“Passporting can continue, but it’s getting so much more complicated”

Passporting for payments providers and banks operating across the European Union is to become much more complex, according to Paul Anning, partner, Osborne Clarke, LLP, as the payments sector could be in for fundamental change.

“Passporting can continue but it’s getting more complicated in terms of PSD2, but also with Brexit. All of that leads firms to think far more carefully about the cost benefit analysis of launching into a new jurisdiction.”

Speaking at PayExpo, in London’s Business Design Centre, Anning pointed to uncertainties around Brexit that could force significant change to the payments infrastructure.

“The UK could become a one leg in one leg out jurisdiction,” he said. “A number of UK banks rely on the Single Euro Payments Area (SEPA). There are steps to include the UK in SEPA but nothing’s guaranteed yet.”

“It’s not just the passporting issue,” said Anning. “The way banks and payments charge will also likely change as well.”

But providers have options, and each enterprise must consider the passporting on a case by case basis, according to Anning.

“With so much of the provision of fintech, payments, emoney is naturally cross-border so firms need to work out where exactly they are providing a service.”

“If you look at a third party provider, that might have a customer in the UK, with a TPP in Poland, and perhaps they are accessing a French bank in order to provide services. Where is the TPP actually providing the service? That’s a really difficult question.

“There’s a lot of case law under European measures that goes back to look at characteristic performance. But in these type of instances you’ll look at the case law and see that the current characteristic of a TPP is the users credentials, you’re accessing their account, and you’re based somewhere else, so actually maybe it’s all three. Without even blinking you’re into cross-border services. That’s a core question for firms to ask.

“Then you have to look at the ecommerce directive and see if that can be applied to step round the licensing requirements.”

“All of this brings you back to the question of what you’re doing in other member states,” said Anning. “That might be assessed through very deliberately appointed agents, or distributors, or a third party. Once you start involving a third party in another member state particularly one that signs contracts for you then you’re straight into an establishment type basis.

“All of which comes back to the substance requirements,” he said. “When we’re helping one [emoney institution] go to Luxembourg, the CSSF [the country’s regulator] said they needed a minimum of five full time equivalents based in Luxembourg in order to have your EMI there. They were very clear on what senior management, risk management they needed locally. You can delegate back either to the UK or if you’ve got a parent somewhere else you can delegate some of that but you’ve got to make sure there’s sufficient substance locally. And that’s in two places if you’ve got two licensed entities going forward.”

Firms working in Europe’s payments sector will also have to consider issues such as transfer pricing, and where profits should sit or be reported. That could further change firms’ business models.

“That’s all looking at it in terms of regulations and compliance,” said Anning. “It’s also important to look at it in terms of mapping both the contractual structure of the funds and the data flows, and most importantly the customer journey.”

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