So now we know – sort of. The UK is likely to leave the EU single market. The UK PM places control of immigration ahead of the single market’s benefits including crucial passporting rights for the financial services sector. What are the implications and which EU countries may benefit? Douglas Blakey writes
The UK’s financial services sector employs 1.9 million people and contributes 10% of the UK’s GDP. Fintech is a crucial and growing part of the sector with payments representing over 40% of financial services in revenue terms; in 2016, 40% of all fintech investments were in payments companies, amounting to £10bn ($12.5bn) globally.
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One of the only things not in dispute amid the political and economic discussions relating to Brexit is the fact that the UK’s payments industry is world-leading. It delivers innovative products and services that are disrupting the incumbents by solving the payments problems of consumers, companies and institutions.
These products and services are created by companies in the UK which, armed with passporting rights, can sell them across the other 27 EU countries.
The Emerging Payments Association (EPA) a commercial membership association of payments industry influencers focused on establishing the UK as the global hub for payments innovation, is unswerving in its assertion the loss of passporting rights will have a significant negative impact on fintech, payments and the UK economy.
But if the worst happens and it becomes impossible for UK regulated companies to deliver payment services across the EEA from the UK, what are the options? And which EU countries might be among the winners?
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By GlobalDataA report for the EPA, Passport to the future, authored by payments expert David Parker, founder of Polymath Consulting and Peter Howitt, of Ramparts European Law Firm sets out to answer this question: ‘If it is necessary to set up a new regulated entity somewhere inside the EEA but outside the UK, which countries should UK- and Gibraltar-based companies consider?’
The report’s research was carried out through direct engagement with regulators, with a number of companies who were operationally regulated by regulators outside of the UK, and with local professionals.
The initial consideration was of a long list of potential markets to consider; from the evaluation of this long list, a shortlist of six countries was then identified.
Payment Service Providers (PSP) are defined for the purposes of the report as those regulated companies that are conducting authorised payment service activities, including organisations regulated under Banking, Credit Union, Electronic Money and Payment Institution licences.
The criteria used for filtering the long list of countries to the shortlist of territories for deep dive analysis was as follows:
- Issuing of licences to a range of PSPs;
- Supportive regulatory environment;
- Estimated timeline for authorisation from application date- reasonable timeline & SLAs;
- Reasonable local establishment requirements (including .corporate structure, minimum local presence for staff compliance/technology);
- Practical anti-money laundering regulatory environment that supports remote customers and electronic transactions;
- Ease of opening a local bank account, and
- Jurisdictional reputation and fiscal strength
Based on these criteria, six markets were identified as being the most likely to offer a viable and effective regulatory regime.
Some notable major territories did not qualify for the shortlist. Germany, the Netherlands and France are the most obvious omissions.
The first thing that springs to mind when considering a PSP’s Home State is a country’s financial strength. And the report shortlist includes countries that are fiscally strong.
But these will not necessarily be the ones that PSPs choose to make their Home State.
Other criteria may be more important and a degree of pragmatism will come into play when selecting a Home State.
Experienced PSPs able to accommodate a degree of risk will put a greater deal of emphasis on the tax rates (both corporate and personal) of the country.
They will also focus on the ease of transferring contracts across borders and the availability of experienced executives to take the role of registered officers.
The shortlisted top 6
CYPRUS
Cyprus, with its 12.5% tax rate, favourable and experienced banking talent pool, open and cooperative regulator and UK-derived legal structure, will be on the list of alternatives to the UK for some operators.
It is relatively quick, inexpensive and easy to become regulated as an EMI or PI in Cyprus. Despite the low rating of the country on the fiscal rating scale, its recent challenges with banking in 2013, and the active presence of Russian money and investors, makes Cyprus is worth considering.
It will allow staff and investors to earn healthy post-tax rewards from basing a company and its staff there, albeit with some risks attached. The main challenge in Cyprus, as with many other potential Home States, is the availability of local banking support. An EMI can, however, seek to open accounts with any other banking institution within the EU as the local law does not preclude it from doing so.
Cyprus is currently negative towards any kind of virtual currency and has issued relevant warnings in the past.
KEY FACTS
- Corporation tax 12.5%, VAT 19%;
- Income tax 20-35% for amounts over €19,500 ($20,847) – highly-paid foreign executives can benefit from a 50% reduction;
- Social insurance contributions low-medium (7.8% to be increased to 8.3%);
- Cost of living is low (<75% of UK);
- Crime and corruption low & medium;
- World Bank ‘Doing Business’ 2017 world rankings 45th out of 190;
- Ease of opening a bank account negative (although local banking institutions are warming up towards accepting regulated PSP applications), and
- Cost of registering a company is approximately £800 with no online application option.
DENMARK
While Denmark has limited experience in regulation of e-payment companies outside of the banking sector, it has shown a very strong desire to encourage fintech and e-payments companies to locate in Denmark.
Responsibility for payment regulation in Denmark is split between the Danish Central Bank and the Financial Services Authority (Finanstilsynet) who is responsible for the authorisation of EMIs and the day to day supervision.
The Chamber of Commerce of Denmark has proposed to allow most retailers (except for essential services like hospitals, post offices, etc.) to make all money transactions electronically. Denmark has a very high level of use of electronic forms of payment.
The Danish regulatory environment is ‘open’ to developments in the payments sector. Denmark has a pragmatic and technologically neutral antimony laundering compliance environment which is similar to the UK (and which is currently being updated for 4AMLD compliance purposes). In addition, the verification of identity papers for Danish residents can be done with NemID, which is a common secure login on the internet.
Due to the application of NemID, many companies subject to AML regulation find the verification process easier than in most other countries.
KEY FACTS
- Corporation tax 22%, VAT 25%;
- Income tax Marginal rate is 56%, effective rate is 35-48% (lower flat tax rates of 26% for relocating staff may be possible;
- Social insurance contributions low (2%);
- Cost of living high (equivalent to UK);
- Crime and corruption Low & very low;
- World Bank ‘Doing Business’ 2017 world rankings 3rd out of 190;
- Ease of opening a bank account Very positive, and
- Cost of registering a company low (less than £200) and easy to do online.
IRELAND
Facebook had previously been rumoured in the media to be seeking authorisation as an EMI in Ireland. Facebook finally became authorised in November and this will do more than anything else to bolster Ireland’s reputation as a major new e-payments hub to be reckoned with in Europe.
Ireland is an obvious choice for international payments companies. Ireland’s proximity and strong relationship with the UK make it very attractive for UK businesses.
The ability to do business in the English language as standard, its English law base and its long-standing good reputation with North America are also strong factors when making investment decisions.
Ireland also has limited experience in regulation of e-payments companies outside of the banking sector. However, it has also shown a strong desire to encourage fintech and e-payments companies to locate in Ireland.
The payments regulatory team recently changed their service levels to ensure that good applications could be processed more quickly and within a six month window assuming the application was well prepared and presented.
KEY FACTS
- Corporation tax 12.5%, VAT 23%;
- Income tax 20-40%;
- Social insurance contributions Medium (8-11%);
- Cost of living High (equivalent or > UK);
- Crime and corruption Medium & very low;
- World Bank ‘Doing Business’ 2017 world rankings 18th out of 190;
- Ease of opening a bank account Positive, and
- Cost of registering a company Low (less than £200)
LUXEMBOURG
Luxembourg has worked hard to secure a good reputation for supporting innovation and payments. PayPal’s decision to re-locate to Luxembourg from London in 2007 and obtain a banking licence for Europe (due to inherent defects in the EU e-money laws then in force) is a major factor in Luxembourg’s early success in this sector.
Luxembourg has made the best of its opportunities to be respected as the continental e-payments leader.
Luxembourg is well located at the heart of many major Northern European economies (adjacent to Germany, Belgium and France and close to the Netherlands and Switzerland). It sees itself as a natural partner to businesses in the UK.
It is very pro-EU and (being a founding member) and therefore very unlikely to wish to leave. It has a strong multi-national workforce (foreign workers account for no less than 72% of its total workforce). Whilst being nominally French speaking, people do business in English.
Luxembourg has the most experience in regulation of e-payments companies outside of the banking sector of any of the shortlist countries.
It has proven itself to be hospitable and engaged in looking at new business models and new technologies.
In 2016 it authorised Bitstamp (a bitcoin exchange) as a payment institution for the fiat aspects of its operations and this really furthered the perception that Luxembourg wants to remain as leading e-payment hub in Europe.
KEY FACTS
- Corporation tax 29%, VAT 17%;
- Income tax 8-40%;
- Social insurance contributions Medium (8%);
- Cost of living Very high (> UK);
- Crime and corruption Low – very low/medium-low;
- World Bank ‘Doing Business’ 2017 world rankings 59th out of 190;
- Ease of opening a bank account Positive, and
- Cost of registering a company Low (less than £200)
MALTA
Malta has worked hard to become an ecommerce hub in the centre of the Mediterranean and it has a long and fascinating history. A key part of this ecommerce activity has been in gambling and this has potentially tarnished its reputation as it is seen by many countries/organisations as a centre of gambling operations in Europe.
This in turn has potentially led to other challenges.
Malta does not yet have a strong e-payments sector but has a growing finance centre, experience of supporting the cross-border regulated online gaming (where some of the necessary skills and experience are highly transferable to the
e-payments sector) and it shows a willingness to adapt and encourage new business models and legal structures.
Malta’s geographic position means it is well suited to take advantage of opportunities in Europe, Middle East and Africa.
KEY FACTS
- Corporation tax 35% (foreign shareholders receive 6/7 rebate bringing effective rate to 5%), VAT 18%;
- Income tax 15-25%;
- Social insurance contributions Medium (10% subject to maximum caps too);
- Cost of living Low (significantly < UK);
- Crime and corruption Low & medium World Bank ‘Doing Business’ 2017 world rankings 76th out of 190;
- Ease of opening a bank account Negative, and
- Cost of registering a company High (> £1,000 excluding additional capital requirements).
SWEDEN
Sweden has been a leader in use of e-payments due to banks and merchants investing and supporting a move to a more cashless society since the 1990s. The regulators have significant experience in regulating PSPs and the payments sector and are open to advancing technologies which will assist consumers.
The authorisation and regulation of PSPs in Sweden is undertaken by the Finansinspektionen.
The Swedish take a practical stance to AML, supporting a risk-based approach – major local compliance issues (including warnings and fines) have related to physical money exchanges that have implemented poor AML practices.
KEY FACTS
- Corporation tax 22%, VAT 25%;
- Income tax 31-54%;
- Social insurance contributions Very high (approximately 30% of gross salary);
- Cost of living High (equivalent to UK and Denmark);
- Crime and corruption Low;
- World Bank ‘Doing Business’ 2017 world rankings 9th out of 190;
- Ease of opening a bank account Very positive, and
- Cost of registering a company Low (2,200SEK, approximately £2000).
