Payments View – September 2023

Payments View returns from the summer break with a panoply of publications - including four consultation papers on APP fraud, three statements on access to cash, and another consultation paper on safeguarding apparently on the way. As ever, if any of the updates raise questions or concerns please don't hesitate to reach out to us.

The updates this month cover:

• delay to the proposed APP fraud reimbursement requirement and a number of consultation papers;
• an incoming e-money safeguarding consultation;
• access to cash statements;
• the FCA's findings on politicians being 'debanked' over political views;
• the EBA's payment account mystery-shopping exercise;
• notice that the reformed systemic payments perimeter will retain its "essential design";
• suggestions that payments and e-money firms should broadly be descoped from FCA D&I proposals; and
• UK Finance's report on the changing nature of payments.

APP fraud consultations on the specific direction for PSPs, claim excesses and gross negligence

With the measures to address authorised push payment fraud ("APP fraud") due to enter into force next year, the PSR has published a swathe of consultation papers, covering the Specific Direction on Faster Payments participants, the practicalities of the reimbursement levels, the requisite consumer standard of caution,andfurther timelines and reporting periods.

Breaking news from the Specific Direction paper is that the PSR are proposing to delay implementation of the reimbursement requirement to 7 October 2024, rather than in April. We see this as a welcome and sensible delay to allow firms to adapt to the significant changes required by the proposals.

The Specific Direction CP is hot off the press (published yesterday - 28 September) and provides further clarity on the general direction's scope and the PSPs it would capture.

The proposed scope covers PSPs participating in Faster Payments who provide a payment account in the UK to their payment service users to send or receive Faster Payments. The purpose of this specific direction is to ensure that all such PSPs comply with the new reimbursement rules. As this was just published, we will likely include further thoughts on the proposals in next month's edition of Payments View. The consultation itself is running until 19 October.

Next, the consultation on reimbursement levels which asks for responses in respect of both Faster Payments and (on behalf of the BoE) CHAPS on:

• The level of claim excess which sending PSPs will be entitled to apply for a claim. where the PSR is primarily consulting on whether this excess should be a fixed amount, percentage, or percentage with a cap. The CP sets out some interesting, practical points to consider - as well as other options (variable levels for different types of fraud) that seem less viable. It is important to remember that this excess will not be applicable in respect of cases concerning vulnerable customers; and
• The maximum level of reimbursement: where the PSR are proposing to match the ombudsman service limit of £415,000 across both Faster Payments and CHAPS. This, however, will apply to cases concerning vulnerable customers.

Two other points which caught our eye included the proposed monitoring process where the PSR have said they plan to "replace the Metric C validation process (covering APP fraud rates for each receiving PSP) with a fuller process for checking information between sending and receiving PSPs to support the liability split between them" and a small point on vulnerability where the PSR flagged that "all respondents who addressed vulnerability [in the September 2022 consultation] agreed with our proposal that vulnerable customers should be exempt from any excess".

On the standard of caution consultation paper, there is plenty of detail to work through with the proposals focusing on:

• specific, directed warnings given by a customer's bank, which "make clear the intended recipient is likely to be a fraudster";
• "a prompt reporting requirement" although this is proposed to extend to up to 13 months after the last fraudulent payment was made (and FOS will have jurisdiction even after this date); and
• consumers being required to respond to any "reasonable and proportionate requests for information" made by their bank to help them assess a reimbursement claim, or to determine if a consumer is vulnerable.

The proposals explain that gross negligence is only expected to apply in a small minority of cases and is a very high bar that will - critically - depend on the individual circumstances of each case. It is also suggested that where a consumer is subject to "repeated APP scams of a similar kind", this may be indicative of vulnerability which may raise some problematic questions. Our initial thought on this is that the level of friction required to get anywhere near the threshold for proving gross negligence is likely to be off-putting in the extreme.

These two consultations are open until 12 September with a final policy expected by the end of this year.

The final consultation paper to mention is a simpler affair, proposing to update the previously circulated proposal of collecting cycle 2 data over a six-month period to, instead, move to 12-monthly reporting, so that the cycle 2 data-collection period captures all of 2023. Under these new proposals, firms would follow the same approach they took with cycle 1 where the PSR note that they "did not find that collecting two six-month periods in one cycle created additional burdens for firms". The proposals would mean that for cycle 2 the data collection covers H1 2023 and H2 2023 with the deadline for the initial submission being 16 February 2024 and data published in July 2024. This consultation is open until the slightly later date of 22 September.

Finally, for those aiming to develop technical solutions, the City of London Corporation and the FCA are publishing a synthetic data set (covering 30 million rows with 30,000 fraud events) for use in creating products and services to minimise fraud.

As we've been talking about in previous edition of Payments View, changes to address APP fraud will be a huge challenge for the industry to address and so do reach out to us with any questions or concerns; you might also want to check out the inaugural Financial Markets Disputes View from our litigation colleagues.

Incoming e-money safeguarding consultation

A quick update on safeguarding where we understand from the FCA that they are still due to publish their consultation paper on e-money safeguarding changes.

Some interesting points came out of a recent UK Finance event with, amongst others, Jane Moore (FCA Head of Department, Payments and Digital Assets) which included that the FCA have acknowledged (i) that they are in "listening mode" on the subject and (ii) that there has been some discussion and thinking about whether something akin to FSCS could be extended to cover customers of e-money firms.

We will continue to monitor development in Payments View but expect the consultation will focus on strengthening requirements for safeguarding funds (held by payments and e-money firms to meet customer entitlements) using enhanced rule-making powers to be conferred on the FCA as part of the Future Regulatory Framework Review with final rules due to be published "around end 2023 / early 2024".

Do let us know if this is an area you would like a chat on as, considering the developments of the last year, we are seeing safeguarding considerations coming to the fore of many client's regulatory priorities.

A hat-trick of access to cash statements

A big month in the world of cash with three linked publications by HMT, BoE and the FCA (the latter of which through FSMA 2023, has been tasked by the government to seek to ensure "reasonable provision" of cash deposit and withdrawal services for personal and business current accounts).

The aim of HMT's policy statement is to inform the FCA's approach to ensuring access to cash, including in relation to what constitutes "reasonable provision" of cash access services in the UK. Two main points are that: the government sees "reasonable provision of cash access services" (as to be determined by the FCA) means free cash access services (with pay-to-use services not being prohibited but falling entirely out of these considerations); and that coverage should be maintained at its current calculated levels which are:

• for people in urban areas having access to cash deposit and cash withdrawal services within a maximum of one mile of where they live; and
• for people in rural areas having access to cash deposit and cash withdrawal services within a maximum of three miles of where they live.

The FCA published a subsequent statement noting that it intends to consult on the rules that will require each of the banks and building societies, which are designated under the access to cash regime, to conduct assessments of the reasonableness of cash provision when/if certain significant changes occur in local access. The FCA expects any new rules will take effect by summer 2024. In the meantime, the statement reminds firms that the Consumer Duty does set a higher standard of protection for banking customers, including where they are impacted by branch closures and ATM conversions.

On the wholesale side, the BoE has published their own statement of policy on its supervisory approach to market oversight for cash distribution following its December consultation. This statement also confirmed that the BoE intends to consult, in autumn 2023, on certain proposals for codes of practice and guidance as well as its proposals concerning imposing financial penalties.

UK regulator finds no evidence of politicians being 'de-banked' over political views

The FCA has come under fire (with calls by Nigel Farage for sackings of the Board) following the publication of their findings that confirmed "no firm closed an account between July 2022 and June 2023 primarily because of a customer's political views".

Although the report does make repeated reference to the fact that this investigation was done "at speed" and Nikhil Rathi commented that "further work is needed for us to be sure", the regulator's 85 page report surveying 34 banks, payment institutions and building societies found that none had closed a single account "primarily because of a customer's political views" during the period. The report notes that "across personal and business accounts, there were 4 cases reported with 'expression of political or any other opinions' as the primary factor behind account action. We followed up on these cases and further information showed that the primary reason for action was, in fact, customer behaviour (e.g. racist language directed at staff), not the 'expression of political or any other opinions'".

Other interesting points which jumped out are that:

• the data received by the FCA includes some quite extreme outliers (see page 38 of the report) with some firms apparently suspending over 70% of its personal accounts and terminating equally significant numbers of business accounts;
• even within the 'central range' (i.e. ignoring outliers) the rate of terminated accounts in respect of payment firms was as high as 44.9% of applications for some firms; and
• the "significant majority" of accounts cited in the report as having been closed because of reputational risk were in respect of payments firms rather than banks or building societies.

On the commitment to future work, Mr Rathi has confirmed that the FCA will include following up with firms on the accuracy of this data and imposing additional supervisory work, as well as further research and review into the nature of declined applications and the 1.1 million unbanked persons in the UK.

If of interest we have recorded two podcasts on this subject which can be found here: DSARs and Debanking and Debunking Debanking (both recorded before this most recent update).

EBA conduct payment account mystery-shopping exercise

The EBA has co-ordinated a mystery shopping exercise alongside five national competent authorities ("NCAs") in respect of 37 firms across the participating member states on 340 occasions. The exercise focused on the pre-contract phase of obtaining personal loans and, in some jurisdictions, also payment accounts. The mystery shopping gathered first-hand information for NCAs on firms' conduct towards consumers by visiting a branch or using a digital channel to obtain a personal loan or open a payment account (250 were carried out on-site and 90 online). The subsequent report notes that:

• many firms did not use the mystery shopper's first visit to provide pre-contract information;
• some firms automatically increased the total amount of credit to include bank fees without collecting the consumer's explicit consent; and
• other firms provided noticeably less information on their digital channels than in branches and product-specific information was rarely made available via online chat.

The report also includes a number of recommended actions that participating NCAs can consider as a follow-up to the exercise, in particular:

• communicating with financial institutions on the lack of information provided to consumers using digital channels in some countries;
• investigating regarding some FIs' practice to automatically increase the total amount of the credit to include the bank fees without collecting explicit consent from consumers, or the provision of information related to specific requirements to get the loan;
• investigating regarding the provision of pre-contractual information documents for personal loans in 'good time' and Fee Information Document for payment accounts; and
• have bilateral contacts with the financial institutions concerned in order to explain the conclusions of this exercise and to propose some guidance or take any supervisory actions.

Reformed systemic payments perimeter to retain its "essential design"

HM Treasury has published its response to the July 2022 consultation on systemic payments perimeter reform. In particular, it has confirmed that it will:

• Legislate to reform the systemic payments perimeter of the BoE as set out in Part 5 of the Banking Act 2009. We understand that a further statement on HM Treasury's legislative approach will be published in due course and that the BoE is also expected to publish its approach on supervision.
• Set out its next steps on the extension of the Senior Managers and Certification Regime to recognised systemic payments entities and authorised payment services providers and e-money institutions. However, HM Treasury noted that it will not set out its position on the proposed extension of the SMCR until after the review of the SMCR as part of the Edinburgh Reforms has concluded.
• Make secondary legislation to reform the PSR's payment system access framework that will revoke the framework set out in regulations 102 to 104 of the Payment Services Regulations 2017.
• Publish a policy statement on its legislative approach to the framework for the PSR set out in the Financial Services (Banking Reform) Act 2013.

The "essential design" of the systemic perimeter is not proposed to change with entities assessed on a "case by case basis and against clear criteria". As a result, the consultation paper does not expect a shift from the current model, with the perimeter still being reserved only for those payments entities "that - through any deficiencies in their design or any disruption to their operations - had the potential to threaten the UK's financial stability or have wider economic consequences". The government has said that it is committed to be taking forward these reforms to the Bank's systemic perimeter at a future legislative opportunity.

Payment and e-money firms broadly descoped from FCA D&I proposals

The long awaited FCA Diversity, Equity and Inclusion Consultation Paper and PRA Diversity and Inclusion Consultation Paper have both been published and, interestingly, the proposals set out that, in the FCA's view, payment services and e-money firms (alongside credit rating agencies) should all remain out of scope of the proposals (to the extent they don't have Part 4A permissions). The FCA does, however, suggest that out of scope firms may consider voluntarily adopting the proposed framework and we may have further clarity on this following the end of the consultation period.

These proposals are expected to be a significant change to the conduct, culture and SMCR considerations at regulated firms and you can find out more in the flash edition of SMCR+ View. The wider team will be writing to the FCA/PRA on the proposals as a whole and so, if you would like to discuss the proposals with us, do let us know.

UK Finance report on the changing nature of payments

UK Finance has published its analysis of the 2022 payment trends, along with forecasts to 2032, in their Payment Markets Report. Interestingly, for the first time ever, half of all payments in the UK were made via debit cards, as the proportion of payments made using cash continues to decline. Particular interesting highlights from the Report including that:

• even though payments made with credit cards have increased by 19% from 2021, debit cards remain the most popular payment methods and volumes increased by 18%, reaching 23 billion payments in 2022;
• contactless payments were used extensively and have increased by 30% compared to 2021;
• surprisingly, the sharp long-running decline of cash payments seems to have plateaued in 2022 (even increasingly slightly) with cash still being the second most frequently used payment method;
• remote banking has remained popular and the number of payments processed via the Faster Payment Services increasing by 17%;
• although still used less frequently than contactless cards, Mobile Wallets appear to be growing in popularity, as 30% of the adult population reported being registered for at least one mobile payment service in 2022; and
• the UK Finance analysis seems to suggest that use of 'Buy Now Pay Later' has stalled slightly, with the same proportion of people using this service over the year remaining the same as was in 2021.

Looking into 2032, the Report has forecast that the debit card payment volume, driven mostly by contactless payments, will increase to over 27 billion, whilst cash payments will continue to decline although the growing pushback to the loss of cash (and measures to retain access to cash, see above) may very well change that.

News Flash

• UK Finance has published updated, interpretative guide on the UK revised Wire Transfer Regulation intended to provide "some operational clarity and encourage market harmonisation on points material to, for example, straight-through processing".

• The FOS have updated their webpage on goods and services bought using cards in relation to complaints concerning section 75 of the Consumer Credit Act 1974 (CCA) and chargeback with a view of rectifying what it sees as a lack of consumer understanding in the area. The ombudsman also published its quarterly complaints data with current accounts and credit cards as the two most complained about products.

• CASS has been formally approved by the PSR as continuing to meet the required criteria for alternative switching scheme.

• The FCA has launched a review into the treatment of Politically Exposed Persons to make sure the rules "are implemented proportionately and don't create unnecessary barriers for public servants and their families". A report (which will be interesting in light of the NatWest / Nigel Farage new story earlier in the summer - see above and our Summer Edition of Payments View) is due by the end of June 2024.

• As the Times has reported, a significant strand of the 50,000 responses to the consultation on the UK Digital Pound were far from positive with "a lot of concerns about privacy" and state control. This comes as Sarah Breeden (incoming deputy governor of the BoE in charge of the digital pound) told MPs on the Treasury select committee that there needed to be a "national conversation" about the merits of a central bank digital currency and that "we must not assume trust in practice. We need to demonstrate that whatever parliament has decided [on privacy] is the right boundary and one that we will deliver."

• BCG has published its Global Payments Report 2023 which covers the opportunities and challenges facing the payments industry, focusing on the following four sectors: acquirers, issuers, wholesale transaction banks, and payments infrastructure providers.

• The BoE have published an interesting staff working paper on 'open banking, shadow banking and regulation' and the interconnected nature of investment, capital requirements and regulator intervention.

• And finally, the Apple Wallet app will soon be able to show current account balances from certain UK banks (as part of iOS 17.1 developer beta) as well as show the user's history of deposits and payments plus inline balances when buying something with Apple Pay, in a significant 'Open Banking-powered' development for the tech company.