Ten years ago, the thought of your phone scanning your face before you pay for your morning coffee may have been a disturbing one. Five years ago, sharing your account information with anyone but your bank would have been unthinkable. And a year ago, for most people, a 'stable coin' was one finely balanced on the edge of a table (often achieved after several attempts to keep it in such a delicate state). It’s safe to say fintech and payment services have evolved at a rapid rate, and have fundamentally changed how we interface with money and investments. With $9.1 billion being invested into the UK’s fintech sector in just the first of half of 2022, it is also safe to say that this evolution has not stopped yet.
But as with all great innovations, there must first exist strong foundations on which to build. From a regulatory perspective, the UK’s Payment Services Regulations 2017 (“PSRs”) form part of this ‘bedrock’ for the UK’s fintech and payment services sectors. Coming into force on 13 January 2018, the PSRs are the transposition into UK law of the EU’s Revised Payment Services Directive (“PSD2”) and on 13 January 2023 HM Treasury released its first quinquennial review of them. The review—which is accompanied by a Call for Evidence on how UK payments regulation should evolve—is particularly pertinent following Brexit as, in the words of HM Treasury, the UK can “approach afresh the desired objectives and purpose of the regulations”.
Key findings from the review
It is important to note that this review is not an in-depth technical analysis of the efficacy of the PSRs as they stand, the substantive assessment of the regulations is only a little over 12 pages. We are still yet to see the kind of detailed analysis the European Banking Authority released in June 2022 in its response to the European Commission’s Call for Advice on reforming PSD2. Having said this, the review does yield some insight into where the UK’s payment services regulation may go in the future and emphasises two notable themes: keeping pace and protecting consumers.
Keeping pace (and retaining the lead)
The review notes that there is much to be celebrated, as the PSRs have fostered “a strong, innovative, and competitive UK payment sector that is recognised globally”. And yet, the review also reflects concerns around ensuring that "payments regulation is future-proofed, agile and proportionate" as technology and the marketplace evolves. The government's work to bring cryptoassets within the perimeter is highlighted as an example of the importance of maximising innovation and potential economic growth, while adequately protecting users and the wider financial system. Going forwards, the government observes that there is a strong case for delegation to the FCA of firm-facing rules as a means of ensuring regulatory agility. This is a re-affirmation of the largely settled position adopted in the Future Regulatory Framework review (which we discuss further here).
In addition to keeping pace with technological developments, an open question is the extent to which UK payments regulation will keep pace with the EU, or whether we will start to see greater regulatory divergence. For example, the government is looking for feedback as to whether it is appropriate to maintain separate authorisation and regulatory regimes for payment services and e-money institutions. This sits against a backdrop where the EBA has stated that it is "strongly supportive" of the merging of the corresponding European regimes.
Another notable focus of the review is on how the regime can better protect consumers and strike a fair balance between providers and their customers. Particular attention is given to the possibility of transferring to the FCA responsibility for developing and delivering a safeguarding regime for payments and e-money, providing clarity where there is currently ambiguity. In this uncertain economic environment, it will be welcomed that the FCA has been invited to consult on this later this year.
The government has also expressed concern with the balance of power between consumers and payment service providers (“PSPs”), and in particular it wishes to determine whether specific protection is required for access to payment services enabling freedom of expression.
Whilst it is unlikely that there will be a seismic event that will alter the ‘regulatory bedrock’ in the payment services and fintech sector anytime soon, there are certainly rumblings underfoot. With the pace of innovation, the desire to retain the UK’s strong position in the global market and for the UK to continue to take advantage of its new regulatory freedom, the regulatory fault lines may shift. This review makes it clear that any shift will be guided by concerns about keeping pace with market changes and the protection of consumers. And who knows, because of this in 10 years you may be able to get to pay for your morning coffee with just a simple thought!
The consultation period closes on Friday 7 April 2023.