Payments View - June 2022

With the start of Wimbledon and the long evenings, we hope you are getting into the swing of British summer and have a relaxing break on the horizon. For now, we have another packed edition of Payments View to help you keep up to date with key developments.

In this edition we include some commentary on HMT's response to the BNPL consultation, the European Commission's review of PSD2, the FCA's guidance on access to cash, market reviews to be carried out by the PSR, reforms to the MLRs for AISPs and Mastercard's new biometric tool.

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

BNPL Consultation - HMT's Response

On 20 June 2022, HM Treasury ("HMT") published its response to the 2021 Buy-Now Pay-Later ("BNPL") Consultation. This is the next step in the legislative process to protect consumers against detriment from unregulated interest-free BNPL products and comes at the same time as a commitment from the government to overhaul the Consumer Credit Act 1974 ("CCA"). The government has set out a number of its intentions in the response, including:

• to widen the scope of the regulation to capture BNPL and Short Term Interest-Free Credit ("STIFC"). HMT believes bringing STIFC provided by third-party lenders into the regulation is proportionate but is seeking further engagement in respect of bringing merchant-provided STIFC within the draft regulation.
• to ensure that BNPL providers carry out the relevant affordability checks and comply with the financial promotion rules. Moreover, BNPL providers will be required to be approved by the FCA
• to amend the running-account credit exemption in section 60F(3) FSMA to avoid BNPL providers adapting their models to utilise the exemption to avoid any obligations under UK regulation
• to provide that the CCA requirements and regulatory controls are applicable but tailored to BNPL/STIFC products. This includes prescribing secondary legislation under the CCA concerning the requirements on form and content of agreements. Further, the FCA will consult on proposals for rules on arrears, default and forbearance, including cost benefit analysis
• to ensure that there is "clear, consistent and timely credit reporting" across the credit reference agencies. As part of this, the government will work with the credit reference agencies to help decipher the approach for reporting BNPL products on credit files
• to ensure that borrowers have the ability to access the Financial Ombudsman Service ("FOS") for complaints on BNPL/STIFC products

The next steps are to collate feedback on whether merchant-provided STIFC's should be captured by the regulation by 1 August 2022 and then to publish and consult on the draft legislation. The government aims to publish this towards the end of the year, laying down secondary legislation in mid-2023. Read more about the changes in our Insights Article available on the Simmons website.

PSD2 Review

In order to assess whether PSD2 is still fit for purpose, the European Commission has recently launched several initiatives.

The first was a Call for Advice addressed to the EBA in October 2021 and kick-started an evaluation of PSD2. On 23 June the EBA published its Opinion in response to the 28 questions set out by the Commission.

The EBA's Opinion focuses on some of the more substantive proposals. A few recommendations to highlight are:

• For the Commission to clarify the regulatory approach to certain business models, e.g. white-labelling / agent models and the security requirements applicable to card schemes, payment gateways and merchants.
• For the regulatory regime to be simplified by merging PSD2 and 2EMD.
• For more significant PIs and EMIs to be covered in a recovery and wind-down framework - a recommendation consistent with the FCA's focus on wind-down planning which made the submission of a wind-down plan a condition for PIs and EMIs authorisation from July 2020.
• For the scope of application of SCA to be clarified and for requirements to be introduced that apply to excluded transactions.

The EBA did not support a harmonised sanctions regime across member states but proposed a central database be introduced to record administrative sanctions and supervisory measures taken under PSD2 across the Member States.

We are still working through the EBA Opinion and annexed report - there is a lot to digest! - but would be very interested to discuss this with you and hear your thoughts on the EBA's recommendations.

As mentioned in the previous edition of Payments View the Commission published a public Call for Evidence on 10 May this year to obtain input from a range of stakeholders to help with the assessment of PSD2. The feedback period runs until 2 August 2022 and presents a great opportunity for the market to feedback to the Commission on the EBA Opinion.

Access to cash

Last month we mentioned in Payments View the government's response to the 2021 access to cash consultation and its commitment to protecting access to cash and ensuring that the UK's cash infrastructure is sustainable for the long term.

On 14 June 2022, the FCA backed this up with a consultation proposing updates to its guidance on bank branch and ATM closures or conversions.

The objective of the proposals is for the FCA to clarify its expectations of firms. For example, amending the definition of "partial closure" to reference "long term" rather than "permanent" changes and extending the communications section to ensure firms proactively contact consumer groups and local councils as well as customers. In addition, since the previous guidance FG20/3, the FCA has published its Guidance on the fair treatment of vulnerable customers and is updating the access to cash guidance to refer to the vulnerable customers guidance and emphasis to firms its relevance when conducting branch and ATM closures. As always, we would flag the Consumer Duty here and its relevance given the focus on vulnerable customers. You can sign up to our Consumer Duty View here to keep up to date with developments.

PSRs market reviews focused on card fees

The Payment Systems Regulator ("PSR") announced on 21 June 2022 that it will be conducting two reviews into card payments to consider whether they are working well against a backdrop of rising costs. One will focus on card scheme and processing fees, the other will focus on cross-border interchange fees.

The draft terms of reference have been published and include the proposed consultation questions. They are open for comments until 2 August 2022 and the PSR plans to encourage stakeholder engagement during the consultation period through a series of events.

The review of card scheme and processing fees will focus on Mastercard and Visa from 2014 to the present day. It will examine the factors the card scheme providers considered when setting the levels, the changes in the offering from these card schemes since 2014 and the associated scheme and processing fees, the reasons for changes in the levels, structures and types of scheme and processing fees, as well as the profitability of the UK card businesses throughout this period.

The review of interchange fees will consider inbound and outbound transactions. Since the UK left the EU, Visa and Mastercard have increased interchange fees by a factor of five and the PSR would like to examine the rationale to ensure the market is working well. The PSR will consider the reasons provided by the card schemes and the impact of the fee rise on competition, innovation and service users.

HMT removes AML regulatory requirements for AISPs

HMT has announced its decisions to amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLRs") to exclude AISPs from scope. HMT launched a consultation last summer which proposed this amendment as the likelihood of money laundering and terrorist financing by AISPs had been assessed as low since the businesses do not come into direct contact with customers' funds. Such an amendment would be more in keeping with HMT's emphasis on proportionality and support for open banking. PISPs will remain in scope.

HMT's response also considers cryptoassets. Chapter 6 outlines the key changes that HMT is considering in relation to the transfer of cryptoassets, and the so-called "Travel Rule". HMT is considering legislation that will require one of the originator's address, date and place of birth, and passport number to be provided with a cross-border transfer of cryptoassets above the de minimis threshold (EUR 1,000). Read more about the proposed changes in our June edition of Crypto View.

Give us a smile - Mastercard launches a new biometric tool

Mastercard has launched its new Biometric Checkout Program in Brazil that will enable consumers to smile or wave, to pay at the checkout. The program is built using the same technology that is used to unlock a phone with your face or fingerprint. The Program will roll out from Brazil to the Middle East and Asia. This development from Mastercard makes the EU and FCA's approach to "inherence" for SCA worth considering.

In January, we noted that the FCA confirmed in PS 21/19 that a wide range of behavioural biometrics could constitute inherence (something the user is) and be used to meet SCA requirements which included characteristics attributable to a person, including behavioural analytics such as spending patterns. This was more permissive than the EBA Opinion on inherence which limits its application to physical aspects of the body, physiological characteristics and behavioural processes created by the body. Currently, Mastercard's Biometric Checkout Program should satisfy the EBA's interpretation of the SCA requirements under PSD2 but the EBA's approach is likely to limit the potential for other innovative SCA solutions.

The review of PSD2 mentioned above includes an examination of the obligation on firms to implement SCA and the elements of SCA, such as inherence. In its response to the Commission's Call for Advice, the EBA confirms its clarifications around behaviour biometrics in its 2019 Opinion on the elements of SCA and considers these sufficient. The EBA does not consider that PSD2 should be amended. This is likely to result in further divergence between the UK and EU as SCA solutions evolve.

You can find previous editions of Payments View here.