UK Government’s Payment Services Regulations Review and Call for Evidence

On January 13, 2023, the UK government published a review and call for evidence on the Payments Systems Regulations 2017 (PSRs), which will close on April 7, 2023.

The review is based on Regulation 158 of the PSRs, which requires HM Treasury to periodically review the PSRs and to publish a report to assess the objectives of the regulations. The report sets the objectives of the PSRs, establishes whether these are still relevant and can be achieved via less burdensome regulation.

This analysis focuses on the objectives of the review, as well as what the government has intentionally left outside its scope, its connection with other government initiatives and potential impacts on the payments industry.

Government payments initiatives

The PSRs transposed the European Union’s (EU) revised Payment Services Directive (PSD2) into national law and are part of the retained EU law (REUL), which has been directly applicable in the UK following Brexit. After the UK left the EU, the government has deemed it necessary to review the purpose of the regulations, whose original aim was to support the harmonisation of rules within the EU’s retail payments industry.

Following the launch of the Future Regulatory Framework (FRF) Review consultation in 2020, in November 2021 the UK government published the Financial Services Future Regulatory Framework Review: Proposals for Reform. The aim of those initiatives was to adapt the regulatory framework applicable to financial services, while taking into account the UK’s withdrawal from the EU. The outcome of the review was the Financial Services and Markets Bill, which was submitted to parliament in July 2022, to repeal the financial services REUL. At the time of writing, the bill is in the House of Lords.

In December 2022, HM Treasury published a policy statement on “Building a smarter financial services framework for the UK”, which sets out the government’s approach to repealing and replacing REUL on financial services. The government has also published the Electronic Money and Payment Services (Amendment) Regulations 2023, which, among other things, propose to extend the Financial Conduct Authority’s (FCA) power to regulate authorised electronic money institutions, small electronic money institutions, authorised payment institutions, small payment institutions and registered account information service providers.

In July 2020, HM Treasury launched a call for evidence on its Payments Landscape Review, to which the government published a response in October 2021. The UK government identified four priority areas:

• Faster payments.
• Unlocking open banking to enable safe, secure payments.
• Improving cross-border payments.
• Adapting the payments regulatory framework to ensure it promotes and supports innovation, safeguards consumer protection and ensures payments networks are resilient.

Following this review, in July 2022, the government published Payments Regulation and the Systemic Perimeter: Consultation and Call for Evidence to explore in depth the inclusion of systemically important entities operating within payment chains into the Bank of England regulation, as well as to define the PSR’s regulatory framework and evaluate the potential application of the Senior Managers & Certification Regime to the payment sector. The UK government’s response is expected to be published in 2023.

On February 15, 2023, the Strategic Working Group (SWG), a non-decision making consultative forum on the future of open banking convened by the Joint Regulatory Oversight Committee (JROC), released its final report titled “The Future Development of Open Banking in the UK”. The report provides a deep analysis and aims to assist the JROC — jointly chaired by the FCA and the PSR, with HM Treasury and the Competition and Markets Authority as additional members — in setting out the its recommendations relating to the vision for open banking and the design of the Future Entity, which will succeed the Open Banking Implementation Entity, with the aim of publishing them in Q1 2023.

In December 2022, the UK government announced a consultation on customer information requirements in the Payment Accounts Regulations (PARs) 2015, which closed on February 17, 2023. Back in 2015, the PARs transposed the Payment Accounts Directive into UK law. The government is considering the requirements set out in Part 2, Schedule 1 and Schedule 2 of the PARs on transparency and comparability of fees related to payment accounts “to reduce burdens” for firms. The government’s proposed objectives are:

• Enhancing the transparency and comparability of fees related to payment accounts that are used for day-to-day payment transactions.
• Making the switching of those accounts easier.
• Guaranteeing access to bank accounts with basic features.

Objectives of future payments regulation

The UK government has set the following objectives for the reviewed regulatory framework:

• “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.”

Government’s view on how to achieve the objectives

Achieving agile and proportionate regulation

As articulated in the “government's review: an assessment” section, the UK government considers whether:

• The scope and definitions provided by the regulatory framework applicable to payments services providers (PSPs) are still relevant.
• Payments and electronic money institutions should keep a separate authorisation and regulatory regime.
• The authorisation requirements for payments and e-money institutions promote competition, while ensuring adequate consumer protection.
• The regime for small payments and e-money institutions, on one side, and payment initiation service providers and account information service providers (AISPs), on the other side, encourage innovation and growth, while also ensuring sufficient protection for customers.

Ensuring appropriate trust and protection for consumers

The government considers that the regulatory framework in relation to consumer protection, including protection from PSPs’ failures, risk of fraud and communication, has operated in a satisfying manner. However, the government highlights the lack of recourse to the Financial Services Compensation Scheme in the case of firms’ insolvency. Although rare, when insolvency has occurred, the effects on consumers have been detrimental, such as delays in return and loss of their funds. The cause has been identified as the “high-level nature” of requirements provided by the PSRs and Electronic Money Regulations; this lack of specific requirements can lead to costly and protracted proceedings due to the need for insolvency practitioners to request intervention by the respective courts to seek direction. In 2021, the Payment and Electronic Money Institution Insolvency Regulations 2021 were issued with the aim of offering a remedy to this issue. Nonetheless, the government observes that “court judgments have highlighted ambiguity within the safeguarding regime that is best addressed ex ante through clearer regulation”.

The government is also seeking views and evidence from the industry on the following:

• Whether Regulation 51 of the PSRs (on termination of framework contracts) and Regulation 71 of the PSRs (on limits on the use of payment instruments and access to payment accounts) offer adequate measures to protect payment service users.

In particular, the government refers to the cases in which PayPal Europe terminated its contracts with certain clients, where no official statement has been released by the company on this regard, but allegedly the reason was based on “the publicly held views of PayPal’s users and those associated with them”, for then reinstating the accounts. This has raised concerns regarding the freedom of expression. It is the government’s view that “a notice-period and fair and open communication with a customer must apply in situations which relate to termination on grounds other than suspected or actual criminal offences or when otherwise allowed by law”.

• Whether the regulations offer adequate protection against fraud and strong customer authentication (SCA) requirements that are proportionate to their aims, especially SCA’s impact on financial inclusion, particularly for people with limited or no access to a mobile phone or internet.
• If more flexibility is necessary, in regard to the requirement for banks and other providers to ensure payments are credited to a receiving account by the end of the next working day (referred to as “Day+1” or “D+1”), so that the transfer can be delayed in case of suspicion a customer may be at risk of fraud.
• Whether enabling receiving banks to hold funds before transferring them in a payee’s account, if they suspect fraud and before they implement the relevant Proceeds of Crime Act’s provisions.

Ensuring the resilience and integrity of the UK’s payment market

The government observes that creating a comprehensive Financial Services and Markets Act model for financial services, which extends regulators’ powers to provide direct regulatory requirements in relation to REUL, will help ensure regulations keep pace with and are adapted to meet the fast developments in the market. To this end, the government published a first consultation on the Future Regulatory Framework (FRF) in October 2020 to set out an overall approach to financial services regulation. This was followed by a second consultation, published in November 2021. As mentioned above, in July 2022, the government introduced the Financial Services and Markets Bill and published its response to the consultation, and published a policy statement in December 2022 on “Building a smarter financial services framework for the UK”.

Fostering competition in the interests of consumers

The government supports the existing requirement for PSPs to provide comprehensible and comparable information to payments services users to enable them to make informed decisions about payment services, consequently promoting competition within the payments market. It seeks views on whether these provisions, specifically those provided by the PSRs and the Cross-Border Payments Regulation, could be enhanced.

Furthermore, the government points out that it is its intention to eliminate the overlap of regimes governing access to payment systems by authorised or registered PSPs, one provided for by Regulations 103-104 of the PSRs and the other one stipulated in Part 5 of the Financial Services (Banking Reform) Act 2013.

Outside the scope of the consultation

The government has left topics connected to payments outside the scope of this call for evidence, such as:

• Open banking. The government is developing a long-term regulatory framework, based on the JROC’s recommendations mentioned above, with the SWG’s final report being part of this work. The report includes “an open banking strategic sprint process to address questions set by the [JROC] under three priority areas:
• Payments Strategy Sprint: Unlocking the potential of open banking payments.
• Data Strategy Sprint: Promoting further data sharing in an open banking framework.
• Ecosystem Strategy Sprint: Ensuring a sustainable open banking ecosystem”.
• Stablecoin and crypto-asset regulation. The government plans to investigate this in the future, but no precise date has been specified.
• Reforms to the Bank of England’s supervision of systemic payments entities. These reforms would come alongside a number of wider regulatory developments relating to both the PSR and the FCA, as this has been explored in the Payments Regulation and the Systemic Perimeter: Consultation and Call for Evidence.

Next Steps

The consultation closes at 23:45 on April 7, 2023. Responses can be submitted either to:

• PaymentServicesCfE@hmtreasury.gov.uk, or
• Payment Services Call for Evidence,
  Payments & Fintech,
  HM Treasury,
  1 Horse Guards Road,
  SW1A 2HQ

The government also stated its intention to review the Payment and Electronic Money Institution Insolvency Regulations, to be completed within two years of the regime having come into force throughout the UK (currently applicable in England and Wales). The government invites stakeholders to submit comments on the regime as part of their response to this call for evidence.

The government invites the FCA to consult later this year on changes to the safeguarding regime for payments and e-money, as, according to the FRF review, it will be the FCA’s responsibility under a framework set by government and parliament.

Conclusion

The payments landscape in the EU and UK has evolved and continues to change since the introduction of the EU’s PSD2; the directive has opened up the payments market to new players, specifically payment initiation services and account information services. As a consequence of Brexit, the UK government has decided to review the current financial regulation put in place while the country was still part of the EU, evaluating its objectives and determining whether it is still fit for purpose or whether the same or better could be achieved via less onerous provisions. The latest review and call for evidence on the PSRs 2017 are part of this agenda. However, the government has decided to leave certain related topics, such as open banking, crypto-assets and stablecoins, as well as relevant regulatory authorities’ powers, outside the scope of this consultation, although it expressed its commitment to ensuring that these initiatives stay connected. These matters have or will be explored via different initiatives.

The review affects areas within the payments regulatory framework, such as the authorisation regime, insolvency procedure, customer protection and information requirements. Therefore, depending on the outcome of the government’s call for evidence, any new requirements that may be introduced to this key piece of payments legislation would be of significance to the operations of payment and e-money institutions. Although it is too early to confirm to what extent changes will take place, it is very likely that amendments to regulations will occur, as it is the government’s intention to do so “where a clear and pressing need for change has been identified”.