Payments View - December 2022

It seems that Jeremy Hunt drew financial services regulatory lawyers as his Secret Santa this year judging by his festive gift of the Edinburgh Reforms. We cover the payments and consumer credit highlights of the reforms below, but the proposals are exceptionally broad (with new announcements regarding SMCR, PRIIPS, short selling and research, amongst others) and these elements are covered in detail in our Edinburgh Reforms View and 45 minute Flash Call (watch on demand here).

This edition we also wanted to look back at some of the other key developments from 2022 – if any of these topics spark further questions, please don’t hesitate to reach out to us. If not, have a lovely holiday break and we will be back in the New Year!

Key Update: Edinburgh Reforms

The 30 policy initiatives that make up the reforms bring together new and existing regulatory initiatives and build on the changes initiated by the Financial Services and Markets Bill (“FSMB”). The proposed reforms represent a commitment from the Government to build on the UK’s position following Brexit. Of particular interest here are an expansion of the FCA’s powers towards payments and e-money firms, long overdue changes to update the Consumer Credit Act (“CCA”) and proposed updates to the Payment Account Regulations (“PARs”), plus news on Central Bank Digital Currency.

The reforms propose a wider overhaul of the regulatory framework for payment services and e-money that will start with the FCA’s powers to make rules in relation to APIs and EMIs. This was signposted as part of the Future Regulatory Framework Review. The focus here is on giving the FCA powers (and HMT influence) to make rules for APIs and EMIs in the same way they do for authorised firms under FSMA. The draft Statutory Instrument proposes changes to specific areas, such as client money which, in the context of the outcome of the Ipagoo case (covered in our March edition) is likely to result in the FCA finally getting their way on the creation of a statutory trust for safeguarded funds. The supporting Policy Note is available here.

The proposals regarding the CCA which the FCA are consulting on are focused on proportionality and simplification, both building on existing proposals from the FCA’s 2019 Retained Provisions Report, Woolard Review and June 2022 announcement. The proposals are also aimed at aligning consumer credit with other areas of UK financial services regulation, such as the broader ‘future regulatory framework’ under the FSMB and the Consumer Duty; after all the CCA is nearly 50 years old and needs to keep pace with the modern world. Responses to the consultation are invited by 17 March 2023.

Some of the key points under consultation include:

• Moving the CCA rules into the FCA Handbook to the extent possible and extending FCA powers. The idea is that this will allow the rules to be flexible and to adapt rapidly to an evolving market. The regime is, however, still likely to end up split between FCA rules and residual legislation, so HMT intends to ensure there is adequate time to allow for these significant changes to take effect.
• Reviewing and modernising information requirements. With its more flexible approach the FCA intends to take a ‘test and learn’ approach to help them respond to innovative credit products going forwards.
• Extending the FCA’s rulemaking powers to allow the FCA to apply unenforceability as a sanction for a breach of FCA rules (without action from the court).
• Changing or possibly abolishing the £25k minimum for the business lending exemption.
• Looking at how reform can encourage financial inclusion and remove barriers to financing electric cars and “green” energy for homes.

These changes will have a significant impact and, as the source of consumer credit obligations transition towards the FCA, firms will need to lobby, engage in the consultation and actively monitor the developments (on top of adapting to the actual changes proposed). We are, however, in for the long haul here and expect it to be several years before the final position becomes clear.

The proposals regarding the PARs focus on changes to the information requirements and the consultation runs until 17 February 2023. HMT are of the view that most of the mandatory requirements on the form and content of fee information that must currently be provided to customers are too prescriptive or ‘less necessary in a UK context’. Whilst the consultation does provide an opportunity to move away from the current EU-centric approach, which doesn’t fit with the free-when-in-credit-banking market in the UK, firms will need to consider how any changes or a perceived move away from being transparent with customers will be viewed by the FCA in light of the Consumer Duty.

As a final point, the Edinburgh Reforms also included an announcement that the government is looking to consult on Central Bank Digital Currency (“CBDCs”) in the coming weeks. This follows the Bank of England’s discussion paper on CBDCs more generally which closed in March of this year. The announcement was part of the government’s push to be seen as a leader in the FinTech space, and it does seem that they are likely to push ahead with some form of CBDC (whether that would be a retail offering remains to be seen). Interestingly, at the same time as announcing the consultation, the Government published an RFP for a supplier to build a CBDC sample wallet proof of concept, which suggests that this isn’t just words.

If any of these proposed changes (or the broader changes within the Edinburgh Reforms) raise questions or concerns, please don’t hesitate to reach out to us.

2022 in Review

It has been a busy year for payments with key regulatory changes across the sector, from flagship developments like the Consumer Duty and Financial Services and Markets Bill, to key consultations on BNPL and APP fraud. For the Simmons team, it has also been a year of exciting new projects, including the successful launch of Crypto Reviewer and starting development on its sister-product, Payments Reviewer (covering payments and e-money, where we are currently conducting a market testing exercise which you can get in touch about).

Consumer Duty

One of, if not the key regulatory project of 2022 has been the Consumer Duty. As noted in Consumer Duty View, the Duty aims to deliver greater trust in financial services, good outcomes for consumers, and provide a more flexible regulatory framework through a shift towards outcomes-based regulation.

Most recently, the FCA announced that they are consulting on ‘clarificatory’ changes (responses due 9 January 2023), more detail on which can be found here. We would also recommend to those working through the Duty the FCA’s payments-specific webinar that was held on 1 November (a recording of which can be found here) and look through our key takeaways and suggested next best steps covered in last month’s edition of Payments View.

The FCA have made clear that they recognise payments is a fast growing sector where innovation is welcome, but they have also noted that there is a risk of harm to consumers if products are poorly designed or delivered in a suboptimal manner. More resources can be found on our Consumer Duty hub. If you would like our support with the implementation of Consumer Duty, please do reach out or complete the form on our website.

The Financial Services and Markets Bill (“FSMB”)

The FSMB has been one of the defining pieces of financial services legislation progressed this year with its intention of bolstering the UK’s competitiveness as a global financial centre. The FSMB has completed its report stage and third reading in the House of Commons and is off to the House of Lords following confirmation that the proposed ‘call in’ power has been dropped. We originally covered the FSMB in our August edition, in particular the proposals covering:

• Regulation of stablecoins and digital settlement assets (don’t forget to look back at previous editions of Crypto View too if this is of interest)
• Retail cash access and wholesale cash distribution
• Increased protection against APP scams

The FSMB has acted as a touchstone for various initiatives this year, with the government and regulators referring back to, and in some cases building on, the proposed changes that are expected to become effective in 2023.

Authorised Push Payment (“APP”) fraud

The changes proposed in addressing APP fraud have progressed with the PSR’s wider consultation on the mandatory refunds for victims, covered in our October edition. Under the consultation, all PSPs (including indirect access providers) will be required to reimburse victims of APP fraud where payment is made over Faster Payments, subject to very limited exceptions. As we noted then, this is a huge proposed change for the industry which would introduce significant costs for all PSPs and may have unintended consequences for the wider payments sector.

The PSR has recently begun consulting on the technical process that banks and building societies will have to follow as part of its new reporting requirement to improve transparency in APP fraud data. The data the regulator propose would cover the proportion of victims who are left fully or partially out of pocket, as well as the rates of APP fraud happening at both sending and receiving banks or building societies. This consultation closes on 17 January 2023 following which the PSR will publish a policy statement, direction and template for publishing the above data, along with the start date for reporting.

Buy-Now-Pay-Later (“BNPL”)

HMT concluded another key consultation (covering BNPL) with the publication earlier this year of its response to their 2021 consultation. More details are set out in our June edition (following the FCA’s direct action on BNPL terms covered in February) with key changes being:

• Widening the regulatory scope to capture BNPL and Short Term Interest-Free Credit (“STIFC”).
• Ensuring BNPL providers are approved by the FCA and conduct affordability checks.
• Amendments to the running-account credit exemption in section 60F(3) FSMA to avoid BNPL providers.
• Tailoring the CCA to BNPL/STIFC products.

We are monitoring this space and so please do reach out if you have any questions or concerns.

Digitisation of Payments

A broad theme across the year has been the ever-increasing digitisation of payments, particularly in terms of the developments of Open Banking and Account-to-Account payments (where we have covered the large number of PSR thought pieces) as well as the counterpoints of increasing scrutiny on access to cash.

On Open Banking, we have been monitoring the progress of the Joint Regulatory Oversight Committee and its Strategic Working Group, with a newly published joint statement covering their vision for open banking and emerging thinking on the design of the future entity. A further statement is expected in Q1 2023 setting out the common views of the authorities and their recommendations. This is also expected to include a roadmap on next steps.

On access to cash, the PSR, FCA and government have all been active in their work to ensure that the UK's cash infrastructure is sustainable for the long term – further details can be found in our January, May and June editions with the FSMB and Consumer Duty also, of course, being important further considerations in this space.

News Flash

• Following the update covered in last month’s edition that the PSR has embarked on the next stages of their two market reviews into card fees, the PSR has published a working paper outlining what it sees as the potential impacts of these fees on UK businesses and consumers. The PSR is collecting feedback until 19 January 2023, but has already set out how they believe UK service users “may potentially have been harmed”. The PSR has previously confirmed that if during its investigations it finds evidence of harm to users or negative impacts on competition or innovation, it will “act swiftly” to take steps to remedy this.
• On the European side, the EBA has published its first thematic review on the transparency and level of fees and charges for retail banking products across 140 financial institutions in the EU (covering mortgage credit, consumer credit, deposits, payment accounts, payment services and electronic money services). The report observes that significant detriment still arises, particularly because of gaps in transparency, requirements and harmonisation, with corresponding difficulties for consumers in making appropriate comparisons between products.
• Transport for London marked ten years since December 2012 when contactless payments were first introduced as a way to pay on London's buses – very exciting at the time!