Payments View - May 2022

In this edition we include some commentary on stablecoins and CBDCs, a number of consultation papers in the UK and EU, developments to address APP fraud and highlight some things to look out for in the FCA's regulatory initiatives grid.

If any of the topics below spark further questions, please don't hesitate to reach out to us.

FCA Regulatory Initiatives Grid

The FCA published the fifth edition of its Regulatory Initiatives Grid on 25 May 2022. Some things to note on the horizon are:

• The Government plans to consult on bringing systemically important firms in payments chains into Bank of England regulation. The consultation is planned for June 2022.

• Rules and standards for Account to Account Payments - the project aims to unlock the potential of Account to Account (A2A) payments to provide greater competition in retail payments leading to lower prices, innovation and improved quality that reflects end-user needs. An announcement setting out the key areas where the FCA believes A2A payments can be improved for retail purchases is expected imminently.

• Policy Statement on the Consumer Duty with final rules and guidance expected in Q3 2022 which the FCA expects to have a high impact on all regulated firms. As mentioned in previous editions of this update, we have been working closely with clients on the impact of the Duty, especially for payments firms, and would be happy to discuss the next stage of implementation with you. You can also sign up to receive our Consumer Duty View which launched last week, the first edition is available on our website.

• Policy statement and final direction requiring certain financial institutions to publish information including their APP scam reimbursement rates and recipients of fraud should be published in Q3 2022 - incidentally another one of the main areas likely to be impacted by the Consumer Duty from day one of implementation.

Confirmation of Payee Service

A consultation paper was published on 24 May 2022 by the PSR on requirements for further participation in the Confirmation of Payee service (CoP). The PSR proposes giving a direction that splits the requirements for PSPs to implement a system to provide CoP into two groups:

• The first group will be prioritised based on the complexity and size of the institution or firm where the adoption of CoP could have the biggest impact in preventing APP fraud. This group consists of almost 50 PSPs (listed in Annex 1). They would need to have implemented CoP by 30 June 2023. This group would increase CoP coverage from 92% to 99% for transactions made via Faster Payments.

• The second group includes all other firms which use either unique sort codes, or Secondary Reference Data. They would need to have implemented CoP by 30 June 2024. This group consists of over 350 PSPs.

Comments can be made on the proposals until 8 July 2022. If the PSR decides to proceed with the proposed direction, it plans do to so around eight to ten weeks after the July deadline.

It is also worth noting the government's intention to legislate in the Financial Services and Markets Bill to enable regulatory action by the PSR to require banks and other payment service providers to reimburse APP scam losses, ensuring victims are not left paying for fraud through no fault of their own. The government's amendment will make it clear that Regulation 90(1) of the Payment Services Regulations 2017 does not affect the ability of the PSR to use its existing regulatory powers in relation to APP scams.

Access to Cash

On 19 May 2022, the government published its response to the 2021 access to cash consultation. This is the next step in legislating to protect access to cash and ensuring that the UK's cash infrastructure is sustainable for the long term.

The government has set out its intentions in the response:

• to provide HM Treasury with powers to set legislative geographic access requirements upon designated firms to protect access to cash across the UK with the intention that these geographic requirements be set on the basis of cash access facilities being available within maximum distances of a minimum percentage of the population.
• HMT would also be given powers to designate firms that legislative and regulatory cash access requirements can be imposed on.The government proposes that the designation of a firm should be made in consultation with the FCA and the relevant firm. Firm designation should be kept under review and subject to change in the event of shifts in the market structure for payment accounts.
• Making the FCA the lead regulator with responsibilities for the monitoring and enforcement of cash access requirements and reporting to HMT on these responsibilities at appropriate intervals.

Digital Payments

At the other end of the spectrum, the PSR published a summary report of the independent PSR Panel's digital payments initiative on 10 May 2022. The Panel found that a main factor driving some consumers' continued reliance on cash is having a low income or other vulnerability and the associated importance of budgeting and avoiding overspending, which the physical nature of cash makes easier.

Other factors limiting the use of digital payments include distrusting digital payments, lacking financial capability / access to digital and financial infrastructure or the skills needed to undertake digital transactions. In addition, some small businesses' needs may not be adequately served by digital payments and for the continued reliance on cash. The Panel took these drivers into account in considering potential solutions.

The Panel identified the following four high-level areas that need to be tackled to address the drivers of cash reliance and enable greater take-up of digital payments:

• Improving the awareness, understanding and trust of, consumers, small businesses and other small organisations in digital payment options.
• Tackling barriers to new digital payment services and service features, including enabling new functionalities and improving trust by addressing fraud risks.
• Reducing digital exclusion.
• Putting better data in place to monitor the transition to digital payments.

European consultation papers

PSD3 and open finance

The European Commission published a public consultation paper to gather evidence for the review of PSD2 and to inform its work on open finance. It was published on 10 May 2022 and the deadline for comments is 2 August 2022.  

Responses to this consultation will provide important guidance to the Commission in its report on the application and impact of PSD2 and may feed into an impact assessment accompanying a legislative proposal for further revising PSD2. The responses will also help guide the Commission's parallel work on the open finance framework, which is part of the data strategy for Europe.

In addition the Commission published a targeted consultation paper on the review of PSD2 that will inform the Commission on the application and impact of PSD2 taking into consideration, among other things, developments in the payments market, payment user needs and the areas where amendments may be useful / required. In particular, the Commission is seeking responses from more professional stakeholders including payment service providers (PSPs) and payment service uses (PSUs), as well as national and EU legislative and regulatory authorities.

Part 1 of the targeted consultation covers general questions concerning PSD2's main objectives and specific objectives grouped by theme. Part 2 covers questions on whether the specific measures and procedures of PSD2 remain adequate. They are grouped in subsections, following the structure of the Directive. Part 2 includes questions concerning possible changes or amendments to the Directive.

The deadline for comments to the paper is 5 July 2022.

Call to retain the Customer Due Diligence Exemption for low-risk e-money products

The current EU AML/CFT legislative framework provides an exemption for firms carrying out customer due diligence measures with respect to e-money products that are proven to be low risk. The latest proposal from the EU Commission removes the exemption and does not explain the rationale. The exemption is under Article 12 of AMLD and enables products like e-money gift cards to be issued more easily.

By removing the exemption, it is expected that low risk e-money products will disappear from the market. Customers benefit from the CDD exemption as it enables uncomplicated access to low-risk e-money products. These products can easily be bought at sales outlets without the need of, e.g. having a bank account or a payment card and therefore support financial inclusion. Consequently, there is a call from the industry for the exemption to be retained.

Chair of the PSR and FCA on Stablecoins and 'Speculative Crypto'

On 20 May, Charles Randell (chair of the PSR and FCA) gave a speech presenting a positive vision of the future of regulated stablecoins, but also questioning bringing more 'speculative crypto' into the regulatory perimeter.

Mr Randell discussed the possibilities of 'strongly regulated' and 'truly stable' stablecoins and their potential to seriously challenge incumbents in the payments market. DLT and its cross-market efficiencies was also cited as a potential innovation. This follows HMT's consultation response in April which included plans for 'payment cryptoassets' to be brought under the e-money and payment services regimes (see the April edition of Payments View for commentary). Mr Randell repeated calls for good consumer outcomes being of paramount importance in regulating stablecoins and the need for broad, consistent policies to safeguard investor interests.

The speech distinguished stablecoins from 'purely speculative' cryptoassets, such as Bitcoin. Citing recent conditions in the crypto market as demonstrating the asset class's potential to 'seriously harm' the financial lives of retail investors, Mr Randall questioned whether it was right for these cryptoassets to be promoted to retail or even regulated at all.

In addition, he raised concerns over how the FCA would fund the 'very significant' costs of any regulation. He noted that he believed that the wider financial services industry should not be exposed (through FSCS) to meet the costs of any failing crypto firms and that consumers may have to acknowledge the lack of regulatory protections afforded to cryptoassets before an advisor assists them in making an investment.

Keep up to date with all things crypto by signing up to Crypto View and let us know if you would like to discuss the UK's changing regulatory attitude towards cryptoassets, including fiat backed stablecoins further.

BIS 2021 survey on central bank digital currencies

The Bank for International Settlements (BIS) published the results of its 2021 survey on CBDCs at the beginning of May. The latest responses from 81 central banks show that the Covid-19 pandemic and the emergence of cryptocurrencies have accelerated the work on CBDCs. Financial stability and enhancing cross-border payments are growing reasons for retail CBDCs and the paper shows that more than two thirds of central banks are likely to issue a retail CBDC in the short or medium term. The wholesale CBDC work focuses on cross border payments as Central banks see multiple ways in which CBDCs could enhance cross-border payments. Many central banks are reportedly exploring a CBDC ecosystem that involves private sector collaboration and interoperability with existing payment systems.

BIS has also created a new research paper, which explores how retail central bank digital currencies could help support financial inclusion. It also includes interviews with nine central banks, with research and policy work - investigating challenges, risks, and regulations around CBDCs.

The ECB has been leading efforts to create a CBDC after launching a public consultation to understand its nature in terms of how it would react with other forms of payment. An assessment of the impact of a digital euro on key industries, users, chambers of commerce and other international stakeholders was also launched. The ECB's consultation will accept comments regarding issues of privacy, data concerns and expectations until 14 June 2022.

Feedback on FMI Outsourcing and Third-Party Risk Management

The Bank of England has invited comments and feedback about its three draft supervisory statements about outsourcing and third-party risk management. One of these supervisory statements is aimed at recognised payment system operators and specified service providers, with the target of:

• Encouraging resilience and adoption of the cloud and other new technologies

• Outlining BoE requirements and expectations around third-party risk management in Financial Market Infrastructures

• Complementing their supervisory statements regarding FMI operational resilience

The consultation closes on 14 July 2022.

You can find previous editions of Payments View here.