However, the extent to which the SEPA rules – which govern cross border and national credit transfers and direct debits – will apply will depend on whether the UK remains a member of the SEPA system or not post-Brexit.
The SEPA regime
SEPA is the 'single euro payment area' (SEPA). Geographically, it covers 34 European countries: the 28 member states of the EU, as well as Iceland, Norway, Liechtenstein, Switzerland, Monaco and San Marino.
The SEPA system is made up of different payment systems from across SEPA that conform to agreed standards.
EU member states are each subject to set EU rules that underpin the SEPA system, which were first introduced through common rules for the authorisation and the revocation of direct debits set out in the first Payment Services Directive. Further technical specifications for the payment systems are set out in the SEPA Regulation and the rulebooks that have been developed alongside it.
Under the SEPA Regulation, payment service providers must establish "payment schemes" that have the same "rules" for the purpose of carrying out cross border and national credit transfers (CTs) and direct debits (DDs). The measures are designed to ensure that different payment systems are "technically interoperable" with one another.
The Regulation sets out certain requirements that payment service providers must conform to when conducting those transactions, which include using a particular "payment account identifier" and "message formats", among other things.
The other non-EU countries within SEPA all have their own rules to underpin their membership of the SEPA system.
SEPA and Brexit
When the UK leaves the EU it will no longer be subject to the EU's SEPA rules. However, the UK government has published draft legislation which is designed to "ensure that the regime continues to operate effectively in a UK context once the UK leaves the EU, in any scenario".
The UK government is keen to retain its membership of the SEPA system post-Brexit, but whether it will do so is as yet unclear and may not be clarified until a final agreement is reached on the terms of the UK's withdrawal from the EU, if any agreement is reached at all.
In a 'no deal' scenario, the UK would no longer be a member of the SEPA system, but according to the government's proposals, UK-based payment institutions that process credit transfers and direct debits in euros would remain subject to some SEPA-related rules.
The draft UK legislation
There are two central pieces of legislation relevant here - the European Union (Withdrawal) Act 2018 (EUWA) and the Cross-Border Payments Regulation (CBPR).
The EUWA provides a framework for a functioning statute book on the day the UK leaves the EU. It allows ministers to make statutory instruments to prevent, remedy or mitigate any failure of the EU law to operate effectively, or any deficiency in retained EU law.
The CBPR sets rules on pricing of cross border euro payments limiting costs of cross border payments to that of domestic euro payments.
The UK government recently issued draft statutory instruments under the CPBR to amend existing UK laws relevant to the SEPA regime – namely the Payment Services Regulations (PSRs), the E-Money Regulations and the SEPA Regulations. Those regulations all stem from EU law that apply to payment institutions, e-money institutions and firms subject to the 'open banking' rules, such as account information service providers.
The purpose of the draft new legislation is to ensure the SEPA system will continue to operate effectively in the UK after Brexit.
Due to the importance of SEPA as an enabler of trade between the EU, the UK and third countries who meet the access criteria, the UK government wishes to retain existing EU payments law to maximise the UK’s prospects of remaining in SEPA, regardless of the outcome of the Brexit negotiations.
- correcting deficiencies that would arise from the UK accessing SEPA as a third country rather than as an EU member state.
- subject to the UK’s continuing participation in SEPA, amending the PSR’s such that transactions in euro between the UK and another member of the SEPA area are treated as ‘two legs in’ – fully subject to the SEPA rules. Part 7 of the PSR’s would continue to fully apply to transactions in Euro within SEPA, including Euro transactions carried out completely within the UK.
- where the UK is no longer able to participate in SEPA, the UK government removing SEPA Regulation from the statute book to reduce transactions in Euro from the UK to a SEPA member to a ‘one-leg’ transaction – where Part 7 of the PSRs only would apply to the part of the transaction carried out in the UK.
‘One-leg out’ transactions refer to payment transactions where either the payer or the payee is in a country that is a member of the European Economic Area (EEA) and the transaction involves an EEA currency, such as Euro, British pound or Danish Kroner. These transactions are subject to the requirements of the PSRs due to PSD2, whereas previously they were exempt. ‘Two-leg in’ transactions are where both parties are in the EEA and the transaction is therefore fully subject to the PSRs.
Prepare for change
The government has said it intends to lay the draft legislation before the UK parliament some time this autumn.
Whether the UK remains in SEPA or not will depend on the outcome of negotiations between the UK and the EU on access to the common market.
Regardless of where negotiations come out on the UK’s continued participation in the common market, as well as SEPA, UK payment service providers and their European counterparts that they regularly deal with, will need to analyse their current arrangements involving the SEPA system and understand what process changes they will need to implement to accommodate the above scenarios.
Tony Anderson is a banking and payments expert at Pinsent Masons, the law firm behind Out-Law.com.