Payments View - May 2023

In this month’s update we cover the PSR's plan for the year, the government's new fraud strategy and some interesting thoughts from UK Finance on the Call for Evidence on the PSR's. If any of the topics spark further questions, please reach out to us.

Also, a quick note that we’ll be at Money 20/20 in Amsterdam from 6-8 June to showcase our cross-border RegTech tools and officially launch, Payments Reviewer which builds on the success of our Crypto Reviewer platform to deliver intuitive, jurisdictional overviews of payments regulation – let us know if you’re interested in taking a look or just pop by and see us at Stand C11.

PSR Annual Plan Event 2023: Insights and Discussions on the Future of Payments

The Payments Systems Regulator (“PSR”) recently held its Annual Plan event, covering speeches from Chris Hemsley (Managing Director) and Aidene Walsh (PSR Chair) on the regulator’s approach to regulating the sector as well as a panel session on the future of payments.

In his welcome address, Chris Hemsley set the stage by highlighting the significance of effective regulation in ensuring fair and competitive payment systems. He emphasised the work towards the priorities set out in the regulator’s Strategy as well as their shift (mirroring the FCA) towards digitised intelligence gathering as a core engagement approach.

Hemsley also touched upon the ongoing work on fighting APP scams and the evolving payment ecosystem, with emerging technologies such as open banking and variable recurring payments reshaping the industry. He underscored the PSR's commitment to adapt and respond to these changes, ensuring that regulation keeps pace with the evolving landscape and that legislation is brought forward (in the form of the Financial Services and Markets Bill) to supplement the PSR’s formal powers of direction and role as a competition authority.

Aidene Walsh emphasised the PSR's strategic objectives and focus areas for the upcoming year. She discussed the importance of collaboration among industry stakeholders to foster innovation and maintain trust in the payment systems. Walsh highlighted the PSR's commitment to promoting competition, user protection, and efficiency. She also emphasised the need for continued regulatory oversight to ensure the resilience and stability of payment systems, particularly in the face of growing cyber threats.

The creation of a supervisory team is another key development aimed at supervising the payment systems operators, Pay.UK, LINK, Visa, Mastercard and Fnality (the latter being the newest operator to be approved which we covered in September). The division has been “created to drive compliance with the PSR’s requirements, something that has become increasingly important as the regulator uses its powers to boost competition, increase choice and tackle payment fraud”.

UK Government Fraud Strategy

The UK Government has published a national fraud strategy (the “Strategy”) setting out the measures it intends to implement to tackle the high levels of fraud in the UK (fraud now accounts for over 40% of all crime in England and Wales and is also estimated to have cost the nation around £6.8 billion in 2019 – 2020). The government’s main aim is to cut fraud by 10% on 2019 levels by 2025. The Strategy is underpinned by three proposed actions:

• Pursue Fraudsters: by investing in law enforcement and launching a new National Fraud Squad. The measures aim to disrupt fraudsters and focus on high-end frauds and organised crime, improve police training in digital skills, enhance international partnerships to clamp down on fraudsters wherever they are located and replace Action Fraud with a new reporting website to make it easier for people to report crimes online and obtain advice on fraud and cybercrime.

• Block Fraudsters: through the appointment of an Anti-Fraud Champion to drive delivery and increase industry collaboration making it harder for fraudsters to operate. Introducing regulations to prevent fraudsters from abusing technology such as banning SIM farms and cold calls on financial products targeting people to buy fake investments. The Government is also seeking to enable financial firms to better protect their customers by allowing additional time to hold suspected fraudulent payments for investigation and by working with a range of industry stakeholders to increase data sharing.

• Empower the public: by improving public anti-fraud communications, awareness and creating a new dedicated police network.

An important issue that is considered is authorised push payment (“APP”) scams. Given the significant investments made in technology by financial institutions to prevent unauthorised fraud, APP scams have been a recurring topic that the government and regulators are keen to address as we have set out in previous editions. The government’s intention was to also require tech companies to reimburse anyone who fell victim to online financial fraud but these plans have been dropped. The proposition is now to agree a new Online Fraud Charter with tech companies which would commit the companies to improve data sharing to stop scams, ensure firms marketing financial promotions are checked against the FCA’s authorised list before being published, outline how they can support law enforcement more and increase the counter-fraud education available to the public.

The Strategy has, however, received some criticism from industry experts, with critics claiming it does not go far enough to deal with the current levels of fraud. It will be interesting to see what impact the Strategy has in the short term and we will be watching out for the framework to measure progress.

UK Finance Response on the PSR Review

UK Finance have published their response to the recent Call for Evidence on the PSRs (covered in detail in our January edition) which makes for interesting reading on the development of the UK regulatory framework. UK Finance’s response is broadly supportive of the proposals and pushes for a move towards a more outcomes-based approach, allowing market participants to compete and innovate.

On the headline proposal of consolidating the Payment Services Regulations 2017 (“PSRs”) and Electronic Money Regulations 2011 (“EMRs”) into one regulation, UK Finance agrees that this would act to simplify the current, complex landscape of regulations and rules. However, they also flag that policymakers should focus on regulating the ‘application’ of emerging technologies and ensuring a level playing field for all payment methods.

UK Finance also advocates for bringing the provision of digital wallets like Apple Pay and Google Pay into the regulatory perimeter. The industry body says that this move addresses concerns related to concentration, operational, and regulatory risks, and aligns with the potential regulation of wallet providers (Payment Interface Providers) as proposed by the Bank of England in their proposed model for the Digital Pound (covered in our February edition).

In respect of the ongoing discussions around combatting fraud, UK Finance recommends a number of specific points on how PSPs are able to pause Faster Payments transactions in cases of suspected fraud. Specifically, UK Finance believes that amendments are needed to regulations 86 and 89 of the PSRs to insert an exemption which disapplies the current processing timeframes for both inbound and outbound payments in order to allow appropriate flexibility. As part of this, UK Finance suggests removing some prescription from Strong Customer Authentication (particularly those requirements which are technology-specific) to improve customer journeys without compromising the objective of reducing fraud, allowing for exemptions or a broader risk-based approach.

Improving customer information is another area of focus with UK Finance suggesting permitting a ‘layered approach’ to the provision of delivering this information to customers. They argue that this should enable market participants to provide required information over time and through various formats, which they argue aligns with the Consumer Duty outcome on Customer Understanding.

Lastly, UK Finance acknowledges the FCA's commitment to safeguarding customer money and calls for further clarity on the ‘compliance gaps’ identified in the recent Dear CEO letter (covered in March).

BIS policy perspectives on CBDCs

The Bank for International Settlements alongside a group of central banks has published a short paper on central bank digital currencies (“CBDC”) and the ongoing policy perspectives surrounding them. The key messages of the paper include that:

• Development of CBDC work requires careful consideration and engagement with a wide range of stakeholders, including the private sector and legislators;
• To successfully meet its public policy objectives, a CBDC ecosystem should allow a wide range of private and public stakeholders to participate and, in doing so, deliver services which benefit end users;
• The complex design questions and the potential risks arising from the implementation of any CBDC require careful consideration. In particular, the paper raises that CBDCs, if issued, “must be interoperable with other forms of money and existing payment systems” alongside concerns over how CBDCs could connect with instant payment infrastructure and be processed at point of sale terminals; and
• The evolving payments landscape requires central banks to give some consideration to how CBDCs may be used for wholesale and cross-border use cases.

Those watching the space will remember that we published an overview of the UK’s proposed Digital Pound back in February, which can be found here.

If you have any questions around the development of CBDCs, please do get in touch.

Speech: FCA's Role in Driving Innovation and Growth in the Fintech Industry

Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations at the FCA has given a speech highlighting the importance of regulatory oversight in establishing strong regulatory foundations for fintech firms to thrive and grow. Ms Shepperd noted that the UK has emerged as the top destination for fintech investment in Europe and is globally second only to the United States. She noted by addressing regulatory issues early on, fintech companies can accelerate their progress and achieve success in a shorter timeframe. In particular, Ms Shepperd highlighted the following key initiatives from the FCA to support fintech innovation:

• Regulatory Sandbox: which allows firms to get feedback from customers and regulators, and to make necessary changes before launching their products and services to the wider market.

• Innovation Pathways: which provide guidance and support to fintech firms that are seeking to launch innovative products and services. So far, more than 830 firms have been supported through the Regulatory Sandbox and Innovation Pathways.

• Early and High Growth Oversight function: The Early and High Growth Oversight function works with firms immediately after authorisation to provide support to fintech firms that are growing rapidly.

• Emerging Technology Hub: The Emerging Technology Hub is a team of experts that work with industry, academia, policymakers, and regulators to analyse the risks and opportunities that new technologies pose to consumers and markets. The hub also provides support to fintech firms that are developing new technologies.

If you have any questions around the FCA authorisation process, please do get in touch.

FCA Overdrafts Remedies Evaluation

As part of a “High-Cost Credit Review” into the UK market for overdrafts in 2019, the FCA implemented certain solutions to deal with harm caused to consumers by expensive and repeat use of overdrafts, complex pricing structures and low education of personal current account (“PCA”) holders on this issue. These solutions were split into two main remedies, being, “pricing remedies” and “repeat use remedies”. The FCA has now published an evaluation paper setting out its findings on the impact of the remedies so far.

The main results which have been highlighted are that it is estimated that £500 million in charges has been saved annually owing to the pricing remedies and around £486 million has been saved by the reduction in repeat overdraft use. The evaluation does not take into account the current cost-of-living crisis which may have an impact on overdraft use, but in general, the FCA is of the opinion that its remedies would still be beneficial if a higher number of consumers now fall under the PCA provider’s definition of a repeat user.

In light of the Consumer Duty, the FCA has also released its findings of a review into the strategies firms are applying to help PCA customers with overdrafts who are facing cost of living difficulties. The findings set out various policies that firms have in place, highlighting good practice and areas for concern around four key features, being: identifying and monitoring of overdraft repeat use customers, communicating with customers and gathering information, interventions to support customers, and monitoring the effectiveness of repeat use policies and procedures.

If you have any questions around the evaluation paper or the requirements of the Consumer Duty, please do get in touch.

News Flash

• The FCA is consulting (CP23/13) on strengthening protections for consumer credit and mortgage borrowers who face financial difficulties. During the Covid pandemic, the FCA introduced Tailored Support Guidance (TSG) to guide firms in supporting customers in financial difficulty. The consultation outlines plans to incorporate aspects of the TSG into the CONC and MCOB sourcebooks and withdraw the TSG alongside additional changes on broadening the scope of the CONC and MCOB chapters, beefing up requirements on customer engagement and giving further guidance on setting fees and charges. The consultation closes on 13 July 2023 with new rules (and the withdrawal of the TSG) expected H1 2024.
• The FCA Director of Consumer Finance delivered a speech at the Credit Summit 2023 covering how firms should be supporting customers facing financial pressure in order to maintain a well-functioning credit market and how firms should be focusing on what they need to do to ensure they are ready to meet the higher standards of the Consumer Duty.
• There has been a reported recent increase in current account switching rates due to a rise in switching incentives. Banks are however under pressure to pass on higher interest rates to savers. The FCA has written to MPs regarding its concerns that banks are relying on “customer inertia” to keep their savings rates low.
• LHV UK Limited, a branch of Estonian bank AS LHV Pank, has obtained a licence from the PRA.
• The European Council has approved the Commission’s proposal for a regulation on instant credit transfers in euro which aims to enhance the accessibility of instant payment options in euro to account holders in EEA jurisdictions.
• HM Treasury has published a letter from the Economic Secretary, Andrew Griffiths, to the Chair of the House of Lords Economic Affairs Committee in relation to a further amendment made to the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 to allow Silicon Valley Bank UK to remain exempt from the ring-fencing regime on an ongoing basis.
• HM Treasury has published a Memorandum of Understanding on Financial Services Cooperation establishing a framework between the EU and the UK based on the shared objective of “preserving financial stability, market integrity, and the protection of investors and consumers.”