Payments View – October 2024

We’re heading to Singapore for the Singapore FinTech Festival next week (and hope to see many of you there) but before we go here´s an autumnal edition of Payments View which covers:

• Buy Now, Pay Later, Regulate Soon (v2.0)
• Slower Faster Payments implementation
• APP scam post-implementation updates
• Interim Regulatory Initiatives Grid published
• Court of Appeal sides with consumers on Motor Finance Commission Disclosures
• PSR seeking feedback on card-acquiring remedies
• FCA findings from multi-firm review of consumer credit firms and non-bank mortgage lenders
• Open Banking Coming to America

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

You should have also received an email from the team earlier in the month on the payments-focused Consumer Duty multi-firm review from the FCA with materials to download to help evidence your current position against the FCA’s comments and can help you cut through the noise to focus on the aspects applicable to your business and customers – do let us know if it would be useful to discuss any of these.

Buy Now, Pay Later, Regulate Soon (v2.0)

Long-time readers of Payments View might start this edition with a sense of déjà vu – which would be fair as HMT have resurrected previously consulted on plans to regulate BNPL (covered in the Feb 2023 edition of Payments View – yes we did use the same title) by publishing a new Consultation of Draft Legislation.

Things went very quiet after the publication of the plans in 2023, when they were promptly shelved by the last government as a problem for the next administration, however we expect things to move quicker this time round. The consultation closes on 29 November and the government looks set on a ‘Regulation Day’ over (it seems) the course of 2025 / 26.

On scope, under the CP the proposals are for credit agreements provided directly by merchants to continue to be exempt from the regulatory perimeter.

The proposals are also now structured around five key principles:

• Consumers must have access to simple, clear, understandable and accessible information in line with the Consumer Duty. Importantly, the proposals will not require CCA information requirements in relation to PCI, the credit agreement, or in relation to servicing and arrears during the course of the agreement. Instead, the FCA will consider whether new requirements are needed in these areas to supplement the rules in CONC and under the Consumer Duty.
• Consumers should have protection when things go wrong, which includes the application of section 75. However, as a result of disapplying CCA information requirements, the associated CCA sanctions of unenforceability without a court order or disentitlement of interest and (more relevant in these circumstances) default sums will fall way.
• Consumers should only be offered credit if it is affordable - detail on this remains limited in the proposals as in line with the current regime regulated credit, the rules on affordability will be set out in CONC. The FCA will decide on the rules in due course, and we expect a key concern for the industry is understanding what a proportionate approach to assessing affordability in the context of a BNPL agreement looks like.
• Regulation “should be proportionate to ensure continued access and choice”.
• Regulation must be introduced “urgently” to ensure consumers are protected and the sector has certainty.

A key point to draw out is in relation to FOS rights; the CP explains that the FCA will consult on enabling customers to refer complaints to the FOS. This will be a key area for the BNPL industry given we expect FOS’s case fee is significantly higher than the credit advanced in most BNPL agreements.

In relation to financial promotions, the government intends to ensure that financial promotions communicated by unauthorised merchants who offer third-party lender BNPL agreements will need to be approved by an authorised person. In most cases, we expect this will be the BNPL lender.

The CP confirms that wider reform of the CCA regime will follow, and proposals will be set out in a separate consultation but given there is a need to regulate BNPL the government believes it is right that the regulation of BNPL precedes any wider reform of the CCA.

On next steps, the Consultation closes on 29 November 2024. Following this consultation, the government will look to lay down the necessary SI as soon as Parliamentary time allows. The SI will set a ‘Regulation Day’, at which point BNPL products will become regulated. In the draft SI, the ‘Regulation Day’ is 12 months from the SI being made. In addition, the FCA will consult on its detailed rules. Following the FCA’s consultation, it will publish final rules and open registration for a Temporary Permissions Regime. There will then be a period between final rules and ‘Regulation Day’ for firms to get ready for regulation, finish preparing for the new rules and to update practices and processes. This is a lot of work for the FCA and firms to do on a relatively short timetable.

Slower Faster Payments implementation

Most of you will be aware that the Payment Services (Amendment) Regulations 2024 are (at time of writing) coming into force tomorrow (30 October). This was an exceptionally quick progress for the Regulations (only having been made on the 8th of this month). The regulations amend regulation 86 of the PSRs, which requires PSPs to execute payment transactions within maximum time limits – specifically for sending PSPs, this has required them to credit the payee’s PSP’s account with the amount of a transaction by the end of the business day following receipt of the payment order (D+1). This is now changing to give sending PSPs more time to identify and investigate suspected fraud.

The amendments will now enable a sending PSP to delay the crediting of the payee's PSP's account for certain in-scope payments by up to a further 72 hours (i.e. D+4) but is only allowed where the PSP establishes reasonable grounds to suspect the order has been made due to fraud or dishonesty perpetrated by a third party (which may include the payee).

APP scam post-implementation updates

After the flurry of publications in the run-up to implementation and nearly a full month of the mandatory authorised push payment reimbursement requirement being live, one might think there was nothing else that could be said on the APP scam regime. But like a gift that keeps on giving, nothing could be further from the truth with updates from the FCA, possible next steps from the PSR and guidance from the FOS all coming this month – not forgetting the fundamental technical problem with RCMS that the PSR can’t fix and the suggestion that firms find their own solution.

The FCA for instance have published two “Dear CEO” letters setting out its expectations relating to reimbursement; one to banks and building societies and the other to payment and e-money institutions. Both letters emphasise the importance of reducing financial crime and protecting market integrity and consumer confidence with the reduction of APP scams through improved systems and controls being central to achieving this. The FCA reminds CEOs, the importance of:

• Having effective governance arrangements, controls, and data to detect, manage and prevent fraud.
• Regularly reviewing fraud prevention systems and controls to ensure that these are effective.
• Maintaining appropriate customer due diligence controls at onboarding stage and on an ongoing basis to identify and prevent accounts being used to receive proceeds of fraud or financial crime.

Firms are also reminded of their obligations under the Payment Service Regulations 2017 and, with particular menace, the Consumer Duty. In particular, the FCA notes that “An example of foreseeable harm would include a consumer becoming victim to a scam relating to a firm’s financial products due to the firm’s inadequate systems to detect and prevent scams, or inadequate processes to design, test, tailor and monitor the effectiveness of scam warning messages presented to customers” and that the regulator will use data arising from the reimbursement regime to monitor for prudential issues, conduct breaches and inadequate systems and controls. In the letter to PSPs, the FCA also specifically encourages firms to consider how this potential liability will impact their capital and liquidity.

The PSR has also been busy post-implementation, with comments from the interim managing director that “there is more that can be done around the point of origination in particular — that is social media, telcos and the internet more generally.” As reported in the FT, the PSR’s comments note that introducing a levy on tech groups was “one of the options that should be considered” by the government going forwards. This is a point that has been consistently made by the industry for some time now, particularly considering where the majority of such scams originate, and is a possible policy direction that will be watched with interest.

Finally, throughout the APP scam implementation process, the question of how these claims would be addressed at the FOS has been high on industry’s agenda – particularly considering the fact that decisions against firms by the FOS have an ‘upper reimbursement limit’ of £430,000 rather than the APP scam regime’s £85,000. Firms tracking this might want to familiarise themselves with the most recent FOS guidance with updates made to both the general fraud page and its specific APP scam page.

In speaking with clients, we have seen that firms are finding it challenging to address all the relevant elements of the APP scam reimbursement rules. Navigating the rules can be tricky and it can be hard to determine whether a particular payment might fall under the reimbursement requirement or if a piece of the fact pattern allows the firm (sending or receiving) to reasonably push back.

We’ve prepared a checklist to help with this, which breaks down the core definition of reimbursable FPS APP scam payment into the constituent parts, definitions and sub-definitions, setting out all the requirements for what constitutes a payment that must be reimbursed. Do let us know if this might also be useful for your teams.

Interim Regulatory Initiatives Grid published

The interim update to the Regulatory Initiatives Grid has been published, highlighting several key areas of focus within the payments sector. This update outlines the FCA's ongoing and upcoming regulatory initiatives, with upcoming developments relevant to the payments industry being those on the Consumer Duty, customer vulnerability, the ongoing UK requirements on improving firms’ operational resilience, and the FCA's proposed enforcement guidance.

The FCA note that the grid is expected to return to its usual format “in 2025” – if dedicated horizon scanning leveraging the grid would be helpful, do of course let us know.

Court of Appeal sides with consumers on Motor Finance Commission Disclosures

The widely anticipated Court of Appeal judgment, Johnson v Firstrand, on motor finance commissions (25 October 2024), has potentially significant implications for motor finance providers who will be concerned the judgment widens the scope of the issues they are already dealing with in relation to discretionary commission arrangements (“DCAs”). This judgment could also have wider impacts on other credit agreements involving commission paid to a credit broker where the amount of the commission, the basis for the commission calculation, and other key terms about the agreement between the lender and broker have not been disclosed to the borrower prominently enough.

This judgment concerns three appeals – Johnson, Wrench, and Hopcraft – addressing the duties of motor dealers acting as credit brokers in arranging hire-purchase agreements for car buyers, and whether lenders are liable in cases of undisclosed or “partially disclosed” commissions. In Johnson, although the motor dealer could have received commission under a DCA, the interest rate selected by the motor dealer under the DCA was the lowest rate available (so the motor dealer didn’t receive commission under the DCA element of their agreement with the lender). Instead, the broker received a fixed commission of 25% of the credit advanced. The Court of Appeal allowed all three appeals, finding that in each case, the dealer owed the claimant a "disinterested duty" and a fiduciary duty, and that the lenders were liable for repayment of the commission.

Dealers owed both “disinterested” and “fiduciary” duties

• The Court held that the dealers in these cases, also acting as credit brokers, were tasked with finding suitable and competitive finance deals for the claimants. They owed the claimants a “disinterested duty” to provide information, advice, or recommendations on an impartial or disinterested basis.
• The relationship was also fiduciary in nature, given the trust and confidence placed in the brokers by the claimants, who relied on them to secure suitable financing. The Court emphasised that dealers play two distinct roles – selling the car and arranging finance – and that the absence of a fiduciary duty in the sale does not preclude the existence of a fiduciary duty in the financing arrangement.

Sufficient disclosure to obtain informed consent

The Court distinguished between cases of “fully secret” commissions and those involving “partial disclosure”.

• Hopcraft fell into the former category as the commission was never mentioned to the claimant. In Wrench, the Court found the statement regarding commission was “buried” in the lender's standard terms and conditions, which the Court deemed insufficient to negate secrecy. The lender was therefore primarily liable as the payer of a “secret” commission.
• Johnson involved partial disclosure, as the Hire-Purchase agreement and the Suitability Document mentioned the possibility of commission. However, the Court’s view was that the information provided was misleading and did not include crucial information, such as the dealer's obligation to prioritise a particular lender, the commission amount, and the basis for the commission calculation. Therefore, Mr. Johnson did not provide fully informed consent, and the lender was liable as an accessory to the broker's breach of fiduciary duty. The Court’s view was that the lender knew of the fiduciary relationship and paid the commission despite the lack of fully informed consent from the borrower. The lender could have made sure the borrower was aware of all the important facts as the lender has a direct contractual relationship with the borrower and could have disclosed relevant information relating to the commission within the agreement. The lender could also have required the borrower to countersign a covering letter which made this information clear.

Unfair Relationship under the Consumer Credit Act 1974

The Court also found the relationship between Mr. Johnson and his lender to be unfair under section 140A CCA. The lack of disclosure about the substantial commission, coupled with the high purchase price of the car, led to the finding of an unfair relationship. The Court stressed that cases will not necessarily be unfair under section 140A because the broker receives a commission, and the borrower is not aware of this – the Court is required to consider all the facts of the case and weigh up their importance.

Conclusion

This judgment will have significant consequences for lenders who enter into commission arrangements with credit brokers. We expect that lenders will be reviewing their approaches to commission disclosures as well as anticipating an appeal to the Supreme Court. This decision – as well as any appeal to the Supreme Court – could have an impact on the timing of the FCA’s on-going work to decide how to respond to motor finance complaints involving DCAs. Over the summer, the FCA said they intended to confirm motor finance next steps by May 2025, but the timelines are likely to be pushed out given the potential wider implications that an appeal to the Supreme Court could have.

PSR seeking feedback on card-acquiring remedies

Firms in the acquiring space will remember the changes implemented over last year by the PSR to address what they saw as a lack of transparency in the market – as set out in the final market review. Since then, the PSR has been monitoring firms' adoption of these measures and is now seeking to deepen its understanding of the remedies' practical impacts by increasing engagement with businesses.

The PSR's current focus includes evaluating the accessibility and accuracy of the Online Quotation Tool and summary box, the impact of trigger messages, and any issues related to the hiring or termination of POS terminals since the implementation of the 18-month contract limit.

The PSR has noted that they are expecting further engagement with the industry and invites businesses to contribute feedback, which will inform a progress report on the remedies.

FCA findings from multi-firm review of consumer credit firms and non-bank mortgage lenders

The FCA published its findings, on a webpage, following a multi-firm review of consumer credit firms and non-bank mortgage lenders.

During the second half of 2023 and the first half of 2024, the FCA conducted a review of a sample of firms to assess their approach to financial resilience and the potential for consumer harm arising from weaknesses in financial resilience.

Overall, the FCA found that the majority of firms could improve their approach to risk governance and risk management. In particular, firms did not always identify and monitor their firm's risks and financial metrics to give a greater insight into the challenges they face.

The FCA's key findings include the following:

• Identifying risks relevant to the business. The FCA identified some firms that had an inadequate approach to identifying the risks that could affect their business. For example, some firms failed to fully consider important external risks such as credit, counterparty, liquidity and funding, operational and market risk.
• Setting risk appetite and establishing appropriate systems and controls. Most firms had an underdeveloped approach to identifying, assessing, monitoring and managing risks, that is, their risk management framework was not fully developed. The FCA expects firms to develop an approach that is appropriate to the size and scale of their business, and which enables the management team to have clear sight of potential issues. This should include mechanisms that provide early warning and relevant performance measures that trigger specific actions.
• Undertaking stress testing and considering wind-down planning. The FCA found that there was a lack of adequate wind-down planning undertaken by firms. To reduce the impact of failure, the FCA expects firms to consider the scenarios leading to financial stress, explore recovery options and plan for winding down the business in an orderly way.

Open Banking Coming to America

After eight years of consultation and a number of jurisdictions including the UK, EU and Hong Kong having made significant steps in their own regimes, the U.S. has announced its own Open Banking requirement.

The Consumer Financial Protection Bureau’s (“CFPB”) final rule (which implements section 1033 of the Consumer Financial Protection Act of 2010) mandates that financial service providers (including banks, credit unions and FinTechs) must provide consumers and approved third parties with electronic access to personal financial data related to consumer financial products or services.

The final rule aims to enhance competition in the financial sector, which comprises over 4,000 lending entities, and (as with other regimes) specifies that data must be shared in a standardised and machine-readable format without either fees or unreasonable restrictions on the frequency of data access requests. The rule explicitly prohibits the current common practice of "screen scraping" (an access method that uses consumer credentials to log in to consumer accounts to retrieve data that was effectively banned post-PSD2) as a method for third parties to access the data, and instead requires firms to implement secure and reliable data sharing methods.

It establishes a phased compliance timeline based on the size of the institution, stretching from 01 April 2026 to 01 April 2030, depending on the institution's size.

News Flash

• The ECB has announced the launch of two initiatives aimed at enhancing cross-border payments through the interconnection of fast payment systems. These initiatives are an extension of the Eurosystem's TARGET Instant Payment Settlement (TIPS) service and include the implementation of Cross-Currency Settlement Service in TIPS (initially supporting the Euro, Swedish kronor, and Danish krone) as well as linking TIPS with Global Fast Payment Systems.
• The FCA has taken action against 20 ‘finfluencers’ who are being interviewed under caution. Limited detail has been provided but it marks another intervention by the FCA in the area, with the regulator referring to this as “targeted action”, alongside 38 FCA alerts, against these individuals who the FCA believes may be making financial promotions not in compliance with the regime.
• The FSB has published its consolidated progress report for 2024 on actions being progressed as part of the G20 roadmap for enhancing cross-border payments, as well as a progress report on LEI implementation and an annual progress report on meeting the targets for cross-border payments.