similar or equivalent arrangements will not only be damaging to the UK but the wider European economy too. What’s needed is a compromise on both sides to ensure the best outcome for all.