Future of the UK payments sector: HMT review of Payment Services Regulations and call for evidence on the wider payments landscape

In January 2023, HM Treasury (HMT) published its statutory review of the Payments Services Regulations 2017 (PSRs) (PSRs Review), alongside a call for evidence on the wider payments landscape, including on the Electronic Money Regulations 2011 (EMRs) (Payments CFE). HMT requests feedback on the Payments CFE by 7 April 2023.

In this blog post, we give an overview of the PSRs Review and the Payments CFE and provide some key takeaways.

1. Key takeaways

• UK/EU divergence: The PSRs Review and Payments CFE demonstrate the UK's preparedness for divergence from EU payments law following Brexit. With the EU currently reviewing the Payment Services Directive (PSD2) to inform a potential PSD3, we will likely see divergence between the reformed UK PSRs and any EU PSD3, although the extent of such divergence is currently unclear. The government also notes that it will continue to monitor the impact of regulatory change in the UK on the UK's continuing participation in the Single Euro Payments Area (SEPA). Further divergence could have a real impact on firms operating across both the UK and the EU, so we encourage firms to consider how this will impact their business and compliance frameworks.
• Pace of change: The government recognises that the pace of change in payments policy has been a concern for some stakeholders in recent years. As it considers the replacement of retained EU law in this area, policy changes will only occur where there are concrete benefits or risks, and not for their own sake. The government has also said it is committed to ensuring that the different workstreams are joined up.
• Approach to regulation: The FCA will likely have a much more prominent role in rule-making once the Financial Services and Markets Bill (FSM Bill) is passed. Following this 'FSMA model' (see below) should mean that future payments regulation will become more responsive to the needs of an evolving payments landscape.
• 'Cancel culture', fraud prevention and safeguarding: The government has made it clear that it "does not support 'cancel culture'", in the context of Payment Service Providers (PSPs) terminating services due to the publicly held views of payment service users, and is considering whether further reform is needed in this area. The government is also considering ways to improve fraud prevention and safeguarding customers from firm insolvency.

2. The PSRs Review

The PSRs set out the framework for the regulation of PSPs in the UK. The PSRs Review, which satisfies HMT's statutory obligation to review the legislation, makes the following observations:

• Innovation and competition: The PSRs provide the foundation for the regulation of a strong, innovative and competitive UK payments sector, whilst also ensuring adequate customer protection.
• Wider payments landscape: However, the success of the PSRs has not occurred in isolation. For example, additional drivers have contributed to the success of Open Banking in the UK, including the Competition and Markets Authority's (CMA) work in this area (e.g. the CMA's 2016 review into retail banking). The payments regulatory framework, and financial services regulation more generally, need to keep up-to-speed with new market developments, including in relation to cryptoassets.
• Deficiencies: There are several areas where the payments regulatory framework is not working as well as it could, particularly against a backdrop of fast-moving market developments and the post-Brexit environment. The Payments CFE – which we summarise in our Payments CFE section below – seeks to gather information to help tackle these deficiencies.

Key findings:

• Agile and proportionate regulation: The government is concerned that the legislative nature of the PSRs makes the payments framework less agile. In order to make payments regulations "future-proofed, agile, and proportionate", the government will consider whether to apply the 'FSMA model' as outlined in the Future Regulatory Framework Review, where it would delegate the making of firm-facing rules in the payments sector to the FCA under a framework set by the government and Parliament. We note the illustrative FCA Rulemaking for Payments statutory instrument ("SI") (and its accompanying policy note), published as part of the Edinburgh Reforms in December 2022, which seeks to fill the gaps in the FCA's rulemaking powers not provided for directly in the FSM Bill. The FSM Bill is expected to receive Royal Assent in spring 2023 and the government has said that it expects to make "significant progress" on the review, repeal and reform of the first tranches of retained EU law (which includes payment services and e-money legislation) by the end of 2023.
• Consumer protection: Whilst the government believes that the PSRs – alongside the EMRs – provide an appropriate baseline of consumer protections, it has the following concerns:
  • Safeguarding customers from firm insolvency: Despite the introduction of the Payment and Electronic Money Institution Insolvency Regulations 2021, the government believes clearer regulation is needed to ensure more efficient safeguarding of customer funds from firm insolvency and that this can be best achieved by transferring to the FCA responsibility for developing and delivering the safeguarding regime for payments and e-money. The government has invited the FCA to consult on this later in 2023.
  • Contractual protections for payment service users: In relation to the termination of payment services contracts by PSPs, the government has stressed that PSPs must comply with the two-month notice period requirement and ensure fair and open communication with customers. The government is considering whether further reform is needed in this area. This follows reports of a major PSP's immediate termination and subsequent reinstatement of a number of user accounts due to the publicly held views of those users, which the government suggests raises questions around freedom of expression.
  • Protecting consumers from fraud: The FSM Bill proposes amending the PSRs to enable the Payment Systems Regulator to mandate reimbursement of authorised push payment ("APP") scams, for which there is currently no legislative framework for victim reimbursement or PSP liability. The Payment Systems Regulator consulted on its approach in 2022. The government is also:
    • considering whether a more outcome-based approach to authenticating payments is required;
    • intending to gather evidence on whether a more flexible, risk-based approach could be taken to the D+1 settlement requirement; and
    • considering whether there may be benefits to enabling receiving banks to delay the crediting of funds where they suspect they are hosting a fraudster's account.
• Resilience and integrity of the UK payment market: Although the PSRs and the EMRs play a key role in the transformation of the UK payments landscape, the government believes further reform and new regulation is required to keep pace with markets developments. Key areas include ongoing work in relation to: (i) bringing cryptoassets into the regulatory perimeter (see our summary of recent developments here); (ii) applying the FSMA model of financial services regulation, including in respect of payments regulation; and (iii) the supervision of systemic payment entities.
• Competition in the interests of consumers: The government emphasises that the UK has a competitive payments sector, and draws particular reference to Open Banking. Other potential areas of reform include the information requirements set out in the PSRs and the retained EU law version of the Regulation on cross-border payments (the Cross Border Payments Regulation), and ensuring fair access to payment systems.

3. Payments CFE

We set out the key areas on which the government is seeking views as part of its Payments CFE below:

4. Other initiatives

For an overview of the changes taking place in the payments sector, some key recent developments are set out below:

• Systemic payments entities: This HMT consultation and call for evidence was published in July 2022 and focused on, among other potential reforms, the Bank of England's supervision of systemic payments entities. The government intends to respond to the consultation during the course of 2023.
• Regulation of cryptoassets and stablecoins: The proposed framework for the regulation of cryptoassets and stablecoins is set out in the FSM Bill, which is expected to receive Royal Assent in spring 2023. The government published its consultation on the regulatory regime for non-stablecoin cryptoassets in early February (see our briefing here) and is expected to publish its consultation on the framework for fiat-backed stablecoins shortly. The government and the Bank of England also recently launched a consultation on a digital pound (see our briefing here).
• Open Banking: The government states that further unilateral efforts will be needed to manage the transition of Open Banking from being a "competition remedy" to being a "permanent fixture of the UK fintech ecosystem". Considerable developments are taking place in the Open Banking space. The UK's Joint Regulatory Oversight Committee (JROC) is currently undertaking work on developing the strategic roadmap and governance model for Open Banking – including finalising design recommendations for a future Open Banking entity – and the government is developing a long-term regulatory framework. JROC published a progress update on its work on 16 December 2022 and its final recommendations are due to be published in Q1 2023.
• Fees: The Payment Systems Regulator published final terms of reference for its two market reviews into card fees; one on scheme and processing fees (interim report expected Q4 2023 and final report expected Q2 2024) and the other on cross-border interchange fees (interim report expected Q2/Q3 2023 and final report expected Q4 2023). Alongside publication of the PSRs Review and Payments CFE, the government also published the Post Implementation Review of the Payment Card Interchange Fee Regulations 2015.