Having finally agreed a trade deal just in time for Christmas, some people expressed surprise that financial services were not included in the final agreement. As a consequence, the ‘passporting’ rights currently enjoyed by UK firms ceased on 31 December.
As head of the Passport Notification Unit at the FSA for a number of years, and having worked closely with the European Commission’s Payments Committee in drafting and publishing passporting guidelines for payments and e-money institutions prior to the PSD2 and the RTS, I can speak on passporting matters with some degree of experience.
We have seen many clients and firms heed the warnings from the European Supervision Authorities and the PRA/FCA and make plans for the UK’s departure from the European Union, to ensure the continuity of their business. Typically, this has involved setting up a separate legal entity in another EEA jurisdiction, and obtaining the authorisation that would allow them to continue to operate in that jurisdiction and passport across the EEA. Where the firm was already established in that Member State, as a branch, the decision is easier. Where, however, the firm has no permanent, physical presence in the EEA and operates solely on a ‘cross-border’ basis it is, in my view, questionable whether such action is necessary.
So the big question is, were some cross-border passports – or ‘notifications under the freedom to provide services’ – ever really needed? I’m not suggesting that passporting was simply a cottage industry grown by the regulators, or that there were no genuine situations where notification was required.
I’m simply challenging some of the core principles that have somehow been hidden over the years. Let me take you back to 1997 and the publication of the European Commission Interpretative Communication on ‘Freedom to provide services and the interest of the general good in the Second Banking Directive’ (97/C 209/04). Whilst this is over 20 years old, the Commission confirmed when publishing PSD, 2EMD and PSD2, that the document is still relevant and, most importantly, to be read across to payment and e-money institutions. So, what does it say that is so interesting?
The Communication itself is concerned with the circumstances when a services passport notification might be made. I have set out below some relevant extracts:
“It is necessary, therefore, to 'locate' the place of supply of the future banking service in order to determine whether prior notification is required.”
“…in its opinion, only activities carried on within the territory of another Member State should be the subject of prior notification. In order to determine where an activity was carried on, the place of provision of what may be termed the 'characteristic performance' of the service, i.e. the essential supply for which payment is due must be determined.”
“This line of reasoning is aimed merely at establishing whether prior notification is necessary.”
“A bank may have non-resident customers without necessarily pursuing the activities concerned within the territory of the Member States where the customers have their domicile.”
“Lastly, the provision of distance banking services, for example through the Internet, should not, in the Commission's view, require prior notification, since the supplier cannot be deemed to be pursuing its activities in the customer's territory.”
“The Commission considers that the prior existence of advertising or an offer cannot be linked with the need to comply with the notification procedure.”
My summary is that where the supply of services takes place dictates whether a passport notification would have been required. So, if no passport was required, irrespective of whether one was actually made, then no authorisation of any kind should be required post-Brexit.
I’m not a lawyer, so feel free to challenge my logic. But it’s broadly reflective of the approach the FCA itself has adopted over the years, per PERG 2.4 and PERG 2.9.
Unfortunately, not every EEA Member State agrees with the ‘characteristic’ test favoured by the Commission, instead following a ‘solicitation’ test – basically, if you reach out cross-border to ‘solicit’ a client in another EEA State then a passport notification would be required.
However (a common word when speaking of EU legislation and regulations!), some transactions are capable of being initiated via reverse solicitation i.e. exclusively at the direction and discretion of a European client. This scenario is set out in MiFID II rather than PSD2 but, whilst not explicitly stated, surely there should be some read-across.
What to do?
We have seen recent press coverage of UK banks notifying customers in certain jurisdictions of the closure of their accounts due to Brexit. I suspect that these jurisdictions are one where the solicitation test is applied. We have also seen some regulators (e.g. the BaFin in Germany) contacting firms to ask their plans for when the passport falls away.
There is, unfortunately, no list of EEA Member States that records whether they favour the characteristic test or the solicitation test and, as a result, no clear indication whether firms would be able to (continue to) provide services on a cross-border basis, based on either argument. There is, though, at least some basis upon which to engage with the regulators as to how you might carry on business in Europe without a passport.