26 January 2023
On 13 January 2023, HM Treasury (HMT) published a Review and Call for Evidence on the Payment Services Regulations 2017 (PSRs). This document fulfils its statutory obligation to review the PSRs and sets out its conclusions. HMT found that the PSRs and wider retained EU payments law have had some success in promoting the UK's payments regulation objectives. However, there are several key areas where the regulatory framework could be improved.
In its Call for Evidence, HMT asks for the industry's views on its plans for improvement and any other benefits for future policy change, as HMT repeals retained EU law and replaces it with a framework specifically tailored to the UK.
Alongside its assessment of the PSRs, HMT sets out a useful holistic overview of its wider initiatives. In this article, we provide a bite-sized overview of the key outcomes of the review itself and our own insights.
HMT used the review as an opportunity to, first of all, reset the objectives and purpose of the PSRs (against which it carried out its evaluation), now that the UK has left the EU. HMT sets out hybrid objectives which take into account the rationale for the Second Payment Services Directive and HMT's and the FCA's own stated objectives for the sector. The new objectives are as follows:
In relation to the objectives, and throughout the review, HMT indicates a desire to understand where the objectives can be achieved with less onerous regulatory provision, through HMT and Parliament merely setting out the framework and the detailed firm-facing requirements being left to the regulators.
While a less burdensome approach to regulation is always welcome, this would need to be carefully balanced against the potentially significant costs payment service providers (PSPs) would bear in implementing any major changes to the regime. It is reassuring that HMT shows recognition of this and has confirmed in its Call for Evidence that policy changes will only occur where there are concrete benefits or risks, and not for their own sake.
HMT has also emphasised that it would welcome concrete reflections for future policy, rather than general views on the principles which should underpin regulatory change. This could be a real opportunity for the industry to influence the direction of travel on specific issues such as the legal uncertainty around the meaning of payment account and the limited network and commercial agent exemptions, the cost of navigating a complex and somewhat ambiguous safeguarding regime and the difficulties of complying with the intricate strong customer authentication (SCA) regime.
In relation to the first objective, HMT notes that to date amendments to the PSRs and Electronic Money Regulations 2011 (EMRs) have only been possible via primary legislation. This risks the framework lagging behind market changes. HMT will therefore consider the balance between delegation to the FCA and enshrining requirements in statute, as it repeals and replaces retained EU law for payments. HMT notes there is a strong case for delegation to the FCA of firm-facing rules to enable a more agile and future-proof framework and that it is in keeping with the outcomes of HMT's Future Regulatory Framework Review.
In this context, in its Call for Evidence, HMT sets out wider questions for the industry, including around the appropriateness of:
Overall, HMT found that the regulatory framework has operated well to achieve the consumer protection objective. However, HMT identified the following areas which may not be working as well as they could to protect consumers.
In the context of this objective, HMT states that the foundational requirements in the PSRs will remain adequate without further reform. Outside the scope of this review, HMT has already started to manage gaps in an asset-class specific way through work to bring cryptoassets in the regulatory perimeter, and more generally the consultation and call for evidence on payments regulation and Bank of England's systemic perimeter (more on which below). Outside of cryptoassets, HMT confirmed that the risk of not keeping up with a dynamic and evolving marketplace will be largely managed through the development of a FSMA model of regulation, in which the regulators will generally be responsible for setting technical firm-facing requirements and, as a result, will be better positioned to respond to market developments.
HMT notes that the UK has a competitive payments sector, developed through a combination of PSRs and EMRs (more specifically their recognition and support of new market entrants) and other specific domestic initiatives, most notably Open Banking (the progress of which, while helpfully summarised, is outside scope of the review). HMT identified three key areas to this objective: continued development of Open Banking, enhancing informed customer choices and fairer access to payment systems.
Interestingly, without any particular discussion in the review, HMT included wider questions on charges for payment services, the balance of rights and obligations between sending and receiving PSPs, and between account servicing PSPs and PISPs/AISPs, as well as the appropriateness of the requirements regarding issuance and redemption of e-money. With all such areas likely having been a point of contention for many PSPs, industry feedback on this is anticipated with no less interest.
Details on how to submit responses to the Call for Evidence (which must be done by 7 April 2023) are set out in the section of HMT's paper entitled "Next Steps". If you have any questions about HMT's Review and Call for Evidence, please contact our experts.
*In Baker and another v Financial Conduct Authority (Re Ipagoo LLP)  EWCA Civ 302 (9 March 2022) the Court of Appeal, found that the EMRs did not create a statutory trust over an EMI's safeguarded asset pool but, nonetheless, "asset pool" must also include a sum equal to such relevant funds that ought to have been but had not been safeguarded in accordance with the rules.
by multiple authors