HM Treasury publishes a review and call for evidence on the Payment Services Regulations 2017

On 13 January 2023, the HM Treasury published a review and call for evidence on the Payment Services Regulations 2017 (SI 2017/752).

Review of the Payment Services Regulation 2017

The government conducted a review on the Payment Services Regulations 2017 and found that while the regulations have successfully cultivated a robust UK payment sector with adequate consumer protection, they do not go far enough to foster meaningful competition via Open Banking. In addition, the pace of market change in bringing about continuous wider developments in the payments sector has resulted in the regulations struggling to keep pace and thus, potentially not working as well they could be.

Call for Evidence

Following the review, the government also issued a Call for Evidence on how UK payments regulations should evolve to meet the government’s objectives and address the specific challenges highlighted in the review. The objectives are as follows:

• 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 resilience and integrity of the UK’s payment market
• Fostering competition, in the interests of consumers

The government then evaluated the state of the current regulations against the backdrop of these objectives.

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 governments notes that the payments regulatory framework thus far has been solely reliant on primary legislation to regulate new developments in the payments sector. This approach could potentially result in the framework failing to keep pace with the pace of market developments and the entrenchment of a regulatory regime that will be unsuitable or inhospitable to new market entrants. In this regard, the government is considering the relative balance between delegation to the FCA and requirements in statute as it enacts the repeal and replacement of retained EU law. As outlined in the Future Regulatory Framework, the government notes that there remains a strong case for delegating firm facing rules to the FCA to create a more agile framework.

In particular, the following issues were flagged as part of the Call for Evidence:

• Whether the scope and definitions of the regime are future-proofed for the rapidly changing payments and data sector, including ensuring that the definitions are enabled for cryptoassets (including initially fiat referenced stablecoin) where relevant;
• The benefits of having a single regulatory framework in this area or if it is appropriate to maintain separate authorisation and regulatory regimes for payments and e-money institutions;
• If the authorisation requirements for payments and e-money institutions ensure sufficient protection for consumers while being supportive to new market entrants and encourage growth.
• Whether the regime for small payments and e-money institutions encourage innovation and growth, while providing adequate protection for customers;
• If the regime for payment initiation service providers (PISPs) and account information service providers (AISPs), and related requirements in relation to access to payment accounts, foster competition and growth.

2. Ensuring appropriate trust and protection for consumers

The government concluded that the regulatory framework has largely been quite successful in establishing clear protections for consumers. Nevertheless, changes in the payments landscape have raised concerns that certain areas in the regulatory framework may not be up to the standard in terms of consumer protection. Three potential areas identified in this regard are:

1. Protecting consumers from firm insolvency

   Cases of insolvency usually have detrimental effects on consumers who face significant loss and long delays for the return of funds. The government has attributed this to the high-level nature of the requirements in the Payment Services Regulations and Electronic Money Regulations. These difficulties have resulted in insolvency practitioners turning to court directions in the course of the administration or liquidation process. However, this is ultimately detrimental to consumers as any underlying funds available to them will go towards funding what are usually lengthy and costly proceedings.

   In this regard, the government, under the FRF review, set out that the FCA will have general responsibility for designating detailed firm-facing requirements in their rulebooks under a safeguarding framework created by the government and Parliament. Transferring this responsibility to the FCA will provide the framework with the necessary regulatory agility and enable the FCA to lend their expertise in the client assets regime (CASS) to this area. The government has invited the FCA to consult on changes to the safeguarding regime later this year.
   
   

2. Effective contractual protections for payment service users

   In relation to effective contractual protection for payment service users, the government is concerned with ensuring the freedom of expression is maintained throughout the payments landscape. Although the government does not have evidence of scenarios where payment service providers have terminated contracts for the provision of payment services based on views expressed by a consumer, they are open to hearing more from both sides to determine if further protections for the freedom of expression are required.

   In particular, the government intends to consider the following through the Call for Evidence:

   • the effectiveness of the current provisions in the Payment Services Regulations, under Regulations 51 and 71, specifically their clarity and fairness
   • how and when providers cease to do business with a user. In particular, the applicability of the 2-month notice period and in what scenarios a notice period is not applied
   • what is the appropriate balance of rights for a provider and user (taking into account the rights of users to freedom of expression, and the right to manage potential commercial risk on the other)
   • if specific protection is required for access to payment services enabling freedom of expression and other lawful activities.
   • if there is a need to provide greater protection to users around termination of a payment service, e.g. if the notice-period is sufficiently robust and adequate in length so as not to unduly harm a user (or if this should be extended in any scenarios, e.g. to protect freedom of expression)
     
     

3. Protecting consumers from fraud

   The exponential rise of authorised push payment fraud shows that the regulatory framework has failed to keep pace with sophisticated crime. The government notes the lack of a comprehensive and consistent framework to reimburse victims of APP fraud. While the implementation Strong Customer Authentication standards may have contributed to the downward turn on the rate of APP scams, the prescriptiveness of the standards has had a detrimental impact on access to payment services in particular, to those without mobile phones or reliable mobile connectivity. The government is thus considering if a more outcome-based approach to the authentication of payments might strike the right balance between firms having the flexibility to innovate to counter evolving threats and meeting the needs of a diverse and complex customer-base.

   The government is also considering the requirement that banks and other providers must ensure payments are credited to a receiving account by the end of the next working day. Firms in the financial sector have long argued that there a risk-based approach should be undertaken to provide more flexibility in delaying payments if a customer who is suspected to be a victim of fraud needs to be engaged.

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

The pace of the market change in the payments sector in the past decade has transformed the payments landscape rendering it almost unrecognisable today. However, this pace of change means that the Payment Services Regulations has had to undergo extensive reform to keep up. For example, crypto assets will be brought under the remit of the Regulations through an asset-class specific approach. Nevertheless, the government is concerned that the ever-evolving nature of the financial landscape has given rise to risks to financial stability that may be beyond the remit of the Bank of England for regulating systemic payment systems. In this regard, the government is currently reviewing evidence provided as part of a consultation published on payment regulation and the Bank’s systemic perimeter.

4. Fostering competition in the interests of consumers

1. Promoting Open Banking

   The CMA has been successful in reducing barriers to entry in the payments sector by developing secure application programming interfaces to a common standard and using common infrastructure (when necessary). This standard encouraged the uptake of the Open Banking API standard among payment account providers, AISPs and PISPs. As a result, the UK has the highest growth and diversity of Third-Party Providers (TPPs) among EU member states operating under the same overarching Payment Services Directive framework.

   Going forward, the HM Treasury, the CMA, the FCA, and the PSR have formed a Joint Regulatory Oversight Committee to oversee the next phase of Open Banking which will build on these regulations and realise the full potential of Open Banking for the benefit of the UK economy. On 16 December 2022, the JROC has released a joint statement to this effect.
   
   

2. Ensuring customers can make informed choices

   The government is considering if the information obligations contained in the Payment Services Regulations and the Cross Border Payments Regulation can be enhanced to further guide customers in making informed choices and foster a competitive payment services market.
   
   

3. Ensuring fair access to payment systems

   The government noticed that there was an overlap between Part 8 of the Payment Services Regulation setting out direct and indirect requirements for access to payment systems (Regulations 103 -104) and Part 5 of the Financial Services Banking Reform Act 2013 setting out the UK’s domestic approach to ensuring fair access. This regulatory overlap has resulted in complexities making the regulatory landscape difficult to navigate, thus, the government is keen to ensure there is only one single and effective regime in place governing access to payment services. To this end, stakeholder feedback obtained from a systemic perimeter consultation (now closed) is currently being analysed. The government will be publishing its next steps later this year.

All stakeholders are invited to engage with the Call for Evidence accompanying this review and provide a response or avenues for future policy changes in this area. The consultation will be open for 12 weeks and close at 23:45 on Friday 7 April 2023.