Payments Sector – Overview and Horizon Scanning FY24/25

PSR requires APP fraud reimbursements

UK Payment Service Providers (PSPs) must reimburse victims (in-scope customers) of APP fraud, save for limited exceptions. The reimbursement requirement is due to come into force on 7 October 2024.

What is the impact?

• New Reimbursement Requirement: The Payment Systems Regulator (PSR) has introduced a new policy for reimbursing victims of Authorised Push Payment (APP) fraud, with a maximum claim limit of GBP415 thousand.
• Consumer Protections: The policy aims to significantly increase fraud prevention and ensure as much money as possible which has been lost to APP fraud is returned to victims.
• Responsibilities and Exceptions: Payment firms can charge a claim excess up to GBP100, which is not applicable to vulnerable consumers. The PSR has recognised that consumers need to continue to be vigilant and careful when making payments and set out circumstances under which the banks may reasonably consider a consumer was not sufficiently careful. Having said that, banks must prove gross negligence to deny a claim, which the PSR deems as a very high bar to satisfy and rely on this exception.
• Implementation Timeline: Payment firms must comply with these obligations by 7 October 2024, with the PSR monitoring the impact of high-value APP scams in the interim.

Future prevention

The PSR has also published a consultation paper in April 2024, focusing on the compliance and monitoring of the APP scams reimbursement requirements to ensure consumer protection.

• Reimbursement Requirement: The document discusses the Faster Payments Scheme (FPS) APP scams reimbursement requirement, aiming to increase fraud prevention investment and enhance customer protections.
• Compliance Monitoring: Pay.UK is responsible for monitoring compliance with the FPS reimbursement rules, and PSPs must report data to Pay.UK to facilitate this process.
• Data Reporting Standards: The consultation paper outlines data reporting standards and obligations for PSPs to support effective implementation and compliance management.
• Consultation Deadline: Stakeholders are invited to provide feedback on the consultation paper by 5pm on 28 May 2024, with non-confidential responses to be made public.

Potential Impact

Following this, PSPs will need to review and implement any relevant obligations including implementing sufficient internal systems and governance to tackle reimbursement requirements and reporting data to meet the expected standards.

 

Customer protection and market opening ambitions of PSR for 2024/25

The PSR has published its Annual Plan and Budget for 2024/25, setting out the strategic approach for the third year of its five-year strategy.

Key takeaways

• PSR’s Strategic Approach: The PSR is at the midpoint of its five-year strategy, focusing on delivering strong outcomes for UK payment systems, fostering economic growth, and ensuring effective competition and innovation. The PSR is also focusing on exploring new payment systems and developments in payments in the UK and globally.
• Protecting Users: The Annual Plan touches upon the PSR's objectives to is implement new rules for reimbursing victims of APP fraud and expanding the Confirmation of Payee (CoP) requirements to reduce fraud and misdirected payments.
• Promoting Competition: The PSR aims to unlock greater competition in payments, particularly through account-to-account payments as an alternative to card payments, and to address issues found in market reviews of card fees. In particular, the PSR has identified issues with the market for the cross-border interchange fees, with final conclusions to be published by the end of the year.
• Engagement and Collaboration: Enhancing stakeholder relationships is also at the forefront of the PSR's plans, including with other regulators and the UK government, to address emerging issues and opportunities in the payments ecosystem.

PSR Commitments for 2024/25

1. Protection
• To ensure that the industry is readily prepared to implement the recently introduced reimbursement requirements for APP fraud.
• Aim to protect victims through innovative mediums, for example by strengthening incentives to prevent fraud.
• Making fraud data for various PSPs visible to the public, so that the public can make informed decisions based on a PSP's real performance data.
• Oversee the expansion of the Confirmation of Payee (CoP) coverage to further reduce fraud and misdirected payments.
  
  
2. Competition
• Share conclusions on the market reviews on card fees looking at competition in card payments, and the impact on merchant costs.
• Publish final report on cross-border interchange fees market review. To be decided if PSR will intervene in market and if so, will consult on remedies and implementation.
• PSR to release interim and final reports on card scheme and a market review on processing fees.
  
  
3. Account to account payments
PSR aims to enable account to account payments to give people and businesses more choice about how they make and accept payments.
• Encourage adoption of new payment options with greater flexibility for consumers and control over managing money.
• Clarify the future regulation of open banking.
  
  
4. Access and choice
• Ensure access to payment services and options to meet needs for people and businesses.
• Collaborate with the FCA to ensure cash infrastructure is reliable, resilient, and sustainable.
• Ensure people can have free access to cash.
• Publish research on and tackle barriers to using digital payments.

Potential Impact

• In line with previous market-focussed efforts and innovation in the market developing alternative methods of payment.
• Cross-collaboration may lead to potential increased regulatory burden.

 

National Payments Vision – Independent Report Update

• Future of Payments Review: The UK’s payments landscape is recognised for its strong banking and regulatory framework, but the Future of Payments Review suggests it is congested and needs a clear strategy. The UK Government plans to publish a National Payments Vision to address this. It also provides for ten recommendations to enhance the UK’s payments ecosystem, focusing on consumer experience and Open Banking.
• National Payments Vision: This initiative aims to clarify the UK government’s ambition for UK payments, guiding industry and regulatory activity towards a world-leading payments ecosystem. It will incorporate feedback from the Future of Payments Review and further industry engagement.

The UK Government has stated it will publish the National Payments Vision this year.

Potential Impact

• Closer regulatory focus may lead to increased scrutiny and regulation.
• Intended to boost UK fintech competitiveness.

 

Reflections and Priorities – PSR 2024

UK Finance was recently in conversation with Oliver Hanmer, Head of Supervision and Compliance Monitoring at the PSR, to discuss the PSR's new approach to supervision, monitoring, compliance and enforcement. By establishing a new division for Supervision and Compliance Monitoring, the PSR aims to broaden its approach to regulation by keeping track of compliance and enforcing the regulatory framework.

PSR's key strategy areas:

Supervision and Relationship Building

• Building effective strategic relationships with key organisations, primarily focusing on Payment Systems Operators;
• Creating a culture of openness, trust, and confidence between the regulator and the regulated to ensure effective supervision and set regulatory expectations.

Monitoring and Compliance

• Monitoring to ensure consistent compliance with the regulatory framework.
• Taking efficient and active enforcement action in cases of serious non-compliance.

Collaboration and Efficiency

• Collaborating with the FCA and other UK regulators to avoid duplication of effort.
• Horizon scanning to identify risks and opportunities in the sector, to help inform policy making.
• Creating an efficient strategy that is not overly burdensome for organisations, with the new approach being built in a more structured way with focus on information gathering.

Future of PSR

• Goal is for the supervision to be adding value as a regulatory tool.
• Building trust with the organisations that the PSR regulates to achieve an open dialog.
• Demonstrate to the organisations that the PSR fully understands the organisations that it regulates.
• Call for views on supervision strategy was published on 24 April 2024, with views welcome until 7 June 2024.

Potential Impact

• Likely to be an increase but more streamlined and impactful approach to regulatory and compliance burdens, with new systems to comply with that will avoid duplication of efforts.
• Higher chance of closer collaboration with the regulator, with a possibility for feedback.

 

End of year reflections of the PSR – Innovate Finance Global Summit

• PSR’s Yearly Reflection: The PSR reflects on the past year’s efforts to enhance trust and deliver strong outcomes in payments, and discusses future initiatives.
• UK’s FinTech Growth: The UK houses 10% of global FinTechs, with the potential to increase to 12% by 2030. The PSR aims to support this growth, emphasising the importance of innovation within its own statutory objectives.
• Open Banking Advancements: Significant progress in open banking has been made, with the UK leading across Europe in relation to the volume of monthly Open Banking payment calls (nearing to 15 million calls a month). The PSR welcomes this major progress and is pushing for further development, including Variable Recurring Payments (VRP).
• Fraud Prevention Focus: Trust and safety in payment systems are crucial for customer adoption. The PSR’s work on tackling APP scams is part of ensuring a trusted, faster payments system.

Potential Impact

• Likely to be a further shift to supporting sustainable growth, to help contribute to competitiveness within the UK markets.
• PSR to work closer with FCA, so it is likely that future developments will be more streamlined and cohesive across the regulators.
• Encouragement of open dialogue across the industry, with the PSR working closely with those impacted and listening to views and concerns.

 

Modernising UK payments – Bank of England Update

The Bank of England has set out its priorities as a provider and regulator or retail and wholesale money:

• Technological innovation in payments: The Bank of England (BoE) is focused on ensuring trust and safety in the face of rapid technological changes in money and payment systems, such as tokenisation and distributed ledger technology (DLT).
• Retail and wholesale payment systems: The BoE is also exploring innovations in retail payments, like embedded automatic transactions, and enhancements in wholesale payments, which could lead to more efficient financial market processes.
• Regulation and collaboration: The BoE is actively working on stablecoin regulation, considering a retail central bank digital currency (CBDC), and seeking input from the private sector through a discussion paper to be published.
• Future of money and payments: The BoE has emphasised the importance of maintaining monetary and financial stability while supporting innovation that benefits customers, businesses, and economic growth.

Potential Impact

Similar to the PSR, the BoE is set on embedding trust and supporting innovation, both as a provider and as a regulator of retail and wholesale money. Therefore it is likely to continue to be open to embracing innovation through technological advancements, as it identifies that these can (i) reduce risks in the financial system (ii) increase monetary and financial stability and (iii) help keep up with new players rapidly growing outside of regulatory perimeters.

 

Digital Pound Taskforce and future of the digital pound

Attention on the potential for, opportunities of and legal and stability considerations around the development of a Digital Pound continue. By way of timeline:

• Digital Pound Taskforce: in April 2021, HM Treasury (HMT) joint efforts with the BoE to create a Digital Pound Taskforce, with an aim to promote a strategic approach and close coordination between the UK authorities to explore a retail central bank digital currency (CBDC) for the UK, known as the digital pound.
• Accountability: the Taskforce is accountable to the Chancellor of the Exchequer and the Governor of the Bank of England, focusing on strategy, oversight and risk management in line with the statutory objectives. HMT and the BoE are said to maintain independent governance on issues within their own areas of competence.
• National Conversation: the Taskforce aims to steer a national conversation about the future of money, ensure that the design of the digital pound meets agreed policy objectives.
• Digital Pound Design Phase: Following a 2023 Consultation Paper, the BoE and HMT published their Response to the Consultation in January 2024, identifying a set of design principles to facilitate the design of the digital pound, including but not limited to security, privacy and accessibility. At the end of the current design phase, the BoE and HMT will decide whether to proceed to the 'build phase', involving building a digital pound infrastructure, by firstly developing a prototype digital pound technology in a simulated environment before proceeding to live pilot tests.
• Regulatory Environment: the UK government has committed to introducing primary legislation in prior to launching a digital pound which would be preceded by further public consultation.

Potential Impact

• Accessibility to banking for consumers, new ways of paying, potential for enhanced security and protection for financial system.
• Businesses would have to adjust their systems to comply with the digital pound infrastructure.

 

UK's Digital Landscape – FCA

• Nikhil Rathi, FCA Chief Executive and chair of the Digital Regulation Cooperation Forum (DRCF) delivered a speech at the DRCF, focusing on the importance of leading a co-ordinated effort to maximise the opportunities of Big Tech while mitigating the risks in financial services.
• The FCA has published a response to the Call for Input on the competition implications of "Big Tech" and data asymmetry. It was noted that respondents did not identify immediate harm deriving from data asymmetry however, the FCA acknowledges the need for vigilance regarding data asymmetry in financial services to avoid reduced competition and innovation and overall worse consumer outcomes.
• The FCA said that it was considering developing a commercially viable framework for data sharing in Open Banking and Finance benefiting firms, markets and consumers. The FCA has said that it will work with the industry and the PSR to explore incentives for data sharing and assisting with creating a level playing field for competition and innovation, including the developments of the Digital Markets, Competition and Consumers Bill, Data Protection and Digital Information Bill and Online Safety Act.
• DRCF acknowledged that data privacy remains a key issue of concern as well as the operational resilience of the financial markets. It is also giving thought to AI and the need for regulation, and it announced that it will conduct research on consumer understanding of generative AI.
• DRCF also launched an AI and Digital Hub aimed at providing informal advice for tech innovators recognising the need to get their products to market quickly, safely and sustainably.

Potential Impact

• Following on from the Bank of England and FCA joint consultation on AI regulation for financial services, we should continue to see AI being considered from a financial services regulatory perspective.
• Ongoing regulatory focus on data asymmetry and digital access to financial services, with a focus on customer outcomes.