HM Treasury has published a review and call for evidence on the Payment Services Regulations 2017, as well as the outcome of a post-implementation review of the Payment Card Interchange Fee Regulations 2015. Both publications anticipate further changes to the regulatory framework as the Future Regulatory Framework for UK financial services is implemented following the passage of the Financial Services and Markets Bill. There is acknowledgement of the wide range of ongoing policy development and legislative change facing the payments and fintech sector and reassurance that there will be no policy change for change’s sake. However, the Treasury goes on to identify some elements of the framework that may be repealed and replaced to an accelerated timescale including measures highlighted in the government’s review of the systemic perimeter and in this review of the PSRs (enhancing fraud prevention, safeguarding, and the fair protection of customers in terminating payment services).
Payment Services Regulations 2017 (PSRs) review and call for evidence
Summary of review findings
- The Treasury is required by law to carry out a review of the PSRs (which implemented the second EU Payment Services Directive (PSD2)) and publish a report setting out its conclusions.
- Its review has found that, while the PSRs have fostered a strong, innovative, and competitive UK payment sector that is recognised globally, the regulations have not gone far enough on their own.
- The speed of market change has also required the UK, like other major jurisdictions, to take account of broader payments developments to ensure that regulation keeps pace with market developments, including but not limited to the emergence of cryptoassets.
- Recognising these continued market developments, and the UK’s ability to determine its own approach to payments regulation post-Brexit, there are several key areas where the current regulatory framework for payments is potentially not working as well as it could.
- Areas where further developments are expected sooner rather than later are:
- Changes to the safeguarding regime: The government invites the FCA to consult on this later in 2023.
- Access to payment systems: As previously indicated in its consultation on the systemic perimeter, the government intends to ensure there is a single and effective regime governing access to payment systems, in place of regulatory overlap. The government will set out its next steps on this later in 2023.
- Treasury response to consultation on payments regulation and the systemic perimeter: The Treasury confirms that it is currently considering responses to its July 2022 consultation and that it will set out its response later in 2023.
- Fraud prevention and customer protection on termination of payment services: In addition to the above, the Treasury also suggests that the measures on enhancing fraud prevention and the fair protection of customers in relation to the termination of payment services referred to in this PSRs review (see further below) may be subject to an ‘accelerated timescale’.
Call for evidence
The call for evidence accompanying the review focuses on how UK payments regulation should evolve to continue to meet the government’s aims and address the specific challenges highlighted in the review. A full list of questions being asked in the call for evidence is set out at the end of the paper. Key points include:
- Achieving agile and proportionate regulation: The UK payments sector is a ‘success story’, and to maintain its status as ‘one of the most diverse and innovative payments sectors in the world’ the government is determined to ensure that payments regulation is future-proofed, agile, and proportionate. Therefore as it enacts the repeal and replacement of retained EU law for payments, it will consider the relative balance between delegation to the FCA and requirements in statute. It notes that there is a strong case for delegation to the FCA of firm-facing rules, as outlined in the Future Regulatory Framework (FRF) Review, to enable a more agile framework that doesn’t depend on amendment of primary legislation to reflect necessary changes in this fast-moving sector. The following specific issues are highlighted:
- Whether the definitions and scope of the regime are future-proofed for the rapidly changing payments and data landscape, including ensuring that the definitions are enabled for cryptoassets (including initially fiat referenced stablecoins) where relevant;
- Whether it is appropriate to maintain separate authorisation and regulatory regimes for payments and e-money institutions, or the benefits of having a single regulatory framework in this area;
- The extent to which the authorisation requirements for payments and e-money institutions support new market entrants and promote growth, while ensuring sufficient protection for consumers;
- Whether the regime for small payments and e-money institutions supports innovation and growth, while ensuring adequate protection for customers;
- If the regime for payment initiation service providers (PISPs) and account information service providers (AISPs), and related requirements regarding access to payment accounts, support competition and growth.
- Appropriate consumer protection: The framework in this area has generally operated well. However, as the payments landscape has continued to evolve, the government is concerned that in some areas the regulatory framework may not be working as well as it could to protect consumers:
- Reforms to the safeguarding regime: Recent Court judgments (specifically, the Court of Appeal’s decision in Ipagoo) have highlighted ambiguity within the safeguarding regime that the government believes is best addressed through clearer regulation. With an eye to the implementation of the FRF, it invites the FCA to consult later this year on changes to the safeguarding regime in light of market and legal developments.
- Effective contractual protections for payment service users: The government would like to hear more through this review from both providers and users of their experiences and reflections, to assess whether the current framework requires further clarification or wider change to protect matters such as freedom of expression.
- Protecting consumers from fraud:
- On Strong Customer Authentication (SCA), the government believes it right to consider whether a more outcome-based approach to authenticating payments might enable firms to continue to have the flexibility to innovate to meet evolving threats, and to meet the complex and diverse needs of customers, and what this might entail.
- Also, the financial sector has highlighted that the ‘D+1’ execution requirements would benefit from greater flexibility and a more ‘risk-based’ approach: eg in a small number of complex cases where firms ought to be allowed to delay payments if they suspect a customer may be at risk of fraud and they need longer than a day to engage the customer and ‘break the spell’. In tandem, the government is also considering if there may be benefits to enabling receiving banks – if they suspect that they may be hosting a fraudster’s account – to delay the crediting of funds to a payee’s account, before they properly engage the relevant provisions in the Proceeds of Crime Act. The government is prioritising the development of policy in this area and swiftly examining the case for legislative change.
- Ensuring resilience and integrity of the UK payment market: In the traditional payment services and e-money arena, the risks of not keeping up with a dynamic and evolving marketplace will be managed in large part through the approach to regulation that will result from the creation of a comprehensive FSMA model for financial services under the FRF. In addition, the Treasury confirms that it is currently considering responses to its July 2022 consultation on payments regulation and the systemic perimeter and that it will set out its response later in 2023.
- Fostering competition in the interests of consumers: On Open Banking as a tool for enhancing competition in the payments sector, the government comments that it is progressing the further development of Open Banking outside the scope of the current review. Also, the government remains interested in whether the information requirements in the PSRs and the Cross Border Payments Regulation can be enhanced to provide relevant information to consumers, and support a better, competitive market in payment services. In addition, and as previously indicated in its consultation on the systemic perimeter, the government intends to ensure there is a single and effective regime governing access to payment systems, in place of regulatory overlap. The government will set out its next steps on this issue later this year.
- Not just the PSRs: While the government’s statutory review focuses on the PSRs, the call for evidence also seeks input on several inter-connected areas of payments regulation in order to build a proper picture, namely the Electronic Money Regulations 2011 and the Cross Border Payments Regulation.
- Interrelation with PSR’s card fees market reviews: In relation to the Interchange Fee Regulation, the paper states that the government will not pre-empt the findings of the PSR’s ongoing market reviews into card fees (see this Engage article) and will reflect on future interchange policy in due course.
- UK participation in Single Euro Payments Area (SEPA): The Treasury comments that the government will continue to seek to understand and monitor the impacts of regulatory change in the UK and EU on SEPA participation, while recognising that the UK must be able to determine its own regulatory approach.
- Call for evidence complementary to other payments initiatives: In acknowledgement of the wide range of ongoing policy development and legislative change facing the payments and fintech sector, and the potential complexity this can entail for stakeholders, the Treasury states that this review and call for evidence are designed to complement ongoing work on priority payments related initiatives – namely the government work on payments regulation and the systemic perimeter following its July 2022 consultation, stablecoin and cryptoasset regulation under the Financial Services and Markets Bill and beyond, and Open Banking – and provide an opportunity to look at the core of payment services regulation separate from these other initiatives which were launched to tackle new problems and gaps emerging since the regulation came into force. The government is committed to ensuring that the workstreams remain joined up, and to keeping stakeholders informed of how policy is evolving across the payments landscape.
Payment Card Interchange Fee Regulations (PCIFRs) post-implementation review
The PCIFRs implemented aspects of what is now the on-shored version of the EU Interchange Fee Regulation 2015 (UK IFR), which caps interchange fees charged for the acceptance of consumer debit and credit cards. The PCIFRs also designated the Payment Systems Regulator (PSR) and the FCA as the co-competent authorities responsible for monitoring the UK IFR.
Following its statutory post-implementation review of the PCIFRs, the Treasury has found that, based on the current regulatory framework, the policy objectives of appointing competent authorities with appropriate expertise, while making use of existing regulatory structures and processes to ensure efficiency and avoid unnecessary additional costs, could not be achieved in another way that imposes less onerous regulatory provisions.
The Treasury notes that the government has also committed more widely through the FRF Review to ensure that the competent authorities have the powers they need in future to be able to replace direct regulatory requirements in retained EU law, including in relation to payments policy. The government’s wider approach to interchange fee policy – both substantively, and related regulatory powers – will be determined under the government’s programme to enact the repeal of retained EU law in financial services and build a smarter financial services regulatory framework specifically tailored to the UK. Specifically, as retained EU law the UK IFR itself will be repealed in due course, and replaced by a comprehensive FSMA model of regulation through the implementation of the FRF, after the Financial Services and Markets Bill receives Royal Assent.