Access to payment systems: what is the impact of the EU Referendum?

 

If the UK’s negotiations to leave the EU mean that passporting arrangements cease to exist, financial institutions’ access to payment schemes could be set to change. James McMorrow, Head of Payment Strategy, Lloyds Bank, outlines why European and UK banks may wish to factor this into their planning for a post-Referendum world, and discusses potential strategies for retaining payment scheme access.

About the author

James McMorrow

Head of Payment Strategy,
Lloyds Bank

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Following the UK’s recent vote to leave the European Union (EU), the future of financial services passporting has been called into question. This is where the authorisation to trade in one EU market has provided financial institutions with the means to trade in other EU markets without having to become authorised in each market.

Discussion to date has largely focused on the ability of UK financial institutions to continue to provide services into the EU – although passporting is obviously a two-way street. Delve a little deeper, and there are also potential financial market infrastructure impacts that banks may wish to take into account in their post-Referendum planning.

Access to payment schemes is a prime example. Current passporting arrangements enable financial institutions based in the UK to enjoy access to European payment systems, and vice versa. This enables quick and efficient movement of money across borders and access to financial markets – a fundamental need for both financial institutions and their customers.

Loss of these arrangements could have a big impact on both UK and European based banks which currently have direct access to payment schemes as a result of their EU ‘passport’. However, there are also opportunities as potentially impacted banks could choose to consider one of a number of potential models alongside their existing arrangements.

Different routes

While it is important to note that there will be no change to access to payment schemes in the near future (due to the UK’s ongoing negotiations with the EU), there is no time like the present to consider possible longer-term scenarios.

Of course, the terms of the UK’s departure from the EU are yet to be decided. As such, the future of the UK’s relationship with mainland Europe is currently unclear. There may be a variety of routes and for the purpose of this article we will look at the following two:

  1. The UK may choose to remain within the European Economic Area (EEA), which would mean passporting regimes could be retained and there would be no change to access to payment systems.
  2. Alternatively, the UK may exit the EEA, and passporting arrangements cease. This could potentially mean that EU banks currently using passporting arrangements into the UK or into mainland EU to gain direct access to payment schemes, may no longer be able to do so.

From a practical point of view, the possible implications of this second route merit some attention – not least from EU-domiciled banks. After all, figures suggest that over 8,000 financial services firms from either the EU or the EEA rely on passports to access the UK financial services market1.

The UK’s significant role within global financial services, together with its position as the leading export market for the EU, with mainland Europe accounting for circa 53% of UK imports last year2, make this an even more pressing issue for EU-domiciled banks.

Without direct access to UK payment schemes, including CHAPS, BACS and Faster Payments, EU-domiciled financial institutions would likely be unable to directly trade and settle assets, as well as losing direct access to certain money markets.

Other impacts might include; reduced transparency and efficiency of payment processing, reduced liquidity and ultimately, an increase in cost. A loss of direct scheme access would also mean a reduction in influence in development of the payment schemes themselves, which could increase systematic risk, both for the bank, but also the payment scheme itself.

UK-domiciled banks currently using passporting arrangements to gain direct access to EU payment schemes and financial markets, would experience similar knock-on effects – and therefore need to consider how they maintain access to the EU’s financial sector. This is particularly important given that Europe has the second largest currency globally and is Britain’s number one trading partner, with 44% of the UK’s goods and services being exported to the EU in 20153.

So, should current passporting arrangements cease to exist, financial institutions in both the UK and Europe would need to carefully consider options for retaining payment scheme access – not least to ensure that they continue to meet clients underlying needs. The good news is that there are a number of different ways that banks can look to achieve this.

Moving forward

Individual financial institutions will likely seek to manage their own arrangements for market and payment scheme access, if passporting comes to an end. This may mean that they need to consider and evaluate the advantages and disadvantages of either direct or indirect connectivity. For those banks that choose the indirect route, relationship with in-country partner banks, typically strong domestic or nationally prominent correspondent banks, such as Lloyds Bank, could be leveraged in order to achieve access and ultimately stability of services for your customers.

Regulators are increasingly looking at ways to create new access solutions to payment schemes to increase competition. These range from direct technical access to the Faster Payments Scheme and the work of the Payments Strategy Forum in the UK, to the revised Payment Services Directive (PSD2). Within these regulatory initiatives, there will certainly be opportunities for financial institutions to consider the best access model for them, depending on the outcome of UK/EU negotiations.

Regardless of whether a bank chooses direct or indirect connectivity, organisational and operational changes are also likely to be a popular route forward. As such, we may see some financial institutions relocating or creating new legal entities in order to retain access to the relevant payment systems and offer in-country accounts to customers. It is worth noting, however, that substantial changes such as this may affect the ability to provide certain products and services to clients and may involve complex decisions which could also have employment, tax, compliance and legal implications.

Customer focus

It is not just the banks that face risks as a result of loss of access to payment schemes, however. Customers of financial providers who do not maintain direct access to payment schemes may find that they receive an inferior payment service, including impaired levels of transparency, information reporting and speed. This makes the choice of any partner especially important, to ensure that they can meet not only your payment needs, but that of your customers.

Ultimately though, the extent of the impact on customers will depend on how and with whom their financial providers maintain access to payment systems and financial markets.

Be prepared

In summary, while access to payment schemes currently remains unchanged, financial institutions are likely to have some important and challenging decisions to make as the UK’s chosen route for leaving the EU becomes clearer – in particular if passporting arrangements come to an end.

Ahead of receiving this clarity, financial institutions would do well to consider which of the possible model(s), ranging from organisational changes to partnership arrangements, could best enable them to retain payment scheme access and therefore continue to service their clients’ current and future needs. And as a leading UK financial institution, with specific expertise in Sterling and payments, Lloyds Bank would be delighted to discuss partnership opportunities and solutions with you.

PAYMENT SCHEME ACCESS: ACTION PLAN

Whilst uncertainty exists around the future of passporting, financial institutions can start to map out the impact of a scenario where they no longer have direct access to UK or EU payment schemes – and what options they have available to retain that access.

Points to consider might include:

  1. Access to schemes. If you already have direct access to UK or EU payment schemes, now could be a good time for a review.
  2. Technology and operations. If you already have direct access and are looking to retain it, do you have the right people in the right place with the right technology to enable access if passporting ceases?
  3. Partner arrangements. By partnering with a strong domestic bank whose offering meets your needs and those of your customers, it should be possible to retain access to relevant payment schemes.
  4. Product capability. How would changing access model or access location affect your customer product offering and what might this mean to your customers?

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