Payments View - November 2023

Ahead of our usual programming, in an exciting development we have just launched our test access to Payments Reviewer, our new cross-border due diligence tool. Payments Reviewer uses custom-built technology to display and explain the regulation of payment services, remittance, execution issuing cards, offering e-money around the world in a clear and user-friendly way. As with our main Navigator platform, Payments Reviewer will update quarterly to ensure you keep on top of legal and regulatory developments.

We can provide you with a demo of the online instance of the platform and then test access for two weeks - if you'd like me to get this sorted for you, do just let me know.

This year's penultimate Payments View is here with a landmark update on the future of payments, as well as developments on the Consumer Duty and Stablecoins.

The updates this month cover:

• Future of Payments Review
• Our webinar with the FCA's Head of Payments and Digital Assets
• The Consumer Duty - what comes next?
• Agreement on instant payments in euro
• Update on the UK BNPL proposals
• FCA multi-firm review on PSP fraud and complaints
• FCA Discussion Paper DP23/4 published on regulating fiat-backed stablecoins

Also we wanted to highlight that the FCA have published their latest edition of the Regulatory Initiatives Grid setting out the planned regulatory initiatives for the next 24 months. We'll update on this fully in the next edition of Payments View.

As always, don´t hesitate to reach out to us if any would be useful to discuss.

Future of Payments Review 2023 published

HMT's report is an interesting review of the UK's payment regulatory landscape, focusing on how payments are likely to be made in the future and the action that needs to be taken to enable the UK to deliver world leading retail payment services.

The report makes some big demands of the government, including calling for a new vision for payments and (with massive understatement) suggesting the headline policy of the APP fraud reimbursement requirements may not be entirely suitable to grow the UK fintech space - in particular, concerns over its potential impact on smaller firms and that, in the context of Open Banking, there is a "risk that the new APP fraud rules will be misused and invoked to cover a much wider range of claims than the intended scope".

The main recommendation from the report is for the government to develop a national payments vision and strategy to clarify its future desired outcomes for UK payments. The recommendation is based on strong feedback that the UK's payments landscape lacks vision and clear priorities. The primary aim should be to simplify the landscape over time and the report make a number of further recommendations to that effect.

One of the most interesting recommendations, to our minds, is on APP fraud where the report calls for the PSR to "formally review the costs and benefits of the new fraud and scam rules after 12 months of implementation have elapsed. Particular attention should be given to understanding the additional friction placed in the payments process and how that compares internationally." Considering the huge impact that these plans will have on the payments sector, we agree that such a step would be sensible. The report also makes the key point that the emphasis on any anti-fraud strategy should be to prevent fraud in the first place, rather than focusing on reimbursement after it has occurred.

Some of the other recommendations that jumped out include:

• Improving the functionality of SCA. The report calls for the FCA's supervision to move away from the detailed technical standards (inherited from European implementation) towards an outcomes-based approach.
• Improving A2A payments through the implementation of a "minimum form" of a disputes process to encourage trust and security, as well as stronger foundation for commercial arrangements for Open Banking (including the development of an Open Banking 'payments journey' to act as an alternative for card schemes). These are very much in line with the wider PSR / JROC messaging on the topics (covered in previous editions of Payments View) and we see these as key areas of focus for the regulators over the short to medium term.
• Potentially reducing the regulatory complexity for small fintech firms - again the report highlights the APP fraud plans, noting that it is "causing the greatest concern" as "a single case could bankrupt a fledgling start up, and the risk of this is a deterrent to investment in UK start-ups", especially as the proposed mitigations to this risk "do not eliminate the problem". Other, similar areas the report highlights could be simplified are PISP AML checks and prohibitions on EMI's that prevent them from competing with credit institutions.

Decoding DP23/4: a Simmons webinar with the Head of Payments and Digital Assets from the FCA

There is a full update on the new stablecoin discussion paper below, but we also wanted to note that 14 December, we are hosting a webinar "Decoding DP23/4" with Jane Moore, Head of Payments and Digital Assets at the FCA. The webinar will be led by Simmons & Simmons Partner George Morris and Managing Associate Neelam Hundal.

This is a rare opportunity to hear from the FCA directly on this ongoing discussion process and is not to be missed. We'll be asking what the focus areas are and what the FCA is really interested in hearing about from respondents. You can register for the webinar here.

The Consumer Duty - what comes next?

Nisha Arora, FCA Director of Cross Cutting Policy and Strategy, has given a speech on the Consumer Duty and what comes next for firms. The FCA has also published two new webpages with practical details on the Duty's implementation.

The Consumer Duty is the first encapsulation of outcomes-focussed regulation from the FCA and the speech highlights that the work for firms to embed the consumer duty to deliver good consumer outcomes has only just begun. Core areas of focus for firms were identified as simplifying language, being upfront about a product's exclusions, and reviewing fees "with fair value in mind". This all feeds into the FCA's mantra that "the Consumer Duty isn't once and done".

Ms Arora also made clear that the "implementation of the duty will remain a top priority for the FCA in how it makes financial services markets work well" noting that the FCA will continue its work across all sectors (specifically referring to the February 2023 portfolio letters - of which one was sent to payments firms) to test firms' implementation and embedding of the Duty. Ms Arora noted that the FCA has recently concluded its second survey measuring small firms' embeddedness of the duty and has plans for a third survey in the new year. Firms should also be focused on the implementation deadline for closed products and services. The FCA expects firms are already advanced in their preparations and it must be a priority for firms in the coming months to ensure they are ready by 31 July 2024.

The webpages set out resources relating to the duty as well as 'examples of the duty in action', such as on bank account access, vulnerable customers, and cash savings. We'd also suggest attending the FCA's planned webinar on the 6 December 2023, where the regulator has said that it will be sharing some of its initial thoughts on its market findings and priorities.

Consumer group calls any scrapping of BNPL proposals a 'disaster'

Citizens Advice, MoneySavingExpert.com and Which? have renewed their calls on the Government for "urgent" progress on the BNPL proposals from earlier this year.

You may remember the HMT consultation paper we covered in the February edition of Payments View, which suggested that agreements currently exempt under Article 60F(2) of the Regulated Activities Order should (generally) instead fall within the regulatory perimeter where they are provided by a third-party lender. Since then, things have gone rather quiet with suggestions that the proposals would be folded into the wider CCA review under the Edinburgh Reforms (or not taken forward at all).

It will be interesting to hear whether this call from consumer groups (and the rapid explosion in BNPL's usage, Citizens Advice research has found that 37% of UK adults have used BNPL in the last 12 months - up over one third since 2021) will kickstart any further action on this proposed regulatory change.

European Parliament and Council agree to expand access to instant payments in Euro

The European Parliament and Council have reached a political agreement to expand the availability of instant payments in euro, with the goal of enabling consumers and businesses across the EU and EEA to transfer funds quickly and conveniently. This is intended to be a significant step forward in improving the efficiency and accessibility of instant payments, contributing to a more integrated and innovative European payments landscape.

Under the provisionally agreed rules, payment service providers such as banks, which provide standard credit transfers in euro, will also be required to offer the service of sending and receiving instant payments. The charges that apply (if any) would not be allowed to be higher than the charges that apply for standard credit transfers. Further steps have also been agreed, including, to safeguard the integrity of transactions, that instant payment providers will be required to implement CoP to verify the beneficiary's IBAN and name match, in an attempt to better prevent errors and fraud.

Once implemented, this will be a significant move forward for the payments space with instant payments becoming more attractive to consumers and businesses and making the European payments landscape more efficient and competitive. The other main point that caught our eye was that payment and e-money institutions will be granted direct access to the European Central Bank's payment infrastructure - meaning they'll be covered by the above requirements, after a transitional period, but will also be able to access significant new functionality.

In terms of timing, we're expecting these rules to come into force over the next few years - with a faster timeline for EEA-euro states and an extra year built in for implementation for non-euro EEA states. The procedure file for the proposed regulation indicates that the next step is for the EU Parliament to consider it in its plenary session, scheduled to be held from 5 to 8 February 2024.

FCA multi-firm review on PSP fraud and complaints stresses need for stronger controls and better customer treatment

The FCA has published a webpage outlining the key findings from its multi-firm PSP review of anti-fraud controls and complaint handling in firms, with a particular focus on APP fraud. The review revealed that many firms need to strengthen their fraud detection and prevention systems and consider the suggested good practices of their February 2023 Implementing the Consumer Duty letter in order to comply with the Consumer Duty.

While some firms demonstrated effective control frameworks and good practices, the FCA found several common weaknesses in key areas of firms' fraud risk management frameworks and customer treatment, particularly:

• an insufficient focus on delivering good consumer outcomes in many firms;
• management information and actions often focused on commercial risk appetite, rather than customer impact and treatment;
• there being significant scope in many firms to improve the support provided to victims of fraud;
• poor complaint handling, including firms often taking too long to respond to customer complaints;
• customers being provided with decision letters that were sometimes unclear, confusing, or included unhelpful and, on occasion, accusatory language; and
• limited evidence that firms are appropriately taking account of characteristics of customer vulnerability when making decisions about fraud claims and complaints.

Despite these shortcomings, the FCA also observed some positive examples of firms that are effectively managing fraud risks and treating customers fairly. For instance, some firms are using risk-based warning messages during the payment journey to help customers identify potentially fraudulent transactions. Additionally, some firms have implemented manual intervention processes for high-risk payments, which can help to prevent fraud by requiring customers to interact with a staff member before confirming a payment.

The FCA also stressed the need for firms to ensure that they are doing enough to mitigate the risks of money mule accounts which are a current focus of the FCA with separate updates published in our October edition.

FCA discussion paper published on regulating fiat-backed stablecoins

The FCA has published a discussion paper on its proposed approach to regulating fiat-backed stablecoins that may be used for payments (DP23/4) which  sets out the FCA's thinking on how to design a regulatory regime for issuers and custodians. This follows the Government's plans to legislate for a future financial services regime for cryptoassets as part of a phased approach, focusing initially on fiat-backed stablecoins, including where used in payments, followed by the wider cryptoasset regime.

The paper sets out a broad scope of the proposed UK stablecoin regime and welcomes views on the topics ahead of 6 February 2024.

The regime itself is based around two potential avenues for fiat-backed stablecoins to be used as a means of payment in the UK - either a stablecoin issuer will need to seek authorisation from the FCA to issue fiat-backed stablecoins in or from the UK or, for overseas stablecoins, 'payment arrangers' would be regulated under the PSRs and would have to be FCA authorised to assess overseas stablecoins against a set of standards set out by the FCA. The latter approach is particularly interesting and follows the more sweeping steps taken by the regulator (such as the wide territorial reach of the recent FinProm requirements) to address the global nature of the crypto industry.

Other elements of the regime which caught our eye (do reach out if you'd like to discuss) include the proposals that:

• stablecoin issuers would be required to secure their stablecoins with government treasury debt instruments that mature in one year or less, along with short-term cash deposits - with no access to MMFs;
• the backing assets for regulated stablecoins would be held on a statutory trust for customers;
• the FCA is considering requiring regulated stablecoin issuers to appoint a CASS oversight officer who is accountable for overseeing the regulated stablecoin backing assets as part of organisational requirements; and
• a dedicated new prudential sourcebook (CRYPTOPRU) will be added to the FCA Handbook.

UK Finance publish their priorities for the next phase of Open Banking: JROC and cVRPs

UK Finance has published its priorities for the next phase of Open Banking, calling the framework a prime example of innovation that positions the UK as a global leader in financial services. UK Finance note that it is actively contributing to the transitionary work of the JROC and Future Entity and fully supports JROC's objectives in its Recommendations for the next phase of Open Banking in the UK. On the future entity, UK Finance "firmly believe that the funding of the Future Entity should be based on a fair and equitable model that does not impose an undue cost on the industry."

The industry body also highlights how it sees great opportunities in the Commercial Variable Recurring Payments (cVRPs) space and will work to ensure that Open Banking drives greater payment choice for customers and merchants and plays a growing part in the vibrant world of payments. Specifically, they consider that cVRPs have the potential to bring a number of benefits including (i) providing more choice and competition and (ii) allowing customers more control over their payments. This is a matter we are also following closely and will provide further details and developments in future editions of Payments View.

The Committee on Payments and Market Infrastructures report on the use of stablecoin arrangements in cross-border payments

Further to DP23/4, and for those looking to understand how stablecoins may integrate into the future of payments, the Committee on Payments and Market Infrastructures (of BIS fame) published a report on the considerations for the use of stablecoin arrangements (SAs) in cross-border payments. The report highlights the challenges that the use of these SAs present, for example even a properly designed and regulated SA might not necessarily have a positive impact on cross-border payments as the drawbacks could outweigh any potential benefits. The report also notes that significant changes towards the alignment of domestic regulatory frameworks and global standards will be necessary for a stablecoin to be used for safe cross-border payments.

PRA Dear CFO letter on working with deposit aggregators

The PRA have published a Dear CFO letter on working with deposit aggregators (DAs), setting out examples of actions it encourages firms take, to the extent their deposit book relies on funding sourced through DAs. These actions aim to mitigate risks in three main areas 1) ensuring depositor protection, 2) managing liquidity risk, 3) outsourcing and third-party risk management. This follows up on the regulator's joint Dear CEO with the FCA in April 2021 on the potential risks associated with the increasing volumes of deposits that are being sourced through these structures. 

News Flash

There were plenty of interesting market movements this month, including:

• The FCA published a call for input on potential competition impacts from the data asymmetry between Big Tech and firms in financial services -particularly interesting given their previous discussion paper on Big Tech. The FCA invites responses by 22 January 2024 and intends to report back in Q2 2024.
• Sky are reporting that Alphabet (through one of its investment funds, Capital G) is close to an agreement to lead a funding round for Monzo.
• Alipay+ have partnered with Yapily on providing open banking payments solutions in Europe.
• Apple Pay launched their UK open banking integration for Wallet - Apple Pay users across the UK can now take advantage of a new feature that taps into the open banking framework to let them connect cards and view their account balance from within the Wallet app.