On 13 January 2023, HM Treasury (HMT) published a Review and Call for Evidence on the Payment Services Regulations 2017 (PSRs). This document fulfils its statutory obligation to review the PSRs and sets out its conclusions. HMT found that the PSRs and wider retained EU payments law have had some success in promoting the UK's payments regulation objectives. However, there are several key areas where the regulatory framework could be improved.
In its Call for Evidence, HMT asks for the industry's views on its plans for improvement and any other benefits for future policy change, as HMT repeals retained EU law and replaces it with a framework specifically tailored to the UK.
Alongside its assessment of the PSRs, HMT sets out a useful holistic overview of its wider initiatives. In this article, we provide a bite-sized overview of the key outcomes of the review itself and our own insights.
Re-setting the Objectives
HMT used the review as an opportunity to, first of all, reset the objectives and purpose of the PSRs (against which it carried out its evaluation), now that the UK has left the EU. HMT sets out hybrid objectives which take into account the rationale for the Second Payment Services Directive and HMT's and the FCA's own stated objectives for the sector. The new 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 the resilience and integrity of the UK‘s payment market, and
- fostering competition, in the interests of consumers.
In relation to the objectives, and throughout the review, HMT indicates a desire to understand where the objectives can be achieved with less onerous regulatory provision, through HMT and Parliament merely setting out the framework and the detailed firm-facing requirements being left to the regulators.
While a less burdensome approach to regulation is always welcome, this would need to be carefully balanced against the potentially significant costs payment service providers (PSPs) would bear in implementing any major changes to the regime. It is reassuring that HMT shows recognition of this and has confirmed in its Call for Evidence that policy changes will only occur where there are concrete benefits or risks, and not for their own sake.
HMT has also emphasised that it would welcome concrete reflections for future policy, rather than general views on the principles which should underpin regulatory change. This could be a real opportunity for the industry to influence the direction of travel on specific issues such as the legal uncertainty around the meaning of payment account and the limited network and commercial agent exemptions, the cost of navigating a complex and somewhat ambiguous safeguarding regime and the difficulties of complying with the intricate strong customer authentication (SCA) regime.
Future-proofing payments regulation
In relation to the first objective, HMT notes that to date amendments to the PSRs and Electronic Money Regulations 2011 (EMRs) have only been possible via primary legislation. This risks the framework lagging behind market changes. HMT will therefore consider the balance between delegation to the FCA and enshrining requirements in statute, as it repeals and replaces retained EU law for payments. HMT notes there is a strong case for delegation to the FCA of firm-facing rules to enable a more agile and future-proof framework and that it is in keeping with the outcomes of HMT's Future Regulatory Framework Review.
In this context, in its Call for Evidence, HMT sets out wider questions for the industry, including around the appropriateness of:
- the definitions, scope and exclusions of the PSRs and EMRs for the rapidly changing payments and data landscape, including but not limited to the emergence of cryptoassets
- maintaining separate authorisation and regulatory regimes for payment and e-money institutions (PIs and EMIs) and the benefits of having a single regulatory framework, and
- the regime for small PIs and EMIs, payment initiation service providers (PISPs), account information service providers (AISPs) and agents.
Appropriate consumer protection
Overall, HMT found that the regulatory framework has operated well to achieve the consumer protection objective. However, HMT identified the following areas which may not be working as well as they could to protect consumers.
- Protecting customers from insolvency: To allow for better customer protection in the case of insolvency of PIs and EMIs, HMT introduced the Payment and E-Money Institution Special Administration Regime in 2021. This regime is intended to accelerate the distribution of funds to customers by providing insolvency practitioners with further powers. Despite this development, the Ipagoo* case highlighted that there remain ambiguities within the safeguarding regime which are likely to continue being resolved through costly litigation. HMT's intentions are that it would work towards transferring to the FCA responsibility for developing and delivering the safeguarding regime for payments and e-money under a framework set by HMT and Parliament. HMT invites the FCA to consult later this year on changes to the safeguarding regime in light of market and legal developments.
- Effective contractual protections: HMT states that the PSRs establish a balance of rights and obligations between PSPs and users. However, HMT flags, without itself having concrete evidence on this, that the fairness of this balance has been called into question in the context of the termination rights set out in regulation 51 of the PSRs and the PSP's rights to stop the use of a payment instrument on reasonable grounds under regulation 71.Through a set of more detailed questions in its Call for Evidence, HMT asks for further details on this from both providers and users to assess if the current framework is operating in the way intended or requires reform to protect matters such as freedom of expression. While HMT's concerns here are valid, care will need to be taken to avoid overly prescriptive rules in this area, which unfairly restrict businesses' flexibility to end agreements on a commercial and risk basis, which could in the long run work to the detriment of consumers.
- Protecting consumers from fraud - SCA: HMT emphasises that protecting consumers from fraud is a priority area for legislative change. HMT notes that the PSRs already set out several protections for customers against fraud such as the principle of PSP liability for unauthorised payment transactions and the SCA standards. However, HMT states that these protections have failed to keep up pace with sophisticated crime, given the significant rise of authorised push payment (APP) fraud. HMT notes that concerns have been raised about the prescriptiveness of the SCA requirements. HMT wants to consider whether a more outcome-based approach might allow more flexibility to innovate to meet evolving threats and customer needs. This will likely be a particular point of contention in the industry, which has already dedicated significant resource to complying with the current regime.
- Protecting consumers from fraud – Day+1: In its efforts to tackle fraud, HMT also calls for evidence on the requirement that PSPs must ensure payments are credited to a receiving account by the end of the next working day (i.e. 'Day+1' or 'D+1'), following calls from the industry for greater flexibility and a more risk based approach. The main purpose of any further delay (than that already allowed in the PSRs) would be to engage the customer. In tandem, HMT is also considering if there may be benefits to enabling receiving PSPs (if suspicious that their accountholder is a fraudster) to delay the crediting of funds to a payee’s account. Importantly, HMT will seek to ensure there is effective and appropriate customer communication by PSPs, and that customers can continue to rely on swift payments where those are legitimate.
Resilience and integrity of the market
In the context of this objective, HMT states that the foundational requirements in the PSRs will remain adequate without further reform. Outside the scope of this review, HMT has already started to manage gaps in an asset-class specific way through work to bring cryptoassets in the regulatory perimeter, and more generally the consultation and call for evidence on payments regulation and Bank of England's systemic perimeter (more on which below). Outside of cryptoassets, HMT confirmed that the risk of not keeping up with a dynamic and evolving marketplace will be largely managed through the development of a FSMA model of regulation, in which the regulators will generally be responsible for setting technical firm-facing requirements and, as a result, will be better positioned to respond to market developments.
Competition in the interest of consumers
HMT notes that the UK has a competitive payments sector, developed through a combination of PSRs and EMRs (more specifically their recognition and support of new market entrants) and other specific domestic initiatives, most notably Open Banking (the progress of which, while helpfully summarised, is outside scope of the review). HMT identified three key areas to this objective: continued development of Open Banking, enhancing informed customer choices and fairer access to payment systems.
- Informed customer choices: The PSRs impose a wide range of information requirements on PSPs, including user-facing ones. The Cross Border Payments Regulation 924/2009 (CBPR) sets out additional requirements, in particular, regarding transactions which involve a currency conversion, with some observers noting that more can be done to enhance the transparency requirements. Now that HMT will have greater flexibility to tailor retained EU law for the UK, it remains interested in whether the information requirements in the PSRs and CBPR can be improved to provide relevant information to consumers and support a better competitive market; it seeks further evidence on the effectiveness of information requirements and proposals for any specific changes. This is another area where changes would need to be carefully considered as against the costs of PSPs updating their documentation and other communications.
- Fairer access to payment systems: As previously signalled in its consultation and call for evidence on the systemic perimeter, it is HMT’s intention to ensure there is a single and effective regime governing access to payment systems, in place of regulatory overlap, which creates complexities for both users and the Payment Systems Regulator. HMT’s consultation is now closed and feedback from stakeholders is being analysed. HMT will set out its next steps later this year. This has the potential to reduce significant barriers to new market entrants.
Wider considerations
Interestingly, without any particular discussion in the review, HMT included wider questions on charges for payment services, the balance of rights and obligations between sending and receiving PSPs, and between account servicing PSPs and PISPs/AISPs, as well as the appropriateness of the requirements regarding issuance and redemption of e-money. With all such areas likely having been a point of contention for many PSPs, industry feedback on this is anticipated with no less interest.
What's next?
Details on how to submit responses to the Call for Evidence (which must be done by 7 April 2023) are set out in the section of HMT's paper entitled "Next Steps". If you have any questions about HMT's Review and Call for Evidence, please contact our experts.
*In Baker and another v Financial Conduct Authority (Re Ipagoo LLP) [2022] EWCA Civ 302 (9 March 2022) the Court of Appeal, found that the EMRs did not create a statutory trust over an EMI's safeguarded asset pool but, nonetheless, "asset pool" must also include a sum equal to such relevant funds that ought to have been but had not been safeguarded in accordance with the rules.
