UK Future of Payments: What is on the horizon?
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Senior Associate
UK
I am an associate in the Banking and Finance team, advising clients within the financial services sector.
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This article intends to summarise the latest UK regulatory developments with regard to recent updates; the Future Regulatory Framework Review, the Financial Services Future Regulatory Framework, the Financial Services and Markets Act 2023 (FSMA 2023) and the Future of Payments Review (Mansion House speech 2023).
Background
When the UK left the EU, EU legislation was retained becoming “retained EU law” (REUL). The UK Government has since launched various reviews and consultations with the intention of reforming the financial markets framework under the Financial Services and Markets Act to give regulators primary authority over rules, with the intention that this could lead to long term economic growth and international competitiveness.
Coordination by Government and regulators such as the FCA and PRA is needed to minimise disruption across the financial sector. Following the Financial Services Future Regulatory Framework Review (published 20 July 2022) the Government announced in their policy paper Building a Smarter Financial Services Framework (published 9 December 2022) as part of the Edinburgh reforms, their intention for the FCA to have rulemaking powers in relation to Payments regulation, which would provide the FCA with the necessary powers to make rules to replace REUL, where it doesn’t already have powers to do so, whilst still being held accountable by HM Treasury and Parliament.
The Treasury’s Future Framework Review (FRF) proposals explain the Government’s vision for the future of the UK’s financial services sector. The review aimed to identify what the UK regulatory framework needs to thrive as a financial ecosystem outside of the EU. The Treasury’s final response to the consultation (published in July 2022) provided the final policy around the FRF which is now implemented in the Financial Services and Markets Act 2023 (FSMA 2023) which recently received Royal Assent on 29 June 2023.
FSMA 2023 creates new requirements for the FCA and PRA to keep under review any new rules they make, whenever passed or made. FSMA 2023 also requires the regulators to provide a statement of policy relating to the review of rules, as such the FCA have published their Rule Review Framework which is discussed further below.
The Financial Services and Markets Act 2023 (the Act)
The original, Financial Services and Markets Act 2000 provided the UK with a framework of legislation for the financial services sector and was intertwined with EU law. The 2023 Act reforms this legislative framework by revoking retained EU law and aims to create a framework to better suit the UK market.
In addition, the FCA and PRA have greater powers to make rules and to regulate/create (‘firm-facing’) requirements in a way that is adapted to UK firms, markets and consumers. It will involve incorporating retained EU law into the FCA handbook rules, with interdependences with the Treasury, Bank of England and PRA.
Among all the changes, FSMA 2023 sets out new objectives and regulatory principles for both regulators, the FCA and PRA:
- Secondary statutory objective for both the FCA and PRA to facilitate the international competitiveness of the UK economy in the medium to long term
- A UK net zero emissions target.
Key changes introduced by FSMA 2023:
(Includes some but not all the various changes made to FSMA 2023, with a focus on the changes to impact the payments sector).
Digital settlement assets (DSA) (Sections 22 and 23) |
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“Digital settlement asset” a digital representation of value or rights, whether or not cryptographically secured, that, (a) can be used for the settlement of payment obligations, The definition has intentionally been drafted broadly to future proof regulation in-order to bring all existing and future fiat-backed stablecoins or DSA under the regulatory perimeter for systemic payments. The Treasury has power to amend the definition and issue a “recognition order” to DSA providers deemed to threaten the stability or confidence in the UK financial system or have serious consequences to businesses or other interests in the UK. Any systemic DSA payment system or service provider would be subject to regulation by the Bank of England and the PSR. In progress - The Government is preparing secondary legislation to bring stablecoins within the FCA's perimeter. The Bank of England and the FCA will consult on their regulatory regimes before the end of the year. |
Financial promotion approval permissions (Section 55NA) |
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The Act establishes a regulatory framework for the approval of financial promotions by the FCA. As a result, the FCA plan to establish a regulatory ‘gateway’ which an authorised firm must pass through before it is able to approve the financial promotions of unauthorised firms. The FCA consulted in December 2022 on how it would operationalise the gateway. Now that FSMA 2023 has received Royal Assent, according the Regulatory Initiatives Grid 2023, the FCA will soon publish final rules including establishing a timeline for the opening and closing of the application period which will be published via statue. |
Cryptoassets (Section 69) |
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“Cryptoasset” means any cryptographically secured digital representation of value or contractual rights that— (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology). Financial instruments, financial products and financial investments mentioned under Designated Activities under 71subsection (3)(b) of the Act may include cryptoassets, changes to the Act include the addition of cryptoassets to S21 of the Act (restrictions on financial promotions). The FCA have already consulted the industry and have provided a policy statement (published June 2023) setting out new requirements for cryptoasset promotions which will apply to all firms marketing cryptoassets to UK consumers, regardless of whether the firm is based overseas or what technology is used to make the promotion. The deadline to comply with the new rules for these firms is 8 October 2023). |
Designated activities regime (DAR) (Part 5A, Section 71k) |
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Designated activity regulations may provide for an activity to be a designated activity only if the activity relates or is connected to— (a) the financial markets or exchanges of the United Kingdom, or (b) financial instruments, financial products or financial investments that are (or are proposed to be) issued or sold to, or by, persons in the United Kingdom. These activities may also include cryptoassets. There are financial services-related activities in the retained EU law that are not ‘regulated activities’ under FSMA’s Regulated Activities Order (RAO). These are generally activities that are carried out by entities or individuals who are not authorised by or registered with the FCA. This means that we cannot make rules to cover these activities using our existing FSMA rule-making powers. The DAR will enable the Treasury to designate certain financial services-related activities, so that the FCA can regulate these activities irrespective of whether they are carried out by authorised persons. Anyone carrying out a designated activity will need to follow the DAR rules for that activity (Future Regulatory Framework (FRF) Review). |
Authorised push payment (APP) fraud reimbursement (Section 72) |
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The PSR is required to create a new requirement for firms to reimburse victims of APP fraud in qualifying cases which the PSR regards as eligible. Under the Act, qualifying cases include payments made using the Faster Payment Scheme and payments being executed subsequent to fraud or dishonesty. On June 7 2023 following a previous consultation, the PSR confirmed the new requirement for reimbursement and set out stages of consultation for the new rules expected to come into force in 2024. |
Access to cash (Schedule 8) |
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A “cash access service” is— (a) a service which enables cash to be placed on a relevant current account (a “cash deposit service”), or (b) a service which enables cash to be withdrawn from a relevant current account (a “cash withdrawal service”). Under the Act the FCA is responsible for ensuring the reasonable provision of cash access services in the UK. According to the FCA’s 2023 regulatory grid the FCA is expected to consult this summer. |
A framework for ‘critical third parties’ (Chapter 3C Section 312L of the Act) |
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The Treasury may designate as a ‘critical third party’ to authorised service providers of financial market infrastructure firms (FMIs), if in the Treasury’s opinion a failure in, or disruption to the provision of services would threaten stability or confidence in the UK financial system. The Treasury will take into consideration the materiality of services provided and the number of authorised service providers or FMI’s the entity provides services to. The FCA, PRA and Bank of England are the relevant regulators established by the Act for oversight of critical third parties, for which this will apply. |
The FCA Rule Review Framework
The FCA published a Rule Review Framework (published 14 July 2023), the review is a key part of the FSMA 2023 reform to ensure that the FCA has created a policy around it’s rule review. The FCA have developed this framework to explain how they will monitor and review that their rules are working in practice. This Framework applies to FCA rules found in the Handbook.
The Rule Review sets out the following framework:
- Policy-making cycle.
- Areas shared with other regulators.
- Consideration of international standards and regulations.
- Approach to reviewing new and existing rules.
- How the FCA set, measure and monitor the outcomes of our rules.
- Stakeholder feedback, to better understand how rules work in practice.
- Types of review.
- Immediate priorities for review.
- Challenges to undertaking reviews.
- Actions to take after a review.
- Cases where a review shows a significant problem.
- The approach to reporting.
The rules also set out how the FCA will consider international standards and regulations by global standard setting bodies to develop common approaches with other competent authorities.
The rule review framework is made up of three types of assessment, simplified as follows:
- Evidence assessment: This will rely on data driven evidence.
- Post implementation review: This will consider whether a rule has met its intended outcomes, with a view of assessing wider implications of the rule e.g. implementation issues, unintended consequences etc.
- Ex-post impact evaluation: This will consist of impact evaluations of interventions.
The FCA are collecting feedback from stakeholders until 15 September 2023.
The Future of Payments Review 2023
In the Chancellor of the Exchequer’s Mansion House Speech (10 July 2023), the Chancellor set out the Government’s progress in delivering an open, green, and technologically advanced financial services sector. Among the statements of change was an announcement that almost 100 unnecessary pieces of retained EU law from the statute book, including parts of the Payments Accounts Regulations would be repealed.
In addition, the Government would be laying a statutory instrument to give the FCA sufficient rulemaking powers, and the PSR sufficient powers of direction, (for payment services and e-money) to replace EU law.
The Future of Payments Review was announced and published 11 July 2023, with the objective of considering how payments are likely to be made in the future.
The final report intends to make recommendations on the necessary steps to successfully deliver retail payments and boost UK financial technology competitiveness. The independent review into the future of payments is chaired by Joe Garner, former Chief Executive Officer of Nationwide Building Society.
The Review seeks to answer the following three specific questions:
- What are the most important consumer retail payment journeys, both today and in the next 5 years? E.g. paying a friend, paying a bill, paying businesses for goods and services, in the UK or internationally etc.
- For these journeys today, how does the UK consumer experience for individuals and businesses compare vs other leading countries? This is to be assessed for the quality of experience and security as well as cost.
- Looking at the in-flight plans and initiatives across the payments landscape, how likely are they to deliver world leading payment journeys for UK consumers?
The call for input closes on 1 September 2023. Joe Gardener is expected to provide a report of recommendations to the Government in Autumn 2023.
Other important updates for payments from the FRF and Edinburgh reforms
- Reform of the Consumer Credit Act: consultation (published on 11 July 2023). Provides an overview of feedback to the consultation (published 9 December 2022) and outlines proposed next steps to overhaul of the CCA. The Government is expected to publish a second stage consultation in 2024.
- Payment Services Regulations Call for Evidence (open 13 January 2023- 7 April 2023). Is a statutory review of the Payment Services Regulations 2017 and Electronic Money Regulations 2011. The Government is assessing responses.
- FCA consultation on changes to safeguarding requirements for payments and e-money institutions. A consultation on strengthening requirements for safeguarding funds (held by payments and e-money firms to meet customer entitlements) is due as part of the Future Regulatory Framework Review. Consultation Paper to be published in H1 2023. Final rules and Feedback Statement to be published around end 2023 / early 2024.
Key dates
(From the Joint Committee Regulatory Grid, PSR, FCA, State of the sector: annual review of UK financial services 2023 (State of the sector: annual review of UK financial services 2023))
| Financial promotion approval permissions | Imminent – This was expected soon after FSMA 2023 received Royal Assent |
| FCA to consult on safeguarding rules for payment and e-money firms |
Due: H1 2023 |
| FCA and BoE to consult on secondary legislation for digital settlement assets |
H2 2023 |
| FCA consultation on access to cash rules |
Summer 2023 |
| Joe Gardener report on the Future of Payments |
1 September 2023 |
| FCA Rule Review Framework feedback deadline |
15 September 2023 |
| Compliance with cryptoasset financial promotions deadline |
8 October 2023 (Firms must ensure they have the relevant permissions prior to this date to continue promoting to UK customers). |
| FMI sandbox |
Expected in 2023 |
| Mandatory reimbursement for Authorised push payment fraud reimbursement |
2024 |
Co-authors
Melissa Daley, Knowledge Manager, London.
Tom Hepplewhite, Senior Associate, London.
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