Payments View – January 2025

Welcome back to Payments View after what we hope has been a good start to the year. However, if anyone has come back to work on the lookout for a new role, they might want to consider the (soon to close) opportunity of ‘Executive Director Payments & Digital Finance, Financial Conduct Authority and Managing Director, Payment Systems Regulator’– which presumably comes with extra-long business cards to accommodate the new title…

Ahead of our usual programming we wanted to reflect on the scale of regulatory change that firms are going to face over the next 12 months, with 2025 shaping up to be another busy year for firms – particularly for those needing to keep up with PSD3 as the industry moves closer to its largest change in a decade.

For readers who had such a relaxing Christmas that a refresher might be helpful, PSD3 (and PSR1, the Regulation that will sit alongside the new Directive) will affect all European banks, PIs and EMIs, as well as firms who have remained outside the regulatory perimeter by relying on exclusions under PSD2. As the regime is moving from two Directives (PSD2 and the E-money Directive) to a Directive and a Regulation, it will be a significant project for any firm servicing the EU market to identify and map the changes that are introduced. Our product, PSD3 Ready is a comprehensive rulebook designed to save you time and help to proactively manage this change, so if we’ve not spoken already, do reach out for a quick chat so we can show you some sample pages.

It’s also only a few days until our webinar on APP scam monitoring and enforcement with the PSR. The PSR will be speaking about changes to their approach to compliance monitoring, how the PSR anticipates using its enforcement powers in practice and will also provide responses to some of your key questions

In the meantime, this edition of Payments View covers a month that seems to be a calm before the storm, with updates focused on:

• The PSR’s five-year strategy and FCA letter to PM
• Open Banking: FCA and PSR next steps
• The FCA’s response to PM on competitiveness
• A Digital Pound blueprint and progress update
• Major incident reporting under PSD2 now repealed
• Q1 dates for your 2025 diary

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

New Year’s Regulatory Resolutions

January was a month of reflection for everyone – not least it seems for the UK’s regulatory bodies. Over the last month, the PSR and FCA both published updates that show gentle course corrections to their approaches (particularly in light of the wider government push towards competitiveness through the NPV and Mansion House updates that we covered in the last edition) and recent announcements by the Chancellor on growth.

The PSR has published an update on the five-year strategy launched in 2022, alongside a summary factsheet, which reflects on the work completed by the regulator to date, as well as the following commitments for the rest of the strategy term. These are:

• “Completing what we started” – such as work to further embed the APP fraud reimbursement requirements but also the commissioning of an independent review on the policy, and delivering the outcomes from its card market reviews.
• Further work on the overall framework for commercial Open Banking payments, focusing on the initial phase of variable recurring payments.
• Work to upgrade FPS, and the “reform of Pay.UK” (which has had questions raised over its future in the post-National Payments Vision shakeup – as covered in our last edition), as well as assessing long term retail infrastructure needs.
• “Sharpening the PSR's focus on competition and innovation in payments systems” – which appears to be focused on both integrating new systems (the Digital Pound being called out) as well as indications of possible steps against systems that the regulator sees as uncompetitive which “may include a greater focus on access”.
• Confirmation that the PSR and FCA will provide an update on the digital wallet consultation this quarter.

The FCA’s update responds directly to the Prime Minister’s Christmas Eve present to regulators, where he wrote to 10 (including the FCA and CMA) challenging them to unleash growth in the UK economy. The FCA’s response states its desire to collaborate with the government in “a fundamentally different way to support the growth mission”, but challenges the government on defining the level of consumer harm that is acceptable and argues that, to achieve the deep reforms necessary, the government will need to accept that it will take greater risks.

These deep reforms start slowly, but many will be welcomed by the industry. Headline points are the FCA’s confirmation that:

• The requirement for a Consumer Duty Board Champion will be removed now the Duty is in effect. It appears this will affect all firms that are subject to the Consumer Duty, but will be particularly welcomed by many in the payments industry. Additionally, the regulator suggests that it will “ensure future consultations on consumer protection ask if the Consumer Duty is sufficient rather than [adding] new rules”.
• The £100 contactless payment limit could be removed to “give customers more flexibility and to level the playing field with digital wallets”. It also suggests that the government could help in this area by introducing digital identity authentication.
• VRP’s are firmly on the regulator’s agenda – with them positioned as the next step in Open Banking.
• The FCA plans to provide more support for early and high growth firms, with 50% more dedicated supervisors, as well as a relaxation in the limits to providing pre-application support and ‘minded to approve’ confirmations.

Overall, the updates make for a very interesting start to 2025 and seem to be first steps from the regulators towards prioritising the economic growth and competitiveness that the government has belatedly realised is essential. Together, they are aimed at addressing the growing calls for a change in how firms are regulated – particularly following the NPV, Mansion House Speech and APPG report into deemed deficiencies at the FCA.

Open Banking: FCA and PSR next steps (more VRPs!)

Regulators are focused on the evolution of Open Banking and the FCA and the PSR have published their next steps for expanding the regulatory framework. These follow on from recent updates for Open Banking again with emphasis on the development of variable recurring payments (“VRPs”) as a means to offer consumers more control and provide businesses with a competitive and efficient payment option. Whilst VRPs are still early in their development (particularly compared to AIS/PIS) the FCA and PSR have noted that they are aiming for “significant progress” over 2025 in enabling consumers to use VRPs to make payments to utility companies, government and financial services firms (with the development of e-commerce also highlighted as a key area of focus).

The FCA and PSR note that they will continue to work closely together, overseen by a joint steering committee, alongside industry and trade associations.

The update also confirms the establishment of an independent central operator by Open Banking Limited to facilitate the implementation of VRPs. As Open Banking evolves, it will remain a critical component of the UK's financial services landscape and driver of competition and growth, and we expect a number of updates on the framework over the coming months.

Digital Pound blueprint published

The BoE has published a design note outlining its initial thoughts on a blueprint framework for a digital pound along with a general progress update (NB. our original overview and impressions of the proposals can be found here). The BoE makes clear that no decision has been made regarding the creation of a digital pound, and these design notes do not represent final policy or design decisions, nor are they formal policy proposals under consultation.

With all of these disclaimers out of the way, the design notes present interesting, emerging ideas on specific topics related to a digital pound which will be of interest to any firms looking at the future of potentially a key element of the UK payments landscape). The blueprint is one of four workstreams in the digital pound design phase, with the other workstreams focusing on proofs of concept and experimentation, a "national conversation," and the assessment phase.

The blueprint aims to provide a proposition for a digital pound, covering technological, operational, ecosystem, commercial, regulatory, and financial considerations. It also starts to break out the roles that both the BoE and the private sector could play in its implementation.

Perhaps prepared in response to the remarkable public engagement with their initial consultation paper (which had over 50,000 responses), the BoE has set out three long-term aspirations for the digital pound, alongside its original four wider Outcomes, being that it should achieve:

• Central bank money as a publicly provided good
• An end-user proposition for retail payments
• The enabling of an open, dynamic, and innovative payments ecosystem

The BoE and HM Treasury have said that they will continue to engage with stakeholders, including banks, fintechs, merchants, and charities, through existing fora and additional publications and will launch the Digital Pound Lab this year. This technology sandbox environment is intended to enable hands-on experimentation, allowing the BoE to test features such as API functionality and potential business models for PIPs and ESIPs.

Entering a DORA-compliant world

Taking a brief but helpful detour into Europe and the brave new world of DORA-compliance for our next two updates (with the act now fully applicable from 17 January). For those not familiar, the EU Act requires financial entities as well as certain IT service providers, to become DORA-compliant – with a significant number of obligations being generated as a result. You can read more about the key facts for financial entities under DORA here.

One helpful update is specifically for payments firms, in that the EBA has announced that it has repealed its guidelines on major incident reporting under PSD2 to simplify the requirements on firms given the now harmonised reporting requirements under DORA. With the growing regulatory burden on firms, steps such as these to identify and manage duplication will be welcomed by the industry.

Particularly as we know that a number of payment institutions were involved in the initial engagement, we also wanted to flag that the Joint Committee of the ESA’s have published their report following the dry run exercise relating to the registers of information. The registers are one of the main obligations for financial entities under DORA and the dry run shows that only 6.5% of all registers analysed by the regulators successfully passed all data quality checks. This is somewhat unsurprising considering the very early stage that the dry run was performed but does highlight the significant amount of work that many firms may still need to dedicate to their DORA compliance.

Q1 dates for your 2025 diary

With the start of 2025 looking to be a particularly busy one for firms to keep track of, we wanted to pull out some of the key responses and updates that we’re expecting over the first few months.

• Whilst not confirmed, we’d expect a policy statement from the FCA on the changes to the safeguarding regime for payments and e-money firms (including a decision on whether a trust will be imposed over relevant funds) ahead of reforms later this year.
• Responses from the FCA on its wide-ranging Calls for Information on Big Tech as well as from the FCA and PSR on their joint ‘Digital Wallets’ consultation – judging by the amount of focus that digital wallets have had from the regulators recently, we wouldn’t be surprised if this proposed quite significant changes.
• Supplementing the Mansion House initiatives, the publication of the government’s ‘Financial Services Growth and Competitiveness Strategy’. This will come alongside the initial steps on establishing the Payments Vision Delivery Committee which will first focus on setting out an approach for the development of the UK’s retail infrastructure needs.
• Further PSR consultation on improving APP fraud data collection, as well as the PSR’s deadline on the requirement that most directed PSPs will need to amend their terms and conditions.
• PRA consultation on its review of the FSCS protection limit.

As you can see, plenty to look forward to! If there is anything that would be helpful to have a chat on at this stage, do let us know.

News Flash

• HSBC has shut Zing (its own currency conversion EMI intended to compete with fintechs such as Wise) following a “strategic review of Zing within the HSBC Group”.
• The BoE published a speech on the BoE's approach to innovation in money and payments and the focus on its work to enable the BoE's wholesale infrastructure to continue to meet the changing needs of the industry as well as its priorities for the future roadmap for the Real-Time Gross Settlement service.
• One for your MLRO, the EBA published its fourth report on the functioning of AML/CTF colleges under MLD4. The report sets out the EBA's findings from monitoring AML and CFT colleges in 2023 focusing on firms in the banking, payment and e-money sectors with a FinTech-oriented business model. Relatedly, OFSI have published a memorandum of understanding with OFAC in the US.