2022 Wrap-Up: Key Payment Regulatory Developments in the EU and the UK

Innovation and technology, such as around digital payments and crypto-assets, continue to contribute to changes within the payment industry. Regulators across the EU and UK are trying to keep pace with this fast-moving industry and are making efforts to adapt legal frameworks to support innovation and competition, as well as to prevent crime and protect consumers.

This overview provides details of the key 2022 regulatory developments across the EU and the UK within the financial sector, and those which will continue into 2023. The main regulatory developments have involved areas such as consumer credit (buy now, pay later - BNPL), consumer protection, anti-money laundering (AML), crypto-assets and the sanctions regimes imposed on Russia as a consequence of the conflict in Ukraine.

Consumer protection

In the UK, the Financial Conduct Authority (FCA) identified that poor practices by firms in the financial sector, such as presenting information “misleadingly” and poor customer service, have a negative impact on consumer outcome. In July 2022, the FCA introduced a new Consumer Duty, which aims to set higher standards of consumer protection within the financial sector. The duty requires firms, among other things, to act in good faith, to avoid causing foreseeable harm to retail customers and to enable and support retail customers to pursue their financial objectives. The implementation deadline for new and existing products or services that are open to sale or renewal is July 31, 2023. In the meantime, the FCA will monitor if firms have effective plans to comply with the duty.

A detailed analysis of the Consumer Duty can be found here.

Consumer credit and BNPL

In June 2022, the European Council adopted its position on the revision of the Consumer Credit Directive, which will repeal and replace Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers. The revision aims to modernise and enhance the protection of consumers “from irresponsible lending practices that could lead to over-indebtedness”, “for example by ensuring that credit information is presented in a clear and understandable way, and is adapted to digital devices”.

On December 2, 2022, the Council and the European Parliament reached a provisional agreement on the Consumer Credit Directive. The new version of the directive:

• Includes loans up to €100,000 within its scope.
• Article 2, paragraph 2(c) removes the €200 minimum threshold provided by the previous version of the mentioned article.
• Includes loans offered through crowdlending platforms (Article 2, paragraph 1 of the revisioned directive) within its scope.
• Includes BNPL products (Article 2, paragraph 1 of the revisioned directive) within its scope.

The provisional agreement is subject to approval by the Council and the European Parliament to be published as a directive.

In the UK, on December 9, 2022, HM Treasury launched a consultation on reform of the Consumer Credit Act (CCA). According to the Treasury, “the overall objective for this reform is to modernise and streamline [consumer credit] regulation to the benefit of consumers and business”.

On November 22, 2022, the FCA published proposals aiming to enhance the credit information market to deliver higher-quality information on the financial situation of individuals applying for credit, so as to support affordable and appropriate access to credit. The consultation will close on February 24, 2023.

In February 2021, the FCA commissioned the Woolard Review to carry out a review of the unsecured credit market, including the need to regulate BNPL. Following the review, HM Treasury launched a consultation on BNPL regulation in October 2021, which closed in January 2022. In June 2022, the government published a summary of the responses received and sought further stakeholders’ views on short-term interest-free credit (STIFC) provided directly by merchants to reach a final decision on the scope of the regulation. A consultation on draft legislation is expected to be published imminently.

Combating fraud

In May 2022, the UK’s Payment Systems Regulator (PSR) launched CP22/2: Confirmation of Payee (CoP): Requirements for further participation in CoP. In October 2022 followed the publication of PS22/3: Extending Confirmation of Payee Coverage, which states that the majority of transactions made via the Faster Payments System (FPS) and Clearing House Automated Payment System (CHAPS) are to be covered by CoP by October 2024. As explained by the PSR: “the CoP service is designed to prevent accidentally misdirected payments and APP [authorised push payment] scams by checking the name of the account holder with the account number and sort code.”

In September 2022, the PSR published CP22/4: Authorised push payment (APP) scams: Requiring reimbursement. The consultation closed on November 25, 2022, and its proposals aim to combat fraud and to introduce a mandatory reimbursement to defrauded victims to be borne by payment service providers (PSPs) in most cases.

PSD3

On May 10, 2022, the European Commission launched three consultations:

• Payments services consultation to gather feedback on the application of the revised Payment Services Directive (PSD2) and on open finance to assess the “directive’s application and impact (backward-looking dimension) and whether an amendment to the Directive is needed (forward-looking dimension)”. This consultation closed on August 2, 2022. Outcomes of the consultation have been published, including feedback received.
• Targeted consultation on the review of PSD2 to assess whether the directive needs to be updated to support innovation within payments, while ensuring security of payments and consumer protection. This consultation ran until July 5, 2022. Outcomes of the consultation have been published, including received contributions.
• Targeted consultation on open finance framework and data sharing in the financial sector to gather feedback on open finance, consumer protection and the sharing of aggregating data for the purpose of supervision, as well as data sharing between firms for the purpose of compliance. This consultation ran until July 5, 2022. Outcomes of the consultation have been published, including received contributions.

Financial Services and Markets Bill

In the UK, on December 9, 2022, the FCA published its approach to HM Treasury's “The Future Regulatory Framework (FRF) Review”. The outcomes of the review will be transposed via the Financial Services and Markets Bill. Among the proposals that the bill introduced to parliament on July 20, 2022:

• Brings digital settlement assets into the scope of regulation when used as a form of payment (Schedule 6).
• Provides measures to support financial inclusion, including:
• Supporting access to cash.
• Enhancing quality of financial promotions.
• Strengthening protection for victims of authorised push payment scams.

Instant payments

On October 26, 2022, the European Commission adopted a legislative proposal to make instant payments in euros available to all citizens and businesses holding a bank account in EU member states and European Economic Area (EEA) countries. The proposal aims to ensure affordable, secure and smooth instant payments across the EU; it is open for feedback until January 5, 2023.

Digital payments

On May 15, 2022, the UK’s PSR published the Panel's Digital Payments Initiative report, followed by its response in July 2022. The intention of the PSR is to identify and remove obstacles to digital payments, as well as to promote financial inclusion.

PSR’s market reviews

In June 2022, the PSR launched two market reviews:

• MR22/1.1: Market review of card scheme and processing fees to understand the cause of the increase of scheme fees paid by acquirers since 2014.
• MR22/2.1: Market review of UK-EEA consumer cross-border interchange fees (IFs) to assess the reasons behind the increases in interchange fees (IF) rates for Visa and Mastercard’s consumer debit and credit UK-EEA card-not-present (CNP) transactions since the UK has withdrawn from the EU.

In October 2022, the PSR published:

• PS22/2: Card-acquiring market remedies: Final decision, which contains final remedies to market practices that “restrict merchants’ ability and willingness to search and switch between card acquirers”. The following remedies are to be implemented by 14 directed PSPs:
• A maximum duration of 18 months for point of sale (POS) terminal lease and rental contracts with a rolling monthly contract to allow switching (January 2023).
• Remedies around trigger messages to prompt businesses to shop around and/or switch (July 2023).
• Providing summary boxes, including pricing and non-pricing information to be sent to individual business in conjunction with a new online quotation tool to compare services (July 2023).
• The final terms of reference for MR22/1.2 on scheme and processing fees and MR22/2.2 on UK-EEA consumer cross-border interchange fees. The regulator’s report, including interim conclusions on card scheme and processing fees, is expected to be published in Q4 2023 and a final report, which would include any proposed remedies, in Q2 2024. The PSR’s report, including interim conclusions on UK-EEA consumer cross-border interchange fees, and a final report are expected to be published, respectively, by Q3 2023 and Q4 2023.

On December 15, 2022, the PSR published MR22/2.4: Impact of the UK-EEA cross-border interchange fee increases working paper, which aims to gather feedback on:

• “The functioning of a four-party card payment system and of the changes to the rates of multilateral interchange fees (MIFs) in scope”.
• The PSR’s considerations on the impacts on UK users of the higher IF rates for Mastercard and Visa’s consumer debit and credit UK-EEA CNP transactions since the UK’s withdrawal from the EU.

This consultation closes on January 19, 2023.

Anti-money laundering

On June 29, 2022, the European Council achieved a partial political agreement on the proposal to create the Anti-Money Laundering Authority (AMLA) to coordinate national authorities. The partiality of the agreement is due to the fact that the location of the new authority’s headquarters has still not been determined. The authority, according to the proposal, is expected to be fully operational, exercising its supervisory powers, by the beginning of 2024.

The proposal is part of a EU legislative package to strengthen the AML framework and the potential impact on the financial market published in July 2021, including:

• New regulation on AML/CTF (AMLR).
• 6th Anti-Money Laundering Directive (6th AMLD).
• Revision of Regulation 847/2015 on information accompanying transfers of funds (FTR2).

The aim of this package is to enhance the detection of suspicious transactions and activities and to strengthen the prevention of money laundering and terrorist financing activities, as discussed here.

In June 2022, the UK government published the Review of the UK’s AML/CFT regulatory and supervisory regime, which followed the call for views launched in July 2021. The review focused on enhancing the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) in terms of an effective application of a risk-based controls approach and developing an advanced AML oversight regime. A second consultation is expected to gather feedback on proposed supervision models.

In September 2022, the UK submitted the Economic Crime and Corporate Transparency Bill to parliament. It followed the introduction of the Economic Crime (Transparency and Enforcement) (ECTE) Act 2022, which received royal assent on March 15, 2022. The act and the bill are part of a package of reforms that aim to combat financial crime. The act requires overseas entities within the scope to register with the Companies House, among other things. The bill aims to make “it harder for kleptocrats, criminals and terrorists to engage in money laundering, corruption, terrorism-financing, illegal arms movements and ransomware payments”.

Crypto: Travel rule

The Financial Action Task Force’s (FATF) Recommendation 16 on wire transfers establishes the so-called travel rule, which provides that “countries should ensure that financial institutions include required and accurate originator information, and required beneficiary information, on wire transfers and related messages”.

In June 2022, the European Council reached a provisional agreement on transparency of crypto-asset transfers, which will introduce the travel rule for crypto-asset transfers in the EU. The provisional agreement would need to be confirmed by the Council and the Parliament before its formal adoption.

In July 2022, the UK introduced the travel rule via Part 5 of the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 (S.I. 2022/860), which will enter into force on September 1, 2023.

Markets in Crypto-Assets Regulation (MiCA)

On June 30, 2022, the Council presidency and the European Parliament reached a provisional agreement on the Markets in Crypto-Assets Regulation (MiCA) proposal, which aims to create a regulatory framework for crypto-assets, crypto-asset issuers and crypto-asset service providers and, among other things, will require crypto-asset service providers (CASPs) to obtain an authorisation to operate within the EU. As reported by the European Parliament, the adoption of the regulation will be voted upon “shortly”.

Cybersecurity

On May 10, 2022, the Council presidency and the European Parliament reached a provisional agreement on the Digital Operational Resilience Act (DORA), which aims to provide a framework to enhance information technology (IT) security in the financial sector. On November 28, 2022, the European Council adopted DORA, constituting the last step in the legislative process before publication in the official journal of the European Union.

In the UK, the government has taken different steps to strengthen cybersecurity resilience, including:

• The launch in January 2022 of a consultation on a legal framework to enhance resilience against cyber-attacks, by mandating, among other things, cyber incidents reporting requirements.
• A call for views on data storage and processing infrastructure security and resilience published in May 2022, which focuses on data centre infrastructure and cloud platform infrastructure. The call for views closed on August 7, 2022.

Fintech

On May 4, 2022, the European Banking Authority (EBA) published a report on non-bank lending in response to the European Commission’s February 2021 call for technical advice on digital finance and related issues. The report recognises that innovation in finance can promote competition and bring benefits for consumers. However, it also states that the provision of lending by non-bank entities creates risks in areas such as supervision, consumer protection and AML/CTF.

The UK has launched several initiatives to support innovation and competition within the financial sector, including the following:

• June 23, 2022 - Evaluation paper “Supporting innovation in ESG [environmental, social and governance] data and disclosures: the digital sandbox sustainability pilot”. The paper focuses on the outcomes of the Sustainability Pilot, run between November 2021 and March 2022, focused on addressing challenges for environmental, social and governance (ESG) data and disclosures. This pilot followed a first pilot, called “Digital Sandbox”, run in 2020, which focused on addressing challenges aggravated by COVID-19 and which aimed to contribute to the discussion on regtech and fintech.
• August 24, 2022 - Diversity, Equity and Inclusion (DEI) Innovation Spotlight to encourage firms to apply to the ongoing sandboxes, specifically the Regulatory Sandbox, to test products and services with real consumers Innovation Pathways, for firms seeking to understand the FCA regulatory regime, but are not ready to test.
• October 4, 2022 - UK Digital Strategy to promote financing digital growth and support UK businesses through digital technology.
• October 25, 2022 - DP22/5 on Competition Impact of Big Tech on Financial Industry. The discussion paper is open for consultation until January 15, 2023 to gather feedback on the impacts (benefits and harms) of bigtechs’ entry into retail financial services.

Sanctions against Russia and Belarus

As a consequence of the crisis in Ukraine following Russia’s invasion, multiple jurisdictions have issued sanctions against Russia and Belarus in 2022.

The EU issued a first package of sanctions against Russia in February 2022, limiting Russia's access to the EU’s capital and financial markets and services, as well as a ban to prevent ten Russian and four Belarusian banks from making or receiving international payments using SWIFT. A full list of the EU sanctions against Russia and Belarus can be found, respectively, here and here.

In the UK, former Prime Minister Boris Johnson announced the first tranche of sanctions in February 2022. Since then, the Russia (Sanctions) (EU Exit) Regulations 2019 had been amended by 16 regulatory instruments at the time of writing, including a ban on providing financial services and funds connected to the relevant bans. A full list of sanctions against Belarus can be found here.

Conclusion

Innovation and the increasing use of technology in financial services enhance competition and provide more choices for consumers; however, they also bring risks and, therefore, regulations need to adapt to protect markets and consumers. As a result, in 2022, many developments have been centred around consumer protection, anti-money laundering and crypto-assets. Financial sanctions on Russia and Belarus have also been used as a way to try and curtail the war in Ukraine by cutting off these countries’ access to financial means.

Many of these developments emerged in 2021, such as the EU AML package of proposals and the new consumer duty rules, and will continue into 2023. The actions needed to finalise and implement such rules will stay on the agenda for the next few years; for example, the EU’s AMLA will become fully operative in 2024 and the UK Consumer Duty will enter into force in September 2023. Both the EU and the UK are continuing to make efforts to ensure that the financial sector is secure and consumers are protected.