UK: Payment regulation 2025: What’s on the horizon?

Our take on the relevant payments regulation updates for 2025 for the UK’s evolving landscape covers some significant developments from the National Payments Vision (NPV)  published at the end of last year and emphasises the growth agenda of the UK government (Government) for the sector in the future. Below we cover initiatives for changes to strong customer authentication requirements, improving safeguarding rules for customer funds , what the UK are doing in relation to firms addressing risks arising from critical third-party services and finally the development of payments in the blockchain space, and how we see the sector developing this year from a regulatory perspective.

The previous two years saw a significant drive from the FCA to focus on the consumer duty, creating higher standards of consumer protection across financial services. We now anticipate industry growth to be high on the agenda for regulators. As outlined in the NPV we expect focus to progress to three key pillars geared towards driving innovation, competition and security.

The Government published the NVP in November 2024 which follows on from the industry review by Joe Garner, Future of Payments Review Report November 2023 . In the review Joe Garner recognises “the economy cannot grow without the payments infrastructure to support it” and provides the steer needed for the UK to remain ahead of global payment trends. 

The NPV is geared toward seizing opportunities for payments in the future and sets out some key objectives, in the form of improving growth, encouraging sector development in next generation technology like distributed ledger technology, artificial intelligence and enhanced data sharing, as well as improving fraud and security in payments.

Streamlining firm facing requirements

There are several initiatives underway to develop and review FCA rules and guidance, The Rule Review Framework, the Smarter Regulatory Framework and Review of FCA requirements following the introduction of the Consumer Duty the FCA have been interested to learn from respondents the effectiveness of their rules and guidance. The goal is to create regulatory flexibility into the rules to be responsive to future innovation, in turn this will develop away from EU law, replacing where appropriate with FCA rules. For example, bringing contactless limits into the FCA Handbook regime could create better flexibility when it comes to the transactions which contactless limits are applied to, as well as improving the strong customer authentication experience (SCA) (see more below).

Regulatory requirements are currently spread across multiple sources, including: assimilated law (previously retained EU law), primary and secondary UK legislation, technical standards, regulators’ rules. The FCA will aim to consolidate these provisions into the FCA handbook as far as it is possible to do so, this includes reviewing Payment Services Directive 2 (PSD2) and Electronic Money Directive (EMD) and equivalent regulations. Most recently progress has begun on reforming the safeguarding regime for payments and e-money firms (see below).

We expect more FCA Handbook reform to continue into 2025.

The framework for Open Banking

The Government see developing the ‘commercial model’ for Open Banking as critical for developing competition and innovation in the UK and has directed the FCA to assume the role as the new Open Banking regulator, taking over from Open Banking Limited. The FCA already has the effective regulatory oversight needed to develop a long-term framework for the Open Banking ecosystem and so is well placed to lead UK Open Banking.

A goal set out by the NPV is to develop the UKs retail payments infrastructure by removing ‘regulatory congestion’ between the FCA and PSR so they may work together to ensure the security of the ecosystem, especially when tackling fraud.

What to expect from the new Open Banking regulator?

The NPV outlines that it is crucial for the fintech sector to deliver a seamless account-to-account payments infrastructure for enabling customers to pay for goods and services in shops and online from their bank account and expects regulators to have a strong focus on this. The Government considers account-to-account payments for e-commerce to be a ‘strategic short to medium term priority’. 

The Government recognises that a regulatory-led free access model to data is also crucial to the success of Open Banking and in supporting innovation and competition to lead to an Open Finance future. The NPV indicates the incoming of a new regulatory framework, which will ‘unleash’ the full potential of Open Banking. In order to do so sustainable commercial models are needed whereby data holders are incentivised to innovate and invest to provide ‘premium services’. 

The Government also expects the FCA to work closely with the PSR to fast-forward work on Variable Recurring Payments (VRPs) and a timely delivery of a sustainable commercial model for VRPs.

The Data (Use and Access) Bill, which is currently progressing through Parliament and will provide the Government and regulators use of incoming smart data powers to advance an Open Banking structure. It remains to be seen whether smart data ecosystems will be developed in parallel with the advance of Open Banking or whether there will be a continued focus on increasing the adoption of Open Banking rails before developing smart data schemes in other financial services sectors and other business sectors (such as energy utilities or telecoms).

Changes to SCA

A key strategy for Government and regulators is ensuring that firms can innovate whilst still being able to tackle the evolving fraud threats.  The Garner review found that although the implementation of SCA reduced fraud, it also resulted in burdensome technical requirements for firms.

Respondents to the Future of Payments Review found that although SCA implementation reduced fraud it also harmed the shopping experience.

This year we expect the FCA to revisit SCA and to improve the point of sale and ecommerce experience. We anticipate a review of the prescriptive nature of the technical requirements of SCA. If SCA requirements are moved from the regulations to rules and/or guidance we would envisage that firms could come up with more innovative/proportionate ways to provide SCA whilst still managing fraud risk. 

Changes to the safeguarding of customer funds

The FCA has concluded that there are some significant flaws in the way safeguarding arrangements are working in practice. Under a regime change proposed in September 2024 via consultation CP24/20, the existing e-money safeguarding regime will be replaced or aligned with a similar client assets (CASS) style regime. 

The FCA despite issuing guidance to firms via the Approach document found that for firms who became insolvent between Q1 2018 and Q2 2023, there was an average shortfall of 65% in funds owed to clients (difference between funds owed and funds safeguarded). The FCA would like to see shortfalls in safeguarded funds limited and that funds are returned as cost effectively and as quickly as possible, with powers for the FCA to intervene if the safeguarding requirements are not met. 

There will be two stages to the change.

1. interim rules designed to improve compliance with the existing statutory safeguarding regime and to come into force after a six-month transitional period from their publication, which is expected to occur by the end of June 2025; and
   
2. end-state rules which will replace the existing safeguarding regime with an improved regime which will incorporate the interim rules improvements and add (principally) two key new elements of protection. These will come into force after a 12-month transitional period from their publication, but their likely publication date is currently uncertain.

Amongst the changes, will be a radically different approach to the draft of the EU payment services directive (PSD3) which effectively ends the D+1 principle in the UK and will require the receipt of relevant funds directly into a designated safeguarding account.

The consultation closed in December and firms should be aware of the interim rules which will come into force after a transitional period of six months following publication and the FCA are expecting to publish as before July 2025. End state rules will follow on from this although the likely date is uncertain. 

Following the consultation the FCA will work with the Treasury to review the regime set out in the Payment Services and Electronic Money Regulations with a view of moving firm facing requirements to the Handbook.

You can find more information on the changes to safeguarding requirements in our latest insight here.

Operational resilience, what’s new?

Prospective critical third parties, regardless of location, will fall under a new oversight regime by HM treasury (the Treasury) as Designated Critical Third Parties (CTPs), we believe CTPs have already been written to by the Treasury.

CTPs will be obliged to comply with a set of CTP Fundamental rules. The services affected are broad ranging as the regulation is technology neutral and aimed at CTPs providing services to firms and financial market infrastructure operators (FMIs). The CTP framework has been designed to be interoperable with international standards including the EUs DORA, the Basel Committee’s Principles for operational resilience and the FSB TPR Toolkit, so in essence should simplify compliance with the different frameworks for international companies.

The rules apply from 1 January 2025 however a newly designated CTP will be provided with a specified date from the Treasury and new CTPs will be announced on the legislation.gov website.

We’ve written more about the new regime here.

Bigtech and digital wallets

For several years the PSR and FCA have been examining Big tech and digital wallet providers, an estimated 14% of point-of-sale terminal transactions and 38% of ecommerce transactions, by value, involved a digital wallet in 2023, digital wallets have grown at an extremely rapid rate with the likes of Apple pay and Google. In July last year the regulators opened a Call for Information to understand both opportunities such as facilitating account-to-account payments and risks such as operational failures of the technology and barriers to entry created to new providers. Increasingly we have seen merchants and retailers also develop their own digital wallets to allow pre-funding of payments of good and services and we expect this trend to continue.

The regulators think there could be greater scope for possibilities offered by open banking and new ways of paying, such as account-to-account payments. A suggestion has been made on the development of technical standards for digital wallet providers to be set, including through regulation. 

The regulators have also contacted firms in the industry directly for data, according to the FCA “If the FCA’s analysis finds Big Tech data is valuable in financial services, it will look to incentivise more data sharing between Big Tech and financial firms through its Open Banking and broader Open Finance work. If it finds potential risk or harms from non-sharing of data it will also look to develop proposals for the Competition and Markets Authority (CMA) to consider when they are given powers to regulate designated firms’ digital and data conduct, expected via the Digital Markets, Competition and Consumers (DMCC) Bill”.

The regulators will publish an update early this year.

2025 the year for pushing towards UK Crypto regulation?

With awareness of cryptoassets rising, according to the FCA's latest research on consumer attitudes and behaviours towards crypto, 12% of UK adults now own crypto, up from 10% in previous findings, the FCA have been encouraged to design “regulation that supports a safe, competitive and sustainable crypto sector".

We are pleased to see developments for regulation is on the horizon through the recently published FCA Crypto roadmap. It outlines a timeline for the design of new rules (see below) but also indicates new regulation for cryptoassets to be in place by 2026. 

Tulip Siddiq set out the Government’s approach to cryptoasset regulation in a keynote speech at the Tokenisation Summit  (November 2024). The Government intends to implement the Treasury’s proposals in full as outlined in the Future of Financial services regulatory regime for cryptoassets consultation paper (February 2023) and response (October 2023). However, we understand that the Government has rejected the phased approach to regulation suggested in the proposals and will proceed with the new regulated activities for stablecoins, which will be implemented to the same timetable as the rest of the regulatory regime for cryptoassets. 

Regulating stablecoins- What to expect

We believe regulation will still involve:

• The regulation of fiat-backed stablecoins as regulated activities under the Regulated Activities Order (RAO), Financial Markets and Services Act 2000.
  
• Will include safeguarding requirements in line with the custody of other cryptoasets, this will be consulted on in Q1/Q2 this year.
  
• The Government has rejected the proposals to bring stablecoins used as a form of payment under the Payment Services Regulations 2017 at this time, as the approach would bring additional regulatory burden to stablecoin activities in a way not proportionate to current use cases.

The Government intends to produce a draft of legal provisions this year.

In August 2024 it was reported that stablecoin market settled more than $10.8T worth of transactions in 2023 and volumes on that adjusted basis are growing by 17% YoY, which means stablecoins are quickly catching up to today’s largest incumbent payment networks. We expect this trend to continue in 2025 with merchants increasingly adopting stablecoin acceptance as a new payment method for consumers to make payments to them. At an institutional level, payment system operators and financial market operators are also developing systems to carry out real time settlement of payments using blockchain technology.

The FCAs will also consider the Consumer Duty in the design and development of the new stablecoin regulatory regime and propose that regulated stablecoin issuers and custodians will be subject to the Consumer Duty, to ensure good outcomes for consumers choosing to use stablecoins to make or receive payments. The FCA will consult on the application of the Consumer Duty in Q3 this year.

The FCA intends to consult on stablecoin backing assets, redemption and custody of stablecoins including the use by 3rd parties in Q1/Q2 of this year.

Here is a roundup of the FCA Crypto roadmap:

Our Regulatory Timetable

As the payments regulatory landscape evolves in 2025, businesses will face both challenges and opportunities. The NPV emphasises fostering innovation, enhancing competition, and strengthening security of payments, aiming to present a clearer roadmap for growth and adaptation in the UK payments sector. Key regulatory reforms, including notable updates to strong customer authentication, safeguarding regimes, and the establishment of a long-term framework for Open Banking, will demand proactive engagement from firms and stakeholders. Moreover, the focus on making payments using emerging technologies like blockchain for stablecoin and crypto payments underscores the need for organisations to align their strategies with regulatory priorities. 

Our Payment Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments in these areas.

With thanks to Knowledge Manager, Melissa Pentescost-Daley for her assistance in preparing this article.