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 amends 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.
Secondly, this SI transfers functions currently carried out by EU authorities to the appropriate UK body. Under the credit transfer and direct debits in euro regulation, the European Commission may adopt delegated acts to take account of technical progress and market developments. 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, HM Treasury—which will be able to make regulations subject to the negative procedure to achieve a similar outcome.
Finally, I turn to the interaction between the UK’s participation in SEPA and the provisions made in both SIs. For the UK to maintain participation in SEPA as a non-EEA country in a no-deal scenario, the UK payments industry is required to make an application to maintain participation in SEPA. I understand that UK Finance, the body responsible for that, which represents UK payment service providers, has made such an application to maintain UK participation in SEPA in a no-deal scenario, on behalf on the UK payments industry. Applications from non-EEA countries are determined by the European Payments Council by reference to its published criteria for non-EEA country participation.
Through these SIs the Government therefore intend to retain relevant EU law in such a way as to maximise the prospects of the UK maintaining participation in SEPA as a non-EEA country in a no-deal scenario. In the event that the UK does not maintain participation in SEPA in a no-deal scenario, UK payment service providers would be unable to comply with some of the requirements in UK law that presuppose the existence of euro-denominated transactions within SEPA. To cater for this scenario, the credit transfers and direct debits SI gives the Treasury limited powers to revoke requirements to prevent the detrimental effects on UK payment service providers of having a requirement which they cannot meet. These powers are exercisable by the SI, subject to annulment in pursuance of a resolution of either House of Parliament.
In summary, the Government believe that these SIs are necessary both to ensure that the regulatory regime applying to payment institutions, electronic money institutions and account information service providers works effectively if the UK leaves the EU without a deal or an implementation period, and to maximise the prospects of the UK maintaining participation in SEPA, to the benefit of UK consumers, businesses and the wider UK economy. I hope noble Lords will join me in supporting both these draft regulations, and I commend them to the House. I beg to move.