Documents considered by the Committee on 4 July 2018 Contents

5SEPA: cost of cross-border money transfers

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee

Document details

Proposal for a Regulation amending Regulation (EC) No 924/2009 as regards certain charges on cross-border payments in the Union and currency conversion charges

Legal base

Article 114 TFEU; ordinary legislative procedure, QMV



Document Number

(39616), 7844/18 + ADDs 1–2, COM(18) 163

Summary and Committee’s conclusions

5.1Within the European Economic Area (EEA), electronic payments in euros are governed by the standardised rules and technical specifications of the Single Euro Payments Area (SEPA). While the practical implementation of SEPA is largely in the hands of the European banking and payment industry via the European Payments Council (EPC), the legal framework that underpins it is laid down in EU law.

5.2While EU’s SEPA regulations have brought down the cost of cross-border payments in euro within the single currency area specifically,70 the rules also require payment services providers (PSPs) in any EEA country—including those outside of the Eurozone—to price domestic and cross-border transfers in euros the same. However, the benefits of the restrictions on charges for cross-border payments have been limited in eight EU Member States, including the UK, that do not use the euro.71 This is because PSPs in those countries can price these transactions as they would a domestic transfer in euros, which are obviously not common and usually more expensive than a domestic transfer in the local currency. This is despite the fact that PSPs in all EEA countries, irrespective of their domestic currency, also have access to the technical payments infrastructure used within the Eurozone to keep the costs of euro-denominated transfers low.

5.3To bring the costs of euro payments down for consumers and businesses in Member States that do not use the single currency locally, the European Commission in April 2018 proposed a change to the legal framework underpinning SEPA.72 The new Regulation would require the nine non-Eurozone Member States to ensure that PSPs in their territory equalise fees for sending or receiving a payment in euros with those for domestic transfers in their national currency. That means, for example, that the UK—while covered by the Regulation under the terms of its EU membership or any post-exit transitional arrangement—will have to ensure that British banks treat an incoming or outgoing payment in euros as if it were in sterling73 (which, all other things being equal, would significantly reduce or altogether eliminate the fee charged for such transfers, card payments or cash withdrawals). The European Commission estimates the annual EU-wide benefit to consumers and businesses would amount to €900 million (£793 million) at the expense of payment services providers.

5.4In parallel, the Commission also proposed new transparency requirements for intra-EU currency conversions (i.e. where consumers are offered different options for currency conversion when making a card payment or cash withdrawal in a Member State that uses a different currency than their home country). As proposed, the new requirements would apply irrespective of whether the transaction is already denominated in the currency of the customer’s payment card—so-called dynamic currency conversion—or takes place in the currency of the country of transaction.74 These rules would be given force of law via a future Delegated Act of the Commission, which in turn would be based on new detailed technical standards to be developed by the European Banking Authority (EBA) in the coming years. Before the new transparency requirements were to take effect in 2022, a maximum currency conversion charge would apply as an interim measure.

5.5The Economic Secretary to the Treasury (John Glen) submitted an Explanatory Memorandum in April 2018 setting out the Government’s position on the proposal. In it, he notes the UK is “broadly supportive” of the new Regulation because it would “make financial services more affordable”. As regards the implications of the UK’s withdrawal from the EU, and the Government’s policy of leaving the Single Market and therefore the effects of the EU’s directly-applicable SEPA framework, he stated only that “the applicability of the proposed Regulation will depend on the future relationship” with the EU.

5.6The European Scrutiny Committee first considered the proposal at its meeting on 6 June 2018, and concluded that the price cap on receiving or sending euros in the UK was likely to apply because the new SEPA Regulation is expected to take effect in early 2019. This will either be before the UK formally leaves the EU or, if the Withdrawal Agreement is ratified, during the post-Brexit transitional arrangement when the UK will continue applying EU law and stay in the Single Market (and therefore also the Single Euro Payments Area).

5.7The situation after the transition is less straightforward. A large number of British banks make use of the UK’s membership of SEPA to offer euro-denominated direct debits and credit transfers under the SEPA legal framework and payments infrastructure.75 To preserve this access for its banking sector, the UK would need to negotiate a new Swiss-style arrangement with the EU and the European Payments Council on continued membership of SEPA.76 That would require continued adherence—referred to as “functional equivalence“—to several pieces of EU payments legislation as they evolve,77 but without the UK’s current influence and vote over future amendments to those laws in the Council of the EU or the European Parliament.

5.8In light of this, we retained the proposal under scrutiny, and asked the Economic Secretary to estimate the likely benefits of the measure for UK consumers and businesses and to clarify the Government’s intentions with respect to SEPA membership after Brexit. In particular, we inquired whether the price cap for receiving or sending euros would be kept in place domestically—the logical consequence of converting the proposed Regulation into UK law under the forthcoming EU (Withdrawal) Act 201878—even if UK banks lost access to SEPA’s payment clearing and settlement infrastructure that allows euro-denominated payments to be processed fast and at virtually zero cost.

5.9The Minister provided an update on the new SEPA Regulation by letter of 22 June 2018. He notes that:

5.10The Minister also explained that the proposal was “making rapid progress” in negotiations in the Council. This has resulted in broad agreement on the text of the Regulation, which in the view of the EU’s national governments should:

5.11A revised legal text based on the above changes is due to be adopted by the EU Member States’ permanent representatives (COREPER) in July 2018, to serve as the Austrian Presidency’s mandate for negotiations with the European Parliament.82 The UK is expected to support the amended proposal. The Parliament’s Economic & Monetary Affairs Committee (ECON) has not yet announced when it is likely to vote on the SEPA proposal, meaning it is unclear if the changes proposed by the Council are likely to be reflected in the final Regulation. Similarly, pending the Parliament’s consideration of the proposal, the timetable for formal adoption of the Regulation (and consequently the timing of its entry into force) is not yet clear.

5.12We thank the Minister for his latest update on the SEPA proposals. Given the rapid progress being made in consideration of the proposed Regulation on pricing and transparency of cross-border currency conversions involving the euro, it appears likely the new measures would take effect either before the UK’s exit from the EU or—pending ratification of the Withdrawal Agreement—the subsequent transitional period.

5.13However, we are disappointed—but not surprised—that the Minister’s letter provides little new information on the Government’s actual planning for its post-Brexit relationship to the Single Euro Payments Area.

5.14While referring to the European Payments Council position paper, which outlined the requirements for continued UK membership of SEPA as a ‘third country’, the Minister stops short of actually committing to this route. This is, presumably, because of the difficulty of reconciling the Chancellor’s recent dismissal of the use of ‘equivalence’ to preserve some measure of cross-border UK access to the Single Market for financial services83 with the SEPA membership requirement of proving ‘functional equivalence’ with EU payment services legislation.

5.15We have not seen a realistic proposition from the Government that would retain UK membership of SEPA without meeting the existing requirements that apply to third countries. The Minister’s letter refers to ‘no deal’ planning with respect to “third country access criteria for SEPA”, but this seems to be a contradiction in terms: SEPA is a reciprocal system that functions by virtue of an international agreement underpinned by EU law; clearly, in a ‘no deal’ scenario, such an agreement between the UK and the EU—or between UK PSPs and the European Payments Council—does not exist. As a result, the default assumption must be that British banks will lose access to SEPA’s payment settlement and clearing infrastructure when the UK leaves the Single Market (either on 29 March 2019 or at the end of the subsequent transitional period) until an agreement to the contrary is reached. The precise impact of an exit from SEPA on receiving or sending euro-denominated payments in the UK is unclear, but it is likely to result in such transactions becoming costlier for PSPs, and therefore for their customers.84

5.16Similarly, while the Minister refers to the retention of EU financial services legislation in UK domestic law after Brexit, he did not answer our question about the impact of retaining in UK law the proposed Regulation capping fees for cross-border transactions involving the euro. We remain of the view that the proposed Regulation, if retained in substance unchanged under the forthcoming EU Withdrawal Act,85 appears to require UK banks to offer euro transactions at the same price as sterling transactions. This effectively implies offering those payments at a loss if banks did not have continued access to the SEPA infrastructure that currently make cross-border euro-denominated transactions cheap and easy to process.86

5.17We hope the Government’s upcoming White Paper on Brexit will provide further information on its proposals in the financial services area, including SEPA. If it does not we will press the Treasury further on this matter in the coming months. Given that the European Parliament is yet to establish its position on the proposal, we retain the draft Regulation under scrutiny and draw these latest developments to the attention of the Treasury Committee.

Full details of the documents

Proposal for a Regulation amending Regulation (EC) No 924/2009 as regards certain charges on cross-border payments in the Union and currency conversion charges: (39616), 7844/18 + ADDs 1–2, COM(18) 163.

Previous Committee Reports

See (39616), 7844/18 + ADDs 1–2, COM(18) 163: Thirtieth Report HC 301–xxix (2017–19), chapter 13 (6 June 2018).

70 Overall, SEPA has lead to a significant reduction in the cost of transferring money within the single currency area for businesses and consumers: while sending €100 between Eurozone countries cost nearly €20 in 2011, it is virtually free of charge now. See Commission Impact Assessment SWD(2018) 84, p. 85.

71 Sweden has made use of a voluntary opt-in under Regulation 2009/924, under which it has by force of law equalised the pricing of domestic and cross-border transactions in Swedish krona. The Commission impact assessment for its new proposal does not refer to the EFTA-EEA countries.

72 See Commission document COM(2018) 163.

73 The proposal would not affect cross-border credit transfers denominated in sterling or other non-euro currencies such as US dollars or Swiss francs (for reasons set out in the Committee’s Report of 6 June 2018).

74 When making a card payment abroad (i.e. making a cash withdrawal at ATMs and card payments at a point of sale) in a different currency than their ‘home’ currency, a payment service user faces two possibilities: Dynamic currency conversion (DCC), where consumer knows the final amount to pay in their own currency at the moment of payment or withdrawal; or on-network conversion, where the consumer pays in the local currency and the conversion to the consumer’s home currency happens later and the consumer does not know the full cost of the transaction in their ‘home’ currency until after the transaction is completed.

75 UK banks also make use of the pan-EU payments clearing systems Target2 and EURO1, but will by default lose their ability to do so as and when the UK becomes a “third country” outside of the European Economic Area. TARGET2 is an inter-bank payments system for euros operated by the Eurosystem (the European Central Bank and the Central Banks of the Eurozone countries. EURO1 is “the only private sector large-value payment system for single same-day euro transactions at a pan-European level. The EURO1 system processes transactions of high priority and urgency, and primarily of large amount, both at a domestic and at a cross-border level”. It is overseen by the European Central Bank.

76 Switzerland is part of SEPA, the only member that is neither in the Single Market nor a user of the euro as its domestic currency.

77 For example, SEPA membership requires implementation of parts of the second Payment Services Directive, the Funds Transfer Regulation, the Capital Requirements Directive, the SEPA Regulation and the Anti-Money Laundering Directive.

78 The European Union (Withdrawal) Bill is still awaiting Royal Assent at the time of writing.

79 The actual proportion of payments in euro sent to or from the UK is difficult to establish because many UK banks route such transactions via subsidiaries in other EU countries. As a result, central statistics on those payments cannot distinguish between Euro payments routed through another Member State, and Euro payments which originate from that Member State.

80 European Payments Council, “Position paper on Brexit and UK PSPs’ participation in SEPA schemes“ (30 May 2018). The paper also notes that, absent a UK-EU agreement on ‘functional equivalence’, UK PSPs could themselves apply for participation in SEPA schemes. However, that still requires a large degree of UK adherence to EU payments legislation for transactions in euro.

81 This narrowing of the scope of the transparency requirements is in line with the Commission’s own Consumer Financial Services Action Plan, which also did not foresee extending them to on-network currency conversion charges.

82 The House of Commons scrutiny reserve does not apply to decisions taken by COREPER. As the mandate for negotiations will not be subject to a formal vote of approval by Ministers (a so-called ‘general approach’), there is no scrutiny waiver involved to allow the Government to support the mandate. However, the scrutiny reserve will apply when the final Regulation goes before the Council for adoption following trilogue negotiations with the European Parliament.

83 Mansion House speech by the Chancellor (21 June 2018): “The view of the Commission and some Member States is that the only possible route for future financial services access is through the EU’s existing, off the shelf, equivalence arrangements. I don’t agree with that. […] It is piecemeal, unilateral and unpredictable. And therefore does not provide the stability that a well-regulated market requires.”

84 For example, Barclays noted in October 2017 that “reduced UK access to EU payment schemes and infrastructure (SEPA, Target2) could increase transaction costs for cross-border payments”.

85 The European Union (Withdrawal) Bill is still awaiting Royal Assent at the time of writing.

86 The other alternative would be for banks to make domestic transfers in sterling more expensive to soften the financial impact of having to offer euro-denominated transactions at the same price.

Published: 10 July 2018