Payments View - September 2022

To kick off the new school year, this edition includes updates on the development of Open Banking, the FCA’s concerns over BNPL adverts, an update on the Financial Services and Markets Bill, commentary from the FCA on its expectations for fighting financial crime and an update from the Treasury on the move towards DLT.

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

Future of Open Banking – Strategic Working Group Update

In our April edition, we commented on the future of open banking and the pressure on the CMA to reveal a successor for the OBIE. The development then was that a Joint Regulatory Oversight Committee (JROC) would be established and led by the FCA and PSR. The expectation was that this would provide clear direction and restore momentum in the development of the UK’s Open Banking Framework. The latest development is that the JROC has established a Strategic Working Group (SWG) to assist it with its mandate.

The SWG published its Terms of Reference which set out its purpose and membership criteria. The stated intention is to collate views and input from industry and other stakeholders to shape the vision and strategic roadmap of Open Banking with a focus on the following elements:

• Providing the JROC with views on the priorities, long-term governance and funding model options for the successor for the OBIE;
• Advising on what activities should be taken by the future open banking entity; and
• Understanding the opportunities in unlocking the potential of open banking payments, enabling end-users to share data, managing access, and developing further data-sharing propositions.

Membership consists of an Independent Chair (Bryan Zhang) alongside representatives from industry trade associations, Pay.uk, and subject matter experts on consumers, SMEs, payments and data.

The SWG is operating through a series of thematic ‘strategy sprints’. The initial sprints commenced in September and run for three weeks. The final sprint ends on 25 November 2022. The sprints consider the strategy surrounding Payments, Data and SWG Ecosystems. Questions are posed by the JROC and written submissions from stakeholders are welcomed to inform the discussion. A final SWG report and future roadmap is expected to be submitted to the JROC in mid-December.

See also the PSRs recent blogpost on retail account payments covered below.

FCA raises concerns on BNPL adverts

On 19 August the FCA published a Dear CEO Letter warning against misleading BNPL adverts with an over-emphasis of BNPL benefits and the encouragement of impulse buying. The letter requests board-level action from recipients which includes firms entering into BNPL agreements and merchants introducing customers to BNPL providers.

The FCA stresses to authorised firms who offer exempt BNPL agreements that the financial promotions of BNPL products must comply with the financial promotion rules. Firms need to ensure consumers are equipped with the right information at the right time so they can make effective, timely and properly informed decisions about the financial choices they make.

In light of the incoming Consumer Duty, which is focused on good outcomes for consumers, it is particularly interesting that the FCA is concerned that firms are taking advantage of behavioural biases which hinder effective consumer decision-making. Under the new rules, authorised firms must avoid foreseeable harm to consumers and should monitor consumer understanding which require a reappraisal of approach and culture across the sector.

In addition, the FCA noted that there is a lack of balance in adverts and singled out the role of social media influencers, highlighting that some may be in breach of the requirements to include fair and prominent indicators of any relevant risks, such as:

• the risk of taking on debt that customers cannot afford to repay;
• the consequences of missed payments; and
• information about when charges become payable.

Although the FCA does not yet regulate BNPL products, it and other entities have taken steps in attempting to address concerns over potential harms to customers (with such concerns being only likely to grow in light of the cost of living crisis that the Dear CEO letter repeatedly mentions). These steps include the consultation earlier this year (covered in our June Payments View) and the recent work with certain BNPL firms to make direct changes to potentially unfair and unclear terms in their contracts (noted in our February Payments View).

The FCA expects authorised firms - communication with unauthorised firms will come separately - to ensure they are complying with the rules applicable to financial promotions and approve the action taken in response to the Dear CEO letter with the Board. The FCA intends to proactively monitor the market and may use a wide range of enforcement powers in situations of non-compliance.

Interestingly, the FCA’s approach to the regulation of BNPL was also raised in the second reading of the FSMB (see below), where it was noted (at times very critically) as a ‘complex and invigorating’ issue and one which can surely expect further intervention going forwards.

Progress Update: Financial Services and Markets Bill

The Financial Services and Markets Bill had its second reading in the House of Commons on 7 September, with discussions highlighting broad support for the Bill but with concerns raised on the potential gaps in its coverage. Particular topics of discussion (the full details of which can be read here) included:

• That the measures modifying and restating retained EU law will “in most cases” be subject to the affirmative procedure in the House of Commons.
• Concerns over why only the faster payments service was included in the duty to mandate reimbursement for APP scams.
• That it is “recognised across the House that the role of Parliament in holding regulators to account needs further investigation”.
• The proposals to extend existing payments legislation to include certain cryptoassets and bring such payments systems within the regulatory remit of the Bank of England and the PSR, “allowing for their supervision in relation to financial stability, promoting competition and encouraging innovation”.
• The possibility of further discussions on a climate-and-nature-specific statutory objective (alongside the proposed objectives of competitiveness and growth).
• Concerns that access to cash did not mean access to fee-free ATMs and on ensuring the sufficient presence of bank branches for face-to-face customer support.

The submission of written evidence from stakeholders has been requested with an expected deadline of 5pm on Tuesday 25 October.

“Financial crime is a bit like Covid”

Sarah Pritchard (Executive Director, Markets at FCA) gave a speech on ‘Fighting financial crime – the force multiplier effect’ which, likened to a virus which mutates to evade destruction, set out useful detail on the FCA’s views on a ‘whole system response’ to financial crime.

The speech outlined the importance of adapting to the “new wave of financial crime” and developing a systematic and collaborative approach to fight it, described as the force multiplier effect. With robust technology and AML processes in place to detect financial crime, AML professionals in authorised firms should be working with regulators and law enforcement to share information. Ms Pritchard specifically noted that fighting financial crime should never be left to one body or one team within an organisation and that the FCA intended to drive improvements in the area more rapidly through the faster deployment of its tools, such as issuing warnings where they see harm (through the warnings list and their Scamsmart campaigns) alongside the traditional approach of enforcement. The total fines for money laundering system and control failures by the FCA since 2018 has reached over £665m and it looks like it will remain an area of active enforcement.

The recent findings from the FCA’s review of challenger banks were flagged as important for the wider industry, as the risks (weak customer due diligence and insufficient rigour in dealing with transaction alerts) being no different to those across the whole retail sector.

The FCA’s upcoming APP tech sprint (occurring 27 – 29 September) was also flagged as key to the FCA’s approach. The sprint will include a demo of proposed technological solutions that might be available and provides an opportunity to collaborate with industry.

Finally the impact of the cost of living crisis was stressed as more than seven in ten people say they have been targeted by scams in the past three months. The FCA are already seeing an increasing number of scams such as loan fee fraud, ghost broking, and false access to rebates from utility companies. Consequently, the FCA recommended that authorised firms review their financial crime controls to address any new/increased risks from the cost of living crisis.

PSR update on account-to-account retail disputes

The PSR published a blog post on 21 September on how the payments industry can minimise payment risks for the dispute process in account-to-account retail payments.

In particular the post stresses the importance of clarity and confidence as well as recognising the role that players beyond PSPs can take. The post suggests that payment systems operators need to consider their role in setting clear rules to support the dispute process; retailers and consumers should be working together to detect and prevent problems and that PISPs and receiving banks also play a role in managing risk.

With the ongoing review of Open Banking, the post also sets out a number of scenarios which the PSR has asked the SWG to explore, specifically in the retail context:

• Before things go wrong: how sharing additional data and providing assurances could improve risk decisions – noting that this will need to be aligned with discussions on account-to-account functional capability and the delivery of the New Payments Architecture.
• Uncontested refunds: whether the right processes are in place to do this effectively.
• Contested refunds: who is best placed to provide this resolution (also considering the implications of funding, participation and operational requirements).
• Where funds are no longer available: whether additional protections may be needed and how liability rules can be assigned to incentivise all parties to minimise the risk of harm.

Account to account payment functionality has been in the news a lot over the last few weeks, with banks increasingly prepared to embrace its development in favour of card payments.

And ‘Fnally’: a tokenised payment system is recognised by Treasury

A recognition order was made on 31 August regarding the Sterling Fnality Payment System meaning that the system has been approved by the Treasury as falling within the Banking Act’s definition of “inter-bank payment system”.

This is potentially a hugely significant step in the development of the UK payments infrastructure (and its incorporation of DLT), with the only other payments systems currently recognised in this way being LINK, Bacs, Faster Payments Service and the Visa and Mastercard European services.

Fnality was founded to create a network of decentralised Financial Market Infrastructures in order to deliver the means of payment-on-chain in the wholesale banking market. Importantly, it uses blockchain-operated, tokenised cash assets to settle securities trades in an attempt to make international payments safer and cheaper. We expect updates on this to follow.