Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook January 2023

Edinburgh reforms

The "Edinburgh Reforms", announced by the chancellor on 9 December 2022, are a package of measures which aim to "drive growth and competitiveness in the financial services sector". The reforms, which build on the work being done in the Financial Services and Markets Bill 2022-23 (FSM Bill), support the government's vision for the UK as a sustainable, competitive and technologically advanced global financial services centre.

There are over 30 policy initiatives, with measures including the following:

• Repealing retained EU law in financial services and replacing it with a new framework tailored to the UK.
• Reforming the existing bank ring-fencing regime.
• Commencing a review of the Senior Managers and Certification Regime in Q1 2023.
• Consulting on the reform of the Consumer Credit Act 1974, to modernise the regulation of consumer lending and update consumer protections.
• Publishing an updated Green Finance Strategy, in early 2023.
• Consulting on removing certain customer information requirements in the Payment Accounts Regulations 2015.
• Committing to work with the Financial Conduct Authority (FCA) to examine the boundary between regulated financial advice and financial guidance.
• Consulting on a UK retail central bank digital currency alongside the Bank of England (BoE). 

At the moment much of the package is in the initial stages, but more detail is expected to emerge during 2023, allowing for a fuller assessment of the likely impact on the industry. The reforms are expected to make extensive changes to the way the financial services sector is regulated, and firms should track these developments closely.

Extending confirmation of payee service to additional payment service providers

On 11 October 2022, the Payment Systems Regulator (PSR) published a policy statement on extending the requirements for participation in the confirmation of payee (CoP) service to around a further 400 payment service providers (PSPs) (PS22/3). The PSR has also published the new Specific Direction 17: Expanding Confirmation of Payee, which expands the CoP service.

The aim of the expansion is to help reduce authorised push payment (APP) fraud and accidentally misdirected payments. In addition, the PSR has continued to see a rise in fraud being received by PSPs who do not offer CoP, but despite this, PSPs have been slow to implement CoP. The PSR expects this trend to continue unless the regulator takes action to direct PSPs to implement CoP.

The PSR has identified two groups of PSPs that need to implement the system:

• Group 1: This focuses on PSPs that will need to use the CoP system after 31 October 2023. The names of the PSPs are listed in Annex 1 to PS22/3.
• Group 2: This refers to all other PSPs that use unique sort codes, or are building societies using alternative reference information, which must use the CoP systems after 31 October 2024.

After the applicable date, a directed PSP must have and use a system to send CoP requests for its customers and respond to CoP requests made to it. The system must send, and respond to, CoP requests in compliance with the CoP rules and standards.
The PSR has prioritised Group 1 based on the complexity and size of the institutions, and on the impact the PSP adopting CoP is likely to have on preventing APP scams. By prioritising this group, the PSR expects to increase CoP coverage from 92% of "Faster Payments" transactions to 99% after October 2023. By 1 November 2026, the PSR expects that CoP will be an everyday part of a directed PSP's processes and a service that their customers expect.

Please see our recent Insight on the topic for further information. 

Measures to combat authorised push payment fraud

On 29 September 2022, the PSR published a consultation paper (CP22/4) on mandatory reimbursement and cost allocation for APP scams. The proposals require reimbursement for APP scams, improve the level of protection for APP scam victims and incentivise PSPs to prevent these scams.

In the context of mandatory reimbursement, the PSR proposes requiring all PSPs sending payments over Faster Payments to fully reimburse APP scam victims. The sending PSP will have to reimburse the victim as soon as possible, and no more than 48 hours from the fraud being reported. Only limited exceptions would apply, such as where the consumer is involved in the fraud themselves, or where they have acted with gross negligence.

With regard to the allocation of costs of reimbursement, the PSR proposes an equal division between sending and receiving PSPs, with a default 50:50 split. PSPs can use a dispute management process to adjust the allocation, to better reflect the steps each PSP took to prevent the scam.

The consultation closed for comment on 25 November 2022. The PSR expects to set out its policy position and accompanying action in the first half of 2023.

It is also worth noting the proposed amendments to the PSRs made by the FSM Bill to allow for a "risk-based" approach to payments under certain circumstances, helping PSPs combat fraud, particularly APP scams, by "pausing" their obligations on execution times and value dating.

The PSR aims to have its core requirements for mandatory reimbursement in place for consumers as soon as possible, and no later than during 2024. In the meantime, PSPs should continue to develop their fraud detection and prevention arrangements as quickly as possible.

UK payments regulation and the systemic perimeter

In its response to the Payments Landscape Review in October 2021, the UK government committed to consulting on bringing systemically important entities operating within payment chains into BoE regulation. On 7 July 2022, it published a consultation paper and call for evidence exploring (among other things):

• the rationale for expanding the BoE's supervision of systemic risk relating to payments beyond payment systems and associated service providers; and
• what an amended regulatory perimeter would involve for regulating risk end-to-end throughout the payment chain; what criteria would apply to recognising new entities; and the continued role for the Treasury in determining which entities fall within the systemic regulatory regime.

Further to the introduction of the FSM Bill, this consultation also set out the government's approach to applying the Financial Services Future Regulatory Framework Review to the payments regulatory landscape at large. In particular:

• The government intends to ensure that the FCA has a general rulemaking power for payments and e-money, and that the PSR has an enhanced power of direction in their areas of retained EU law, better aligning the regulators' powers with those that exist in their domestic regulatory frameworks.
• The government sought views on the potential applicability of a Senior Managers and Certification Regime more widely to the payments and e-money sector, including within the FCA's regulatory ambit, and if this should include potentially differentiated treatment for differently sized market actors, commensurate with their risk and reach.

Firms should look out for the UK government's formal response to the consultation which is expected to be published in 2023.

As part of the "Edinburgh Reforms", the government published a policy paper entitled "Building a smarter financial services framework for the UK", in which it states that it would give the FCA wider rulemaking powers in relation to payments regulation to ensure that the FCA has the necessary powers to make rules to replace certain retained EU payments legislation. Further detail is also contained in an example (draft) Statutory Instrument (Payment Services and E-Money Regulations) and related policy note that the government published alongside its policy paper.

UK regulation of stablecoins used as a means of payment

Due to the propensity of stablecoin potentially to become a widespread means of payment and store of value and to deliver improvements for payments transactions, in July 2022, the FSM Bill introduced legislation that will allow stablecoins used as a means of payment to be brought within the UK regulatory perimeter.

This will be achieved primarily by amending existing UK electronic money and payments legislation to provide the FCA and the PSR with powers to regulate and supervise firms engaged in relevant payment activities. Under the proposals, the FCA's e-money and payment services regimes will be amended to provide the FCA with appropriate powers over stablecoin issuers and other entities, including wallet providers. To cater for this model, the existing payments regime will need to be adjusted, including, for example, the definition of e-money.

The FSM Bill also enables HM Treasury to apply the Financial Market Infrastructure Special Administration Regime to stablecoin firms that have been recognised by HM Treasury, with appropriate modifications. This will ensure appropriate tools are in place to mitigate the risks to financial stability associated with a systemic stablecoin firm's failure. 

A range of market participants are involved in facilitating the use and issuance of stablecoins used as a means of payment, and may be impacted by these proposals. Key participants or entities which will be caught by the proposed regime are likely to include at least the following:

• issuers or systems operators responsible for managing the rulebook of a system, the infrastructure, burning and minting coins;
• cryptoassets exchanges, enabling consumers to exchange tokens for fiat money or other tokens; and
• wallets, which may provide custody of tokens and manage private keys.

It may be some time before the proposals concerning the regulation of stablecoins are finalised and come into force. Firms should track these developments closely.

It has recently been announced that five associations (City of London Corporation, Digital Pound Foundation, the Payments Association, the CityUK and UK Finance) have formed the UK Forum for Digital Currencies which will provide a forum for discussion and collaboration around the industry's response to digital currency developments in the UK. This includes the potential for a Central Bank Digital Currency, as well as the regulatory approach to stablecoins and other variable value cryptoassets.

Regulation of buy-now, pay-later products

The government has confirmed its plans to expand the regulatory perimeter to include interest-free buy-now, pay-later products (BNPL) and other currently unregulated short-term interest-free credit products (STIFC) provided by third-party lenders. Once the new rules come into force in future, BNPL providers and products will be subject to a range of new requirements, including pre-contractual disclosures, creditworthiness assessments, and in relation to the form and content of the credit agreement.

There will be exemptions for some agreements where there is limited risk of consumer detriment and where regulation would otherwise adversely impact day-to-day business activities. Merchants offering BNPL as a payment option will be exempt from the requirement to be authorised as a credit broker by the FCA, as would usually be the case where introducing a customer to a lender.

HM Treasury intended to publish a second consultation seeking views on the draft legislation by the end of 2022. Alongside this, it will set out its final position on regulating STIFC. In its earlier consultation, HM Treasury was minded to extend the scope of regulation to capture STIFC provided directly by merchants where it is offered online or at a distance, but requested further input from industry in order to come to a final view on this.

The government intends to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.

Affected firms should track the ongoing development of BNPL regulation closely to make sure they are aware of changes that will affect them. It may also be helpful for firms to engage with industry bodies which are in dialogue with the authorities on these reforms.

Please also see our Insights on HM Treasury's consultation and on the FCA's warning to firms regarding BNPL products for further details.  

Use of AI and machine learning in financial services

Please see our previous edition of the Regulatory Outlook for details of developments expected in 2023 on this issue.

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Please see our previous edition of Regulatory Outlook for details of developments expected in 2023 on this issue.