PSD2 to Level the Playing Field for Finance Firms, Even After Brexit

With Britain now set on heading for the EU exit door, focus moves to the next two years and what the exit negotiations will mean for the future of the UK and the remaining 27 EU states. One of the biggest areas of contention is what the UK financial market will look like and how firms here will be able to continue playing a leading role in the world.

Of particular interest are the regulations laid out by PSD2 and what role this EU wide regulatory framework will play in Brexit Britain. The regulations are aimed at increasing competition and improving access to data and services and Craig James, CEO of Neopay, tells Lawyer Monthly they will continue to benefit Britain long after Brexit.

Levelling the playing field

For UK tech start-ups looking to enter the financial market, PSD2 provides the perfect opportunity to play on the same level as established providers by requiring banks to share data about customers’ accounts (with their consent).

Allowing these payment service providers (PSPs) access to this information will make it much easier for them to create competitive products, both in the UK and the European Economic Area (EEA) and will lead to increased competition and a more innovative marketplace.

PSD2 in Brexit Britain

A major concern for UK financial firms is what will happen to their place in the market when the UK is no longer a member of the EU, and potentially is no longer seen as a gateway to the single market.

From a general business perspective, it is worth noting here that choosing where to be based and regulated is less about Brexit and more about commercial demographic. If for instance, a significant proportion of your business is from the UK it makes sense to be regulated by the FCA, and if the UK does leave the Single Market as well as the EU, then being regulated by the FCA would be a requirement if you want to continue doing business in the UK.

UK firms can be reassured by the fact PSD2 aims to increase the standards of financial transactions, making them more transparent and competitive while ensuring firms – whether banks or non-traditional market entrants – comply with stricter requirements on transparency, competition and security.

Another point of concern is how these regulations will impact transactions made between UK and EU firms post Brexit, but PSD2 puts in place new legislation that requires EU firms to meet transparency rules, even when dealing with providers outside the union.

Under current legislation, transparency requirements for payments service providers (PSPs) only apply when both the payer’s and recipient’s PSP are located in the EU, and if payments are made in euros or a member state currency.

PSD2 extends the geographical scope of transparency and conduct of business requirements to include “one leg” transactions, as long as one of the PSPs is located in the EU and also to transactions in non-EU currencies which have at least one leg in the EU.

This means that clearing foreign currency transactions abroad is no longer relevant and the EU part of the transaction will be in the scope of PSD2 regulations if the above conditions are met.

For the next two years at least, banks and fintech start-ups will be able to establish themselves as reliable providers of services with the surety that the UK will continue to implement and comply with PSD2.

Indeed, even after Britain exits the EU and possibly the Single Market, PSD2 will remain in place for those firms still based in the bloc, ensuring they continue to meet the strict regulations. For UK firms, this will prove particularly beneficial if they are hoping to continue pan-European trading, as EU competitors will remain regulated by the stricter financial legislation, in terms of remaining transparent, and will not be able to undercut UK firms.

The real advantage the UK will hold in these scenarios is that once it is no longer in the EU and EEA, it is no longer required to comply with EU regulations implemented post Brexit and the market will be able to adapt accordingly, and much more quickly than the EU market.

Being able to adapt regulations without the agreement of 27 other nations will serve the UK well as it steps away from the EU.

While remaining nations will be forced to continue complying with EU wide legislation, the UK can be much more agile and react to market needs as required.

It should be noted that it is likely that many positive elements of PSD2 will survive in UK law after the Brexit negotiations as the government will want to create an environment that promotes innovation and growth in one of the country’s most historic and important economic sectors.

Business as usual in the short term

With PSD2 set to come into force next year – in the middle of Brexit negotiations – the financial sector can expect an element of business as usual in the short term.

Of course, the UK government has a commitment to remaining engaged with and complying with EU legislation while the UK remains a member so, for the immediate future at least, financial firms across the continent will be operating on a level playing field, under the same regulations.

Whilst we expect many regulatory aspects to remain in place after 2019, forward thinking companies will at least be considering the possibility that no longer needing to comply with EU legislation could offer UK lawmakers a lot more freedom in how the market develops and the advantages that may bring.