On 13 January 2023, HM Treasury (Treasury) published a review alongside a Call for Evidence on the Payments Services Regulations 2017 (the PSRs) on how UK payments regulation should evolve to meet the aims of the UK Government (Government) to support an innovative and competitive payments sector.
Alongside the review and Call for Evidence the Treasury have also published a Post Implementation review of the Payment Card Interchange Fee Regulations 2015 (PCIFRS), the Interchange Fee Regulation 2015 (IFR) which is EU derived regulations which caps interchanges fees received by debit and credit card issuers.
In comparison to the EU’s review of the EU Payment Services Directive 2015/236 (PSD2) expected in Q2 of this year, the Government’s call for evidence provides a welcome insight into the Government’s approach to tailoring our existing EU based framework to the UK. This insight provides an overview of these ambitions.
The PSRs form part of retained EU law, the transposition of PSD2. The PSRs require the Treasury to review UK payment services regulations and publish a report setting out its objectives and conclusions.
As the approach of the PSD2 was the integration of retail payments within the European Union, another purpose of the Government’s review is also to refresh the purpose of the objectives following the UK leaving the EU.
As part of the Call for Evidence, the Government is seeking evidence on the following:
- the Electronic Money Regulations 2011 (EMRs) - The regulations provide the framework for authorisation and supervision of electronic money institutions which mirror some of the requirements of the PSRs;
- the Cross Border Payments Regulation- The regulation provides information requirements in the PSRs in regard to the transparency of charges involved in currency conversion.
The FCA’s statutory objectives include:
- securing an appropriate degree of protection for consumers
- protecting and enhancing the integrity of the UK financial system
- promoting effective competition in the interests of consumers
In addition, the draft Financial Services and Markets Bill introduces a secondary objective for the FCA to facilitate the international competitiveness of the UK economy and its growth in the medium to long-term, subject to aligning with international standard.
Taking into the consideration of the rationale for PSD2 with the FCA’s objectives and the government’s objectives, the Government has set out the following objectives as part of the review:
- Achieving agile and proportionate regulation, which facilitates the international competitiveness of the UK economy through growth and innovation in the UK payments sector
- Ensuring appropriate trust and protection for consumers
- Ensuring the resilience and integrity of the UK‘s payment market
- Fostering competition, in the interests of consumers
1. Achieving agile and proportionate regulation, which facilitates the international competitiveness of the UK economy through growth and innovation in the UK payments sector
The Government is determined to ensure new regulation is agile and future proofed and will consider the balance between delegation to the FCA and requirements in statute, noting a strong case of delegation to the FCA for firm-facing rules.
As part of the Call for Evidence the Government will consider the following rules:
- 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 stablecoin) where relevant;
- If it is appropriate to maintain separate authorisation and regulatory regimes for payments and e-money institutions, or the benefits or having a single regulatory framework in this area;
- If 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.
2. Ensuring appropriate trust and protection for consumers
The Government’s opinion is that generally the PSRs and EMRs have established clear protections for consumers and has concluded that the framework has operated well, however the Government has identified the following areas of improvement.
- Protecting customers from firm insolvency: Referencing the Ipagoo judgement which highlighted ambiguity within the safeguarding regime in respect of funds being held on trust, the Government assess that clearer regulation is needed to help ensure customer funds are not eroded. In addition, in adopting a firm-facing approach, the FCA is likely to have more responsibility in delivering a safeguarding regime for payments and e-money firms.
- Effective contractual protections for payment service users: Following a set of high-profile cases where PayPal Europe terminated and later reinstated end user accounts due to publicly held views of PayPal’s users, the Government would like to hear more on experiences and reflections from other firms.
- Protecting consumers from fraud: the Government wishes to take evidence on whether a more outcome based approach to authenticating payments would allow firms to have more flexibility when tackling threats. Another area the Government would like to explore is a risk-based approach to delaying crediting of payments to payees where firms suspect a customer may be at risk of fraud.
3. Ensuring the resilience and integrity of the UK‘s payment market
Some gaps in relation to bringing crypto assets into the regulatory parameter and addressing financial stability in respect of payment infrastructure and payment systems is being brought into the regulatory parameter by the Government. This is already underway and the Government will provide a consultation response on the latter later this year.
4. Fostering competition, in the interests of consumers
Open Banking: Unlocking Open Banking payments is a critical area for delivering on the Government’s vision for the payment sector and the FCA, PSR, and Treasury are developing a long-term regulatory framework for Open Banking in the UK. In addition, the Treasury, CMA, FCA and PSR who form the Joint Regulatory Oversight Committee is expected to produce a final report in Q1 2023 for the next phase of Open Banking.
Ensuring customers can make informed decisions: The Government is interested in whether information requirements set out by the PSRs and Cross Border Regulations provide relevant information to customers.
Ensuring fair access to payment systems: The Government’s intention is to ensure a single and effective regime governing access to payment systems. Next steps are expected to be laid out this year following the Government’s consultation on the systemic perimeter.
Regarding stablecoins, the Government will consult on regulation in due course.
The Post Implementation Review of the Payment Card Interchange Fee Regulations 2015 (PCIFR)
The PCIFRs appoint competent authorities, the PSR and FCA, to monitor and enforce compliance with the IFR and enables noncompliance to be penalised.
Using data from the PSR on the costs of supervision and enforcement of the IFR as well as annual reports the Government have formed the post-implementation review.
The post-implemenation review is relevant only to the PCIFRs. The IFR will be repealed and replaced by a Financial Service and Markets Act (FSMA) model in due course. The Financial Services and Markets Bill is currently making its way through Parliamentary stages.
Separately, the Government have also committed to a wider review of regulatory frameworks, to ensure competent authorities have the powers needed to future proof regulation in the Future Regulatory Framework Review through firm-facing regulation.
The PSR are also currently undertaking a market review of cross-border interchange fees and have published a working paper to understand the increases in interchange fee rates for Mastercard and Visa’s consumer debit and credit card not present (CNP) transactions between the UK and EEA since the UK’s exist from the European Union.
The Treasury have said they will not pre-empt the findings of the PSRs investigations and will reflect on the future of interchange fee policy in due course.
The Payment Regulation Call for Evidence closes on 7 April 2023.
Our Payment Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments.