Payment Services Regulations - a once in a lifetime opportunity to reform?

The race has been on in Whitehall to see which department can form its substantial proposals first on repealing and replacing European legislation, especially with limited parliamentary time left before the 2024 election.

For many in government, the advanced and thriving UK payments sector, with multiple business models and a healthy fintech sector, is a jewel in the financial services crown. Getting its regulation right is therefore critical.

At the heart of this is the Payment Services Regulations (PSRs), our onboarded version of the European Payment Services Directive. HM Treasury (HMT) issued a Review of the PSRs last quarter, looking for improvements to support 'a flourishing, innovative and internationally competitive payments sector' in the UK.

In response, we have identified detailed changes to the regulatory framework that our members believe will foster even more growth and innovation, while securing resilience and protection. We have also taken legal advice on how to ensure any changes do not jeopardise our critical access to the Single Euro Payments Area (SEPA).

How changes can help payments thrive

  • Simplifying regulation: The removal of different layers of regulation which can be difficult for firms to navigate; and a move away from prescriptive requirements, for example in Strong Customer Authentication where acceptable types of authentication technology are specified. The Financial Services and Markets Bill will delegate powers to the Financial Conduct Authority (FCA) and the Payment Systems Regulator to allow for a more flexible approach to changing regulation.
  • Who should be regulated: HMT is currently considering who should be regulated from a 'systemic' perspective in payments (i.e. if the firm suffers a failure will it have a significant impact on the wider ecosystem); while the European Commission is considering whether some newer players should be regulated from a 'conduct' perspective (i.e. in their relationship with the end consumer). This would help ensure a level playing field between providers and also protect end consumers. In the UK, the government is likely to consider whether digital wallet providers and BNPL providers, among others, should be brought into the regulatory perimeter.
  • How payment providers should communicate with customers: At present, payment firms are required to send significant amounts of information to new customers in specific formats, such as paper statements. Allowing for a layered approach, where firms build up communication over time through different methods, would ensure customers receive information at the right time and format; and this also fits better with the FCA's new Consumer Duty outcome for customer information.
  • When and why a payment provider can block an account: We support the government's view that freedom of speech is a fundamental British liberty; however, having access to a payment account is not. There are important gateways in place to ensure providers can manage fraud, illegal activity and credit risk, and upsetting the existing balance of rights between payment providers and customers could significantly impact these protections and also put other customers at risk. 
  • Allowing firms to manage fraud risk: HMT should consider changes that provide extensions to payment processing timeframes for both inbound and outbound faster payments, and therefore provide opportunity for all firms in the prevention of fraud for their customers.

Holding the regulators to account

While a simplified and more agile regulatory framework will have benefits, the payments industry, from large multi corporates through to start up fintechs, needs three things from the UK government and regulators:

  • Certainty and sufficient lead times: so they can plan their own business and innovation changes on top of regulatory ones. In 2023, most firms do not have budget for anything other than regulatory change.
  • Proportionality and coordination: cost-benefit analysis should underpin any major change, and coordination between regulators on significant changes is crucial e.g. New Payments Architecture and Digital Pound infrastructures.
  • Accountability:  there must be a mechanism to hold regulators to account if a change that is implemented does not meet the above criteria. UK Finance has previously recommended a new rule review mechanism and we continue to believe this would be a viable solution.

We can expect a number of associated payments consultations during the rest of 2023 – so stay tuned.