Q&A | What would a “no deal” Brexit mean for APIs/EMIs?

Written on 2 Aug 2018

What would be the impact on APIs/EMIs if the UK leaves the EU on 29 March 2019 without a withdrawal agreement with the EU in place that provides for a transition period?

Both the UK and the EU have been more vocal about the possibility of a so-called “no deal” Brexit in recent weeks. Emphasising the worst case scenario is, of course, a basic rule in negotiating. The European Commission published this 15 page document calling for an acceleration in “no-deal” preparation for businesses on the same day that Dominic Raab embarked upon his first foray around the Brexit negotiating table.  Equally, the FCA has continued to emphasise the importance of firms preparing for a “no deal” scenario.

Osborne Clarke is a leading adviser to authorised payment institutions (APIs) (including payment initiation service providers (PISPs) and account information service providers (AISPs)) and electronic money institutions (EMIs) in the UK and across Europe. In this article we address some of the key Brexit questions that we have been asked, and give an insight into the types of contingency planning that our API/EMI clients are exploring.

  1. Can the Article 50 period be extended?

Under Article 50 of the Treaty on the Functioning of the EU, the UK will leave the EU by operation of EU law on 29 March 2019. That date can be pushed back if the UK and all the EU27 Member States agree; see paragraph 3 of Article 50. This provision could be used if the Withdrawal Agreement is not agreed and ratified by 29 March 2019, either because there remain sticking points on the terms of withdrawal, or if the Withdrawal Agreement is rejected by the UK Parliament and this leads to, for example, a UK general election. However, the need for unanimity between EU Member States means it could not be assumed that this option would be available.

  1. Until the UK formally leaves the EU, can UK and EEA APIs/EMIs continue to provide services under their existing passports?

Until 29 March 2019 (or such later date as may be agreed – see above), there is no change to the current position:

  • Inbound passporting EEA firms can continue to provide services into the UK based on their EEA API/EMI status; and
  • Oubound passporting UK firms can continue to provide services from the UK based on their UK API/EMI licence into EEA states.
  1. If a withdrawal deal is agreed by 29 March 2019, will everything continue ‘as is’?

If a Withdrawal Agreement is ratified in the form agreed at a political level and substantially in the form of the current draft Withdrawal Agreement, this would preserve the position ‘as is’, including allowing UK firms to continue to passport into the EU and EEA, for the duration of the transition period (which is proposed to be from 29 March 2019 to 31 December 2020).  Similarly, an incoming EEA firm (such as a Luxembourg API) would continue to enjoy and exercise its passporting rights into the UK on the same basis as now.

After any transition period, the availability of passporting for UK and incoming EEA firms will depend on the future trade deal struck between the UK and the EU. There is currently very little clarity as to what the deal would comprise.

The European Union (Withdrawal) Act provides that all EU law in place as at Brexit (such as PSD2) will be (initially, at least) retained as UK domestic law post-Brexit, subject to any ‘correction’ needed to ensure that the those laws operate properly once the UK has left the EU.

  1. Can non-UK EEA authorised APIs/EMIs still passport their services into the UK after 29 March 2019 in the event of a “no deal” Brexit?

As things currently stand, no, but there is likely to be a temporary permissions regime (TPR) for inbound passporting EEA firms. See the FCA’s Approach Document published on 24 July 2018.

More information on the proposed TPR regimes that will apply to EEA APIs/EMIs will be set out in the policy notes that accompany the relevant draft statutory instruments, which HMT will publish in due course.

  1. Can UK APIs/EMIs still passport their services into EEA states in the event of a “no deal” Brexit? Will there be a reciprocal TPR?

As things currently stand, no. A UK API/EMI would cease to have passporting rights and therefore be unable to provide services based on their existing passports into EEA Member States. This curtailment would occur immediately.

There are a couple of caveats to this, notably that PSD2 has not yet been implemented in many EU Member States (such as the Netherlands) and not adopted by the three EEA states (Iceland, Lichtenstein and Norway), so a UK authorised API/EMI would be free to continue providing services in these countries until they adopt PSD2.

Firms should note that the provision of non-regulated technical services, including outsourcing services, should be unaffected by Brexit.

There is currently no sign of a reciprocal TPR for UK firms needing to access the EU in the event of a “no deal” Brexit. This contrasts with the FCA’s calls for a bilateral solution for financial services issues beyond Brexit, and is something the FCA says it stands ready to discuss with its EU counterparts (see the speech delivered on 19 July 2018 by Nausicaa Delfas, Executive Director of International at the FCA).

  1. Are the competent authorities in other EU Member States offering any ‘fast-track’ authorisation process for firms already regulated in the UK?

As far as we are aware, none of the competent authorities in other EU Member States are facilitating any fast-passes (based on a firm being regulated already in the UK). Rather, they are sticking with their usual application processes – though some of the materials used for a UK FCA application, or recent PSD2 re-authorisation, should be capable of being re-used.

  1. What approach have UK APIs/EMIs been taking in respect of their contingency planning for a “no deal” Brexit?

Whereas banks are expected by regulators to have their contingency planning under control already, in our experience APIs/EMIs have until recently been taking a more risk-based approach, exploring options, thinking about relevant jurisdictions and making connections, for example.

As we move closer to Brexit and a “no deal” scenario becomes a real possibility, we are now seeing much greater activity.  Some have set up second authorised entities in the EU and are looking at pre-emptively migrating their European customers across from the UK authorised entity.

Others have identified potential jurisdictions (typically the Netherlands, Ireland and Luxembourg) and are progressing applications for local authorisation.

Whilst there is desire on all sides to avoid a “no deal” Brexit if possible, firms that have not already done so should be giving serious thought now to what this would mean for their business, and putting in place any necessary contingency plans sooner rather than later.