Key developments of interest over the last month include: IOSCO publishing its final Policy Recommendations for Crypto and Digital Asset (CDA) Markets; the UK government publishing a response to its previous consultation and call for evidence on proposals for the future financial services regulatory regime for digital assets as well as the FCA and Bank of England publishing proposals on the UK stablecoins regulatory regime; the European Parliament's ECON Committee publishing draft reports on the proposed PSD3 and Payment Services Regulation; and the UK government publishing a Future of Payments Review 2023 report.
STOP PRESS: Seventh edition of UK Financial Services Regulatory Initiatives Grid published
On 30 November 2023, the UK Financial Services Regulatory Initiatives Forum published the seventh edition of the Regulatory Initiatives Grid setting out the regulatory pipeline for the next 24 months. Among other things, regarding the process of repealing and replacing retained EU law a new Smarter Regulatory Framework (SRF) section has been added in response to stakeholder feedback. This brings all SRF initiatives into one place and reports on progress for each. The SRF payments and cryptoassets sub-section mentions (i) repeal of the Payment Accounts Regulations 2015 Part 2 (disclosure requirements) with effect from 1 January 2024 and (ii) in relation to the repeal and replacement of the retained EU regulation of payment services and e-money (PSD2/EMD) ‘where necessary’, further information on a timeline will be communicated ‘as and when known’. The Forum intends to publish the next edition of the Grid in H1 2023.
In this Newsletter:
For previous editions of the Payments Newsletters, please visit our Financial Services practice page.
Regulatory Developments: Payments
European Union: European Parliament's ECON Committee publishes draft reports on PSD3 and PSR legislative proposals
On 16 November 2023, the European Parliament's Economic and Monetary Affairs Committee (ECON) published draft reports containing proposed amendments to the PSD3 and Payment Services Regulation (PSR) legislative proposals that were published by the European Commission on 28 June 2023.
The draft report on the PSD3 proposal identifies a number of issues with the current text and proposes amendments on specific areas (such as authorisation and grandfathering, the Settlement Finality Directive, central contact points, access to cash, and the opening of accounts by payment institutions) to ensure that the overall objectives of PSD3 remain consistent with that of PSD2. For example, the proposed amendments aim to clarify the text to make clear that payment service providers already authorised under PSD2 will not need to undergo a full reauthorisation process.
The draft report on the PSR proposal considers that there are "some improvements" to be made to the Commission's proposal. The proposed amendments mainly relate to enhancing transparency measures, strengthening the EBA's role and ensuring better protection for consumers from fraud.
United Kingdom: HM Treasury publishes Future of Payments Review 2023 report
On 22 November 2023, HM Treasury (HMT) published a report on the Future of Payments Review 2023 (the Report), which was launched as part of the Chancellor's Mansion House Reforms in July 2023. The Report aims to provide a 'high-level, strategic view of the digital payments landscape' and a number of recommendations for the Government, the financial services regulators and industry on the steps needed to successfully deliver world leading retail payments. Key points include:
- The Report's leading recommendation is for the Government to develop a National Payments Vision and Strategy.
- There are two recommendations encouraging HMT to rapidly move strong customer authentication (SCA) and other requirements (eg in relation to contactless limits) away from detailed technical standards and into FCA regulatory rules and/or guidance based on outcomes.
- It is recommended that Open Banking should be leveraged to improve the person-to-person bank transfer payments journey.
- The Report also stresses the need to prioritise a basic level of consumer protection and clarity on liability for payments made via Open Banking, to avoid the risk that the new authorised push payment (APP) fraud rules will be misused and invoked to cover a much wider range of claims than intended.
- In addition, there is a recommendation that HMT and the regulators should review whether the way some current regulatory requirements are applied to Fintechs is clear and appropriate, with a view to reducing complexity for smaller firms to facilitate their more rapid growth.
In response to the Report's recommendations, the government announced in the Autumn Statement that it:
- will publish a National Payments Vision in 2024;
- is looking to repeal 'prescriptive EU-derived payments authentication rules' to improve fraud prevention and the customer payments experience, and the FCA will review the rules with a view to adopting an outcomes-based approach, with particular consideration of the contactless limits; and
- is planning to legislate to unlock the full potential of Open Banking-enabled payments next year.
European Union: Council and Parliament announce agreement on proposed Regulation to accelerate rollout of instant credit transfers in euro
On 7 November 2023, the Council of the EU and the European Parliament announced that they had reached provisional political agreement on the text of the proposed Regulation on instant credit transfers in euro.
Under the provisionally agreed rules, payment service providers (PSPs) which provide standard credit transfers in euro will also be required to offer the service of sending and receiving instant payments in euro. Instant payments will allow people to transfer money within ten seconds at any time of the day, including outside business hours, both domestically and to other member states. The proposals also prevent PSPs from charging higher fees than those that apply for standard credit transfers.
Additionally, payment and e-money institutions (PIEMIs) will be afforded direct access to the European Central Bank's payment infrastructure which, following a transitional period, will result in PIEMIs being obliged to offer the sending and receiving of instant credit transfers.
The next step is for both the Parliament and the Council to formally adopt the proposed Regulation. On 23 November 2023, the European Parliament updated its procedure file on the proposed Regulation to indicate that the Parliament will consider it during its plenary session to be held from 5 to 8 February 2024.
United Kingdom: PSR consults on changes to draft review framework
On 9 November 2023, the Payment Systems Regulator (PSR) published a consultation paper (CP23/11) on the way it reviews its general directions and generally imposed requirements. The paper was prompted by new provisions contained in the Financial Services and Markets Act 2023 which require the PSR to ‘keep under review generally any generally applicable requirements’ and to publish a statement of policy in relation to how the PSR will conduct its reviews. The consultation closes on 22 December 2023 and the PSR intends to publish a final policy statement in early 2024.
Italy: Suspicion of fraud in unauthorised payment transactions: reporting to Bank of Italy
On 30 October 2023, the Bank of Italy published instructions (in Italian) to be followed by payment service providers (PSPs) when refunds for unauthorised payment transactions are suspended for justified suspicion of fraud.
As discussed in our recent Engage article on this subject, alongside the instructions the Bank of Italy has also published the mandated template which PSPs must use to notify it of the suspended refund. PSPs are required to send the notification to the Bank of Italy on the tenth day of the following month.
United Kingdom: FCA publishes findings from multi-firm review on anti-fraud controls and complaint handling in firms, focusing on APP fraud
On 7 November 2023, the FCA published the key findings from its review of anti-fraud controls and complaint handling in firms. This involved a high-level assessment of firms' approach to fraud risk management and authorised push payment (APP) fraud.
The FCA chose a risk-based sample of firms to review, including different firm types, sizes and risk profiles, resulting in a mixed sample of 12 current account providers, challenger banks and payment firms.
The review found that firms could do more to strengthen their systems to detect and prevent fraud and that firms are failing to do enough to ensure they are delivering good outcomes under the Consumer Duty. Firms should do more to detect, manage and reduce fraud losses more effectively. Common areas of weakness identified included:
- Insufficient focus on delivering good customer outcomes;
- Management information focusing on commercial risk appetite rather than customer impact or treatment;
- The need to improve the support provided to victims of fraud – particularly those customers who may be more vulnerable; and
- Poor complaint handling, often taking too long to respond to customer complaints, including unclear, confusing, and unhelpful language in decision letters.
Payment account providers are expected to consider the FCA's findings to inform reviews of their own anti-fraud systems and controls as well as their approach to handling customer complaints about fraud. Where shortfalls are identified, firms should take appropriate action to address these. Firms should also ensure sufficient focus is being taken to mitigate risks of money mule accounts (as to which, see the October 2023 Payments Newsletter for more on the FCA's key findings from its recent multi-firm review of payment account providers’ systems and controls against money mule activity).
The FCA will continue to monitor how payment firms are meeting its expectations to slow the growth in APP fraud cases and losses and putting the needs of customers first.
Regulatory Developments: Digital Assets
Italy: First step towards MiCA implementation
On 30 October 2023, the Italian Parliament gave a delegation to the Government to adopt one or more legislative decrees to implement the Markets in Crypto Assets (MiCA) Regulation. This marks Italy’s first steps toward MiCA implementation. The Italian Government will now be required, among other things, to:
- identify the Bank of Italy and CONSOB as “competent authorities” and entrust them with supervisory and investigative powers;
- determine the amount of pecuniary sanctions pursuant to Article 111 of MiCA; and
- introduce crisis management measures for asset-referenced token issuers. Finally, in accordance with the delegation law, these measures would need to be introduced within six months starting from the entry into force of the delegation law.
United Kingdom: FCA finalises guidance on cryptoasset financial promotions
On 2 November 2023, the FCA published its finalised non-handbook guidance on Cryptoasset Financial Promotions (FG23/3) (the Guidance).
While the Guidance does not create new regulatory obligations for firms and, strictly speaking, firms do not need to follow the Guidance to achieve regulatory compliance, the FCA will treat a person as having complied with a rule or requirement if a person acts in accordance with the Guidance. The Guidance therefore serves as an important tool to assist firms in achieving regulatory compliance in relation to the communication and approval of cryptoasset financial promotions.
For further in-depth analysis of the Guidance, and views from the Hogan Lovells Global Digital Assets and Blockchain Practice, take a look at our recent Engage article on this topic.
Global: IOSCO publishes final Policy Recommendations for Crypto and Digital Asset Markets
On 16 November 2023, the International Organization of Securities Commissions (IOSCO) announced that, following its earlier consultation report on the topic published in May 2023, it has published its Final Report with Policy Recommendations for Crypto and Digital Asset Markets.
IOSCO explains that the 18 policy recommendations included in the Final Report, which are addressed to relevant authorities, are designed to support greater consistency with respect to regulatory frameworks and oversight in IOSCO member jurisdictions, to address concerns related to market integrity and investor protection arising from cryptoasset activities.
While the Recommendations are not directly addressed to markets participants, cryptoasset service providers (CASPs) and all participants in cryptoasset markets are strongly encouraged to carefully consider the expectations and outcomes articulated through the Recommendations and the respective supporting guidance in the conduct of their activities including registered/licensed and cross-border activities.
IOSCO separately consulted on proposed policy recommendations for decentralised finance (DeFi) on 7 September 2023, which it states will be finalised by the end of 2023. At that time, IOSCO will also publish an umbrella note explaining in more detail the interoperability between the two sets of recommendations.
United Kingdom: HM Treasury confirms proposals for future financial services regulatory regime for digital assets
On 30 October 2023, HM treasury (HMT) published the response to its February 2023 consultation and call for evidence on the future financial services regulatory regime for cryptoassets, in which it confirmed its final proposals, including its intention to bring a number of cryptoasset activities into the regulatory perimeter for financial services for the first time (i.e. “phase 2” of the government’s approach to regulating cryptoassets). For more on the February 2023 consultation and call for evidence, see the February/March 2023 Payments Newsletter. Some key points from HMT's consultation response include:
- The government intends to proceed as broadly proposed in the consultation, by expanding the list of ‘specified investments’ in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and thereby requiring firms undertaking relevant activities involving cryptoassets by way of business to be authorised by the FCA under Part 4A of the Financial Services and Markets Act 2000 (FSMA).
- There is no intention to expand the definition of “financial instruments” in the RAO to include presently unregulated cryptoassets (but cryptoassets that already qualify as financial instruments such as security tokens will continue to do so).
- Firms undertaking regulated cryptoasset activities will need to adhere to the same financial crime standards and rules under FSMA that apply to traditional financial services activities. So those already registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) will need to seek FSMA authorisation.
- Firms already authorised under Part 4A of FSMA would be expected to apply for a Variation of Permission (VoP) to enable them to undertake newly regulated cryptoasset activities.
- A person will generally be required to obtain Part 4A authorisation from the FCA if it undertakes by way of business one of the following regulated activities in or to the UK: issuance activities; exchange activities; investment and risk management activities (e.g. dealing in cryptoassets as principal or agent, arranging deals in cryptoassets, and making arrangements with a view to transactions in cryptoassets); lending, borrowing and leverage activities; and safeguarding and/or administration (i.e. custody) activities.
- Firms dealing with UK retail consumers should be authorised irrespective of the firm's location.
- The government generally intends to take the approach as proposed in the consultation to establish an issuance and disclosures regime for cryptoassets based on the intended reform of the UK Prospectus Regime.
- The government will introduce a market abuse regime for cryptoassets admitted to trading on a UK cryptoasset trading venue.
- Regarding issues raised in the call for evidence, among other things the response explicitly states that the government does not intend to ban decentralised finance (DeFi), although it reiterates that it would be premature and ineffective to regulate DeFi activities currently. Instead, the government will support efforts at the international level.
In terms of timeline, the government’s aim is for phase 2 secondary legislation to be laid in 2024, subject to parliamentary time.
For more on this development, take a look at this Engage article.
United Kingdom: HM Treasury publishes policy updates on regulation of fiat-backed stablecoins and failure of systemic digital settlement asset firms
On 30 October 2023, HM Treasury (HMT) published an update on its legislative approach for regulating fiat-backed stablecoins (i.e. “phase 1” of the government’s approach to regulating cryptoassets), following on from its consultation on the UK regulatory approach to cryptoassets and stablecoins in January 2021, and the response to that consultation in April 2022.
HMT seeks to regulate activities relating to fiat-backed stablecoins in two ways (though the precise legal drafting is yet to be developed):
- by regulating the use of fiat-backed stablecoins in payment chains – in relation to both mixed (fiat/stablecoin) and pure stablecoin payments – through amendments to the Payment Services Regulations 2017 (PSRs 2017); and
- by regulating the activities of issuance and custody of fiat-backed stablecoins when issued in or from the UK irrespective of their uses (for example whether they are used for payments, store of value or as a settlement asset), by including such activities in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
The update aims to clarify the government's objectives in regulating activities relating to fiat-backed stablecoins, covering: the FCA’s regime, the Bank of England's (BoE) regime, the Payment System Regulator’s (PSR) regime, and co-responsibility of the FCA, BoE and PSR for supervision of systemic fiat-backed stablecoin firms.
HMT intends to bring forward secondary legislation in relation to the “phase 1” activities relating to fiat-backed stablecoins as soon as possible and by early 2024, subject to available parliamentary time.
On the same day, HMT also published a response to its May 2022 consultation on the approach to managing the failure of systemic digital settlement asset (DSA) (including stablecoin) firms.
HMT seeks to make suitable amendments to the existing regulatory approach to managing the failure of payment systems which are of systemic importance to the UK financial system, in order to address the risks arising from the failure of systemic DSA firms (given the differences between traditional payment systems and DSA systems).
The consultation response confirms the government’s intention to apply the Financial Market Infrastructure Special Administration Regime (FMI SAR) under the Financial Services (Banking Reform) Act 2013 (FSBRA), with modifications where necessary, as the primary regime to be used in the event of a failure of an operator of a recognised systemic DSA payment system, a recognised DSA service provider to such payment systems and a non-systemic service provider to such payment systems designated under section 112 FSBRA (in each case as defined in the Banking Act 2009) (together defined as "systemic DSA firms").
DSA firms not included within the modified FMI SAR will continue to be able to access the already-existing corporate insolvency procedures under the Insolvency Act 1986 (including liquidation and administration). The government will consider whether a special administration regime should be developed for non-systemic stablecoin firms, and also whether, in the longer term, a bespoke regime is required for those covered by the extended FMI SAR.
The government intends to lay regulations to implement the policy intent described in the consultation in due course, with the corresponding insolvency rules to follow.
For more on these developments, take a look at this Engage article.
United Kingdom: FCA and Bank of England publish proposals on the UK stablecoins regulatory regime
Following HM Treasury’s October 2023 policy update on plans for regulating stablecoins (see separate item), on 6 November 2023 the FCA and the Bank of England (BoE) published discussion papers providing more details on aspects of the proposed UK regulatory regimes for stablecoins when used as a means of payment.
The FCA's discussion paper sets out a number of proposed requirements in relation to stablecoins, particularly with regards to issuers and custodians of ‘regulated stablecoins’ (i.e. fiat-backed stablecoins issued in the UK and in accordance with FCA rules). The FCA hopes its discussion paper will help inform the development of its regime for fiat-backed stablecoins as a means of payment to help ensure the safe and secure usage of fiat-backed stablecoins.
The BoE's discussion paper provides more details on its proposed regulatory regime for systemic payment systems using stablecoins and related service providers. The proposals aim to ensure confidence in systemic payment stablecoins as a form of private money and to support sustainable innovation in payment services. A deeper dive into the BoE's paper can be found in our recent Engage article which also contains the views of the Hogan Lovells Global Digital Assets and Blockchain Practice.
The deadline for responses to the two discussion papers is 6 February 2024. The BoE plans to consult on the final proposed regime. It is also considering the risks and benefits from innovations in wholesale settlement, including the use of stablecoins for wholesale purposes, and will set out its views on this in due course. Similarly, the FCA plans to engage a range of stakeholders in discussions and to consider industry feedback in developing specific policy proposals, and to draft appropriate new Handbook rules for consultation.
The FCA and BoE discussion papers were published alongside a PRA Dear CEO letter addressed to deposit-taking entities (e.g. banks) in relation to innovations in deposits, e-money and stablecoins (covered in more detail in this Engage article), and a cross-authority roadmap setting out how the various regimes interact together.
For an overview of the key takeaways from all four publications, see this Engage article.
European Union: EBA consults on technical standards and guidelines under MiCA
On 8 November 2023, the EBA published a series of consultation papers on regulatory technical standards (RTS), implementing technical standards (ITS) and guidelines under the Regulation on markets in cryptoassets (MiCA) relating to:
- Liquidity requirements and liquidity stress testing of relevant issuers of tokens;
- Own funds requirements and stress testing of issuers;
- Recovery plans for issuers of asset-referenced tokens and e-money tokens;
- Reporting of transactions with asset-referenced tokens and e-money tokens denominated in a non-EU currency; and
- Supervisory colleges.
The consultations close on 8 February 2024. The EBA intends to hold a hybrid public hearing on 30 January 2024 to discuss the prudential package of MiCA products, of which most of the consultations form part. Interested stakeholders are invited to register using this link by 23 January 2024 at 16:00 CET. A separate virtual public hearing on the consultations relating to reporting and supervisory colleges will be held on 17 January 2024 and interested stakeholders should register using this link by 15 January 2024 at 16:00 CET.
European Union: European Commission launches webpage for feedback on MiCA draft delegated acts
On 8 November 2023, the European Commission launched a webpage seeking comments on four draft delegated acts on:
- Criteria for an asset-referenced token or e-money token to be classified as significant;
- Supervisory measures on product intervention powers (i.e. the ability of a body/authority to restrict or ban the sale of cryptoassets or related activities);
- Procedural rules for the EBA to impose fines; and
- Rules on the supervisory fees charged by the EBA.
Feedback on the draft delegated acts can be submitted until 6 December 2023. The Commission will take into account the feedback received when finalising the delegated acts and it intends to adopt them before the application of the relevant parts of MiCA on 30 June 2024.
United Kingdom: HM Treasury publishes response to consultation on Digital Securities Sandbox
On 22 November 2023, HM Treasury (HMT) published a response to its July 2023 consultation on proposals for a Digital Securities Sandbox (DSS). The DSS is the first financial market infrastructure (FMI) sandbox to be established under powers granted by the Financial Service and Markets Act 2023 (FSMA 2023). It is aimed at testing how existing UK legislation must change to accommodate digital asset technology and the new practices associated with it, enable the financial sector to test and adopt digital asset technology in FMIs, and test the use of FMI sandboxes as a policymaking concept.
In terms of next steps, HMT intends to lay a statutory instrument on the implementation of the DSS shortly. The Bank of England and the FCA will publish details of the application process, together with guidance and rules relating to the DSS.
Australia: Airbnb partners with Klarna to launch Pay Over Time
On 24 October 2023, Airbnb announced that it had expanded its Pay Over Time partnership with Klarna to roll out the offering to Australian customers. This follows the launch of the product in North America in summer 2023 and Airbnb states that they intend to offer the product in 20 countries by early 2024.
Global: Deutsche Bank and Standard Chartered Bank test new payments network
On 23 October 2023, it was announced that Deutsche Bank and Standard Chartered Bank had completed the first Universal Digital Payments Network (UDPN) proof-of-concept transaction.
The parties were able to execute real-time on-chain transfer and swap test transactions between USD Coin (USDC) and Stasis EURO (EURS) stablecoins on the UDPN infrastructure.
North America: Amazon partners with Affirm for BNPL option for small businesses
On 2 November 2023, Amazon announced that it was expanding its partnership with the payments network Affirm to make Affirm the first pay-over-time option available at checkout on Amazon Business (Amazon's business-to-business store). The offering will allow small businesses pay-over-time options of three to 48 months and instant credit decisions.
Global: Ripple partners with Onafriq to deliver cross-border digital payments between Africa and other markets
On 7 November 2023, Ripple announced that it was partnering with Onafriq to facilitate digital asset-enabled cross-border payments between Africa and several new markets including the Gulf Cooperation Council, the UK and Australia.
Global: HSBC partners with Metaco for an institutional digital asset custody service offering
On 8 November 2023, Metaco and HSBC announced their intention to launch a new digital assets custody service for institutional clients who invest in tokenised securities. The offering is scheduled to go live in 2024 and will complement HSBC Orion, which is HSBC's existing platform for issuing digital assets.
United Kingdom: PayPal registered to provide cryptoasset services in the UK
On 31 October 2023, the FCA webpage on registered cryptoassets firms was updated to reflect that PayPal has been registered as compliant with the amended Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). This follows an earlier pause on UK cryptoasset transactions by PayPal.
Global: JP Morgan's Onyx announces the launch of programable payments for JPM Coin
On 10 November 2023, Naveen Mallela, head of JPMorgan’s bank-led blockchain platform Onyx, shared that JPM Coin programable payments were now "generally available" to all institutional clients. Mr Mallela shared a Bloomberg article (paywall) which provided further details including a new dynamic funding option allowing the programming of a range of rules for dynamically funding a bank account in case of shortfalls.
United Arab Emirates: Dubai Islamic Bank partners with Mastercard to facilitate cross-border payment services
On 13 November 2023, Dubai Islamic Bank announced that it had partnered with Mastercard to launch cross-border payment services for peer-to-peer (P2P) and business-to-business (B2B) fund transfers.
The Dubai Islamic Bank considers that access to Mastercard Cross-Border Services will facilitate the movement of funds to any end point across over 140 countries through one secure connection.
Global: Feedzai and Mastercard partner to promote cryptoasset fraud protection
On 20 November 2023, Feedzai announced that they and Mastercard are combining technologies to increase cryptoasset fraud protection for hundreds of millions of consumers.
The collaboration will see Mastercard’s cryptoasset intelligence solution, Ciphertrace Armada, integrate with Feedzai’s RiskOps platform to rapidly notify banks when a transaction appears fraudulent.
Surveys and Reports
Global: Oxford University and Protiviti release their Executive Outlook on the Future of Money, 2023 and Beyond
On 6 November 2023, Oxford University and Protiviti published the key findings of their survey on 'Future of Money, 2023 and Beyond'. The survey encompasses the feedback of 251 company board members, executives and business leaders across North America, Europe and Asia-Pacific. Those respondents believed:
- A cashless future would occur sooner rather than later;
- That they are ready to transition to digital currencies;
- Crime, fraud and corruption would be more prevalent in the future;
- That the US dollar would retain global confidence;
- That regulated central bank-issued currencies were preferable; and
- That heavy government regulation of digital currencies would occur.
North America: Justt publishes its 2023 Chargeback Pulse
On 26 September 2023, Justt released its 2023 Chargeback Pulse which attracted 520 responses from merchants with at least $50 million in revenue in the United States and Canada. Some key takeaways were:
- 40% of respondents report that at least 1% of their companies’ revenue is lost to chargebacks annually;
- 53% of merchants see chargebacks volume growing compared to last year, with only 15% reporting a decrease;
- 42% of merchants now have BNPL offerings, and another 14% plan to add BNPL over the next 12 months; and
- 35% of merchants exceed a chargeback to transaction ratio of 0.9% - the threshold at which Visa places them under greater scrutiny and subject to potential fines.