Payments View Summer 2024

Welcome back to Payments View after a summer break. Hopefully the weather will hold long enough for you to enjoy all of the payments updates covered in this edition while the sun is still shining:

• ECB policy update for European PSPs
• Digital wallets next in the regulatory spotlight
• Final stretch for APP scam reimbursement rules changes
• Focus on Virtual IBANs by the EBA and MLD6
• FCA takes enforcement action against cryptoasset firm under EMRs
• Provisional findings of ‘lack of effective card competition’
• Pushback for FCA on plans to publicise enforcement investigations with Lords and FSRC enquiries
• Bank of England Paper on innovation in money and payments
• Credit Corner: Motor Finance Discretionary Commission Arrangements
• Operational resilience observations from FCA

As always, don’t hesitate to reach out to us if you would like to discuss any of the developments in this edition.

ECB policy update for European PSPs

The ECB recently released a policy publication regarding non-bank PSPs' access to central bank operated payment systems and central bank accounts.

While most of the policy is focused on more straightforward harmonisation, most impactful is section 4 which confirms that the Eurosystem central banks will no longer provide safeguarding accounts to non-bank PSPs. The ECB argues that access to such accounts should not be supported on the grounds that doing so might have an impact on the overall safety and soundness of the financial system, or encourage ‘synthetic CBDCs’ or ‘narrow banks’ which could lead to ‘market fragmentation’ between different forms of money. This is despite the Instant Payments Regulation amending PSD2 to give non-bank PSPs the option of safeguarding users' funds in an account held with a central bank (subject to that central bank's discretion).

This will prove challenging for Bank of Lithuania (who already provide this service through CENTROlink) and for EU firms who use them. For readers of Payments View whose firms currently partner with Bank of Lithuania, we understand that the central bank should have already reached out to you, but there is some (albeit limited) further context on next steps in Annex 1 of the publication.

Digital wallets next in the regulatory spotlight

One of the biggest shifts in recent years in how UK consumers make payments has been the rise of digital wallets such as Google Pay and Apple Pay that facilitate card payments using mobile devices and those holding stored value.

These wallets have so far avoided significant regulatory scrutiny but the PSR and the FCA have now published a joint consultation paper on digital wallets focusing on their connection with the growing involvement of Big Tech in the financial sector. The paper focuses on how consumer payment preferences have shifted from using cash and physical cards to what the regulators refer to as ‘pass-through’ wallets such as Apple Pay, and how this may impact payment systems in the future.

The two regulators have different priorities with the PSR primarily concentrating on how pass-through wallets could be considered as 'participants' in a designated payment system, and the FCA more focused on the future of digital wallets and whether providers of such wallets will start offering regulated services, such as account information services or account-to-account payment initiation services.

Both regulators have posed an intriguing set of questions (17, to be precise), ranging from: the benefits of digital wallets for all parties in the payment chain to features of digital wallets that cause harm to consumers and whether future potential harms could be mitigated through regulation. This will be an area of interest for participants across the industry, particularly in how it may give more colour to the evolving position of the UK regulators vis a vis Big Tech – first properly flagged in the FCA’s Big Tech feedback statement covered in last summer’s edition of Payments View.

Final stretch for APP scam reimbursement rules changes

For any readers of Payments View who might have thought this edition would be the one that didn’t include an update on the PSR’s APP scam reimbursement requirement, we’re sorry to disappoint. There have been a number of updates as the proposed ‘go live’ date draws near.

Firstly, a reminder that Pay.UK is expecting firms to register with them by 20 August.

The main reading is the letter (which you may have received directly from the PSR) on its core areas of focus for PSPs, being:

• Understanding the new requirements: We imagine this is already at the front of mind for all firms, but an interesting reference in the letter is to ongoing sessions the PSR are having with FOS. There will be a clear need to ensure that any disputed reimbursements raised through the service will be examined and assessed on the same grounds as industry.
• Claim management and data reporting: The PSR reminds firms of their obligations to Pay.UK.
• Consumer awareness: The PSR points to its April 2024 consultation (CP24/3), which included proposed changes to SD20 to require PSPs to notify their customers about the reimbursement requirement, including through changes to T&Cs.

Also of note has been the publication of the final rules from Pay.UK on the FPS Reimbursement Rules and Compliance Monitoring regime, with a policy statement on the latter also published by the PSR.

Elements of the regime are still to be confirmed which is challenging for firms looking at properly scoping their obligations and preparing for the 7 October go live date. Key to this will be the PSR’s CP on draft guidance to support ‘the identification of APP scams and civil disputes’ (with civil disputes falling entirely outside the APP scam regime). What stands out to us is that the PSR’s proposed guidance here is exceptionally high-level and PSPs will likely need to dedicate significant resources from 7 October to, as the CP proposes, consider all information available in the round.

We would also suggest taking a look at the letter from the PSR to the Treasury Select Committee which recognises the “significant amount for industry to deliver” but otherwise paints a highly positive picture of current progress and levels of readiness.

Focus on Virtual IBANs by the EBA and AMLD6

One of the key developments of the payments industry which we have seen over the last few years has been the growing use of virtual IBANs (“vIBANs”) across an extremely wide range of companies, sectors and use cases. Whilst this functionality has received limited direct regulatory attention to date, it has been coming under more scrutiny across Europe (although no word from the FCA yet) with, most recently, the EBA publishing a report on their ‘risks’ and vIBANs getting the dubious honour of being specifically addressed in the next suite of European AML regulatory change.

On the EBA report, this sets out the common characteristics of vIBANs and outlines six methods through which PSPs or their partners offer vIBANs to their customers (although we’d note that the focus here is somewhat narrow). Whilst the report underscores the potential advantages of vIBANs (streamlining payment reconciliation and reducing the complexity and cost associated with managing multiple bank accounts) it does not shy away from discussing the potential risks and challenges associated with vIBANs. These risks have also been raised at the European Council level, from the French and Belgian delegations in particular.

The core of the risks identified by the EBA are around divergent interpretations of legislation by authorities across different European states on the regulatory treatment of vIBANs and their application to AML CTF requirements – specifically where the vIBANs’ ‘users’ are not the holders of the ‘master account’. The EBA report also highlights potential consumer detriment due to a lack of transparency about key information, such as complaint procedures and deposit guarantee schemes. Although, whilst we would agree that these could be concerning from a harmonisation perspective, the risks reflect (in our eyes) more an issue over the possibility of regulatory arbitrage in the Union, than an inherent risk of the functionality itself.

To address these risks, the EBA proposes certain actions for PSPs, legislators, and national competent authorities and includes an annex with the EBA’s understood risk factors to aid in the identification of money laundering and terrorist financing risks. We imagine this would make interesting reading for any firms offering vIBANs to compare their offering against.

On AML CTF, the specific inclusion of vIBANs within the changes for the “AML Regulation”, “AMLA Regulation” and “MLD6” is one that firms will also want to be tracking ahead of the (expected) H2 2027 implementation. Although all firms will need to adapt to these changes, the key changes for vIBANs in particular are that:

• the AML Regulation will require firms to be able to obtain the KYC of natural persons “using” a virtual IBAN within 5 working days of a request.
• MLD6 will require “centralised automated mechanisms” (“CAM”) to be put in place, and to include information on virtual IBANs associated with a bank or payment account. The information held by the CAM must be directly accessible in an immediate and unfiltered manner to Financial Intelligence Units and AMLA.

FCA takes enforcement action against cryptoasset firm under EMRs

The FCA issued a final notice to a cryptoasset firm (which also operates in the UK as an authorised electronic money institution), fining it £3.5 million for failing to comply with a VREQ ‘imposed’ under the Electronic Money Regulations 2011. The firm, which acts as an on/off ramp for the exchange of cryptoassets, had previously agreed to the voluntary requirement under Regulation 8 of the EMRs to not onboard new high-risk customers or provide them with payment or e-money services whilst an ongoing review of its controls framework was underway.

The focus of the FCA’s action (and the significant fine it has resulted in) centred around the governance controls (particularly the care and diligence in the design, testing, implementation and monitoring of the controls) put in place. This underscores the critical importance of robust controls in mitigating money laundering risks associated with cryptoassets.

Provisional findings of ‘lack of effective card competition’

The PSR has published its interim report on its ongoing card scheme market review which notes that the regulator “provisionally finds that the cards schemes do not face effective competition in the supply of scheme and processing services to acquirers”.

The 158 page consultation paper (which closes 30 July) makes interesting reading – with particular challenges highlighted for acquirers in negotiation or accessing information about fees. As such, the proposed potential remedies (at this stage) are focused on improving transparency around these costs and ensuring that acquirers and businesses are given clearer information about the services provided. The PSR is seeking feedback on its interim report from anyone with an interest in card payments in the UK – particularly businesses, issuers, acquirers, card scheme operators, and cardholders.

Both Visa and Mastercard have responded to the findings.

Pushback for FCA on plans to publicise enforcement investigations with Lords and FSRC enquiries

As covered in the Feb edition of Payments View, the FCA has proposed in CP24/2 to overhaul its current approach to publicising enforcement investigations and to specifically name firms under investigation to make sure the FCA has "the maximum impact in deterring misconduct and crime". This has faced certain ‘challenges’ with pushback from industry and government now followed by specific enquiries from both the Treasury Committee and House of Lords Financial Services Regulation Committee.

Both committees have asked rather pointed questions of the regulator over the summer (amongst questions on resourcing, investigation timings and ensuring UK PLC’s competitiveness) on the potential impact of the proposal on firms, which may have their reputations damaged unjustly should the investigation lead to no further action. In this, the FSRC has published two letters, one expressing ‘a number of concerns about the proposals contained in the consultation and asks that [the FCA does] not take further steps to implement this change until it has had the opportunity to do so and reach a final conclusion’ and another (released in light of the election announcement) summarising the committee's concerns relating to the FCA's proposals on publicising enforcement investigations.

Bank of England Paper on innovation in money and payments

The Bank of England has published a discussion paper on its approach to innovation in money and payments. This DP sets out the Bank’s approach to dealing with future innovations while maintaining stability – covering both the ‘singleness of money’ (that all forms of money be exchangeable at par value) and the ‘finality of settlement’ (that once something is paid for it has actually been paid for at par value).

The approach described in the DP includes enhancements to the Real Time Gross Settlement (RTGS) system, increased use of programmable ledgers, the Digital Securities Sandbox (DSS), the regulation of new forms of private money and retail CBDCs.

The Bank’s proposed approach covers:

1) Its low risk appetite for a significant shift away from settlement in central bank money to settlement in private assets with options being explored to enhance access to settlement in central bank money – noting there are significant financial stability risks from the use of stablecoins in wholesale transactions;
2) Close engagement with industry to design functionalities in the RTGS that support innovation including extending settlement hours and improved interaction with programmable platforms with a programme of experiments to test use cases of wholesale central bank digital currencies;
3) Seeking a retail payments landscape which maintains the singleness of money and promotes sustained innovation in a way that is resilient with sustainable governance and funding models.

The Bank has not yet taken a decision on whether to issue a retail CBDC but continues to undertake preparatory work to ensure the option remains available if needed.

In terms of retail payments, the Bank sets out examples of Sweden, Brazil and India where interbank retail payment systems are used to make retail payments in ways which do not currently happen in the UK (at least not widely) – such as payments being made using only a mobile number or QR code. The Bank wants to support policy outcomes in retail payments which are geared towards supporting these types of innovations while delivering trust and confidence in money. It noted that HM Treasury also plans to publish a National Payments Vision which will set out the government’s overall ambition for UK payments which will reflect a broader range of objectives than those the Bank is responsible for.

Particular points to highlight for readers include:

• Any new retail payment systems must be interoperable with RTGS as the UK’s core payments infrastructure;
• Retail payment methods must be responsive to customer choice and needs – quick, easy, secure, cost effective and widely available;
• Innovation should include a broad range of use cases for account to account payments at point of sale;
• Consumers should have access to payments made on programmable platforms;
• New market entrants should be able to provide payment services without having to issue money;
• There must be end to end resilience for retail payments;
• There must be effective governance.

The Bank welcomes views on the overall approach as well as on specific areas of possible innovation.

It’s clear the Bank is looking to the future and wants to see real innovation in payments with a particular push on retail account to account payments. Given the extent to which similar types of payments are used in other countries now might be a good time to revisit that pitch deck and start on the regulatory application!

Credit Corner: Motor Finance Discretionary Commission Arrangements

Hot off the press, the FCA have announced an extension to the pause on motor finance discretionary commission complaints until 4 December 2025 with an update from the FCA expected in May 2025. This is to allow time for the FCA to factor in the outcome of the Barclays Partner Finance judicial review as well as other cases currently at the Court of Appeal. The FCA do say they will end the pause earlier if they can (following a consultation period).

While they haven’t provided any specific findings so far the FCA have stated that a consumer redress scheme is now seen as being more likely than when they started their review.

Alongside the published update the FCA have also released a podcast with Nikhil Rathi which provides some additional information. This includes some comments which may indicate the direction of travel:

• Listeners should not automatically assume that we would adopt the same approach as the Ombudsman;
• We have to consider … the impact on the market now and in the future whilst also our objectives to protect consumers and ensure competition;
• It’s unlikely at the end of this that we’re going to find nothing;
• One option is potentially for us to allow firms to continue to process complaints in the normal way, and that might be a route we choose for some situations.

The FCA now plan to set out their findings, and any relevant next steps (such as a consultation on the terms of a redress scheme) by the end of May 2025. They state they want to make sure consumers are appropriately compensated and that the market continues to work well, with effective competition.

While the extension to the pause is longer than many might have expected there is still a lot that can be done to be ready to deal with outstanding complaints (along with any new ones within scope of the FCA’s final approach). Effective planning over the next few months will make the process a lot easier once the pause ends.

Prior to the FCA’s update, FOS wrote to customers with complaints about car finance commission to provide an update in light of the ongoing FCA discretionary commission review, Court of Appeal cases and judicial review brought by Barclays Partner Finance to inform them that they are unlikely to be able to issue final decisions for some time.

FOS has also published guidance for firms on handling car insurance complaints and the temporary rules providing additional time for complaints about discretionary commission. FOS reminded firms that, even where the complaint does relate to discretionary commission, it expects firms to be able to show that they’ve investigated the complaint thoroughly. This includes providing meaningful responses to customers and being clear about the type of commission arrangements in place and how much commission was paid.

Operational resilience observations from FCA

The FCA has published a new webpage on points for firms to consider in relation to their operational resilience, ahead of the end of the new rules’ transition period on 31 May 2025. The FCA says that it expects firms to use these to review their approaches and to assess their readiness across important business services, mapping and third parties, scenario testing, vulnerabilities and remediation, response and recovery plans, and governance and self-assessment.

News Flash

• The PSR has published a policy statement (PS24/4) on final guidance on extensions or exemptions from specific directions and requirements.
• The European Commission has published clarificatory Q&As on the incoming requirements of the Instant Payments Regulation ((EU) 2024/886) as well as, on a related webpage, explaining that PSPs in the Euro area will have to comply with their first set of obligations from 9 January 2025.
• The FCA has published a policy statement on access to cash rules to maintain reasonable access for customers in the UK, as well as a research note on its analysis of characteristics ‘associated with cash reliance in the UK’. Recently the PSR has published the response to its call for views on its review of SD12, issued to LINK, on maintaining free-to-use ATMs in the UK. The headline view is that whilst SD12 has been working well, it intends to retire SD12 when it expires in January 2025 with the FCA’s new access to cash framework. Similarly, HMT has published the list of designated banks under the access to cash framework.
• FOS has published a consultation paper on proposals to charge fees to CMCs. The proposals would see an initial case fee being charged to the CMC which, if the CMC is successful, would be partially reimbursed but, if the CMC was not successful, would see the case fee payable by the respondent firm reduced from the usual £650 to £475 (being offset by the CMC’s fee not being refundable).
• OFSI has published a revised set of UK Financial Sanctions FAQs. Whilst these should be considered as only supplementary to primary guidance issued by OFSI, these will be of interest to firms’ MLROs.