UK payments watchdog to be axed in move to simplify regulatory burden on business

Sir Keir Starmer, in a pivotal move to reduce the regulatory burden on businesses as part of a broader strategy to stimulate economic growth, has announced that the government plans to abolish the Payment Systems Regulator (PSR).

The prime minister's decision also addresses long-standing complaints from the industry over the complexity of engaging with multiple regulators – a challenge particularly pronounced for smaller businesses.

What is the PSR?

The regulator for aspects of the payment systems industry in the UK, the PSR was established in 2015 as a subsidiary of the Financial Conduct Authority (FCA) under the Financial Services (Banking Reform) Act 2013. Its statutory duties and objectives include:

• A competition objective to promote effective competition in the market for payment systems.
• An innovation objective to promote innovation with a view to improving quality, efficiency and economy of payment systems.
• A service user objective to ensure that payment systems are operated and developed in a way that takes account of, and promotes, the interests of those who use them.

In pursuing these objectives, the PSR implements specific directions. These are legally binding instruments applicable to payment system operators, infrastructure providers and other market participants covering issues ranging from authorised push payment (APP) fraud to the information provided by the acquirers to their merchants.

Industry backlash

Overseeing UK payment systems through which significant volumes of payments are settled, including systems such as Faster Payments and Mastercard, the PSR has been openly criticised in recent years, most notably over its approach to a mandatory refund system for APP fraud. Its proposal for banks to reimburse victims of APP fraud up to a total of £415,000 was the subject of significant industry opposition. The regulator ultimately backed down shortly before the new regime was due to come into force, reducing the threshold to £85,000 in line with the Financial Services Compensation Scheme's protection.

Deregulation for economic growth

The announcement is part of a clear government policy to reduce regulatory burden – with the FCA and Prudential Regulation Authority (PRA) rowing back on planned diversity and inclusion rules, as well as plans to use a public-interest test to determine when investigations should be made public.

The chancellor, Rachel Reeves, said that "the regulatory system has become burdensome to the point of choking off innovation, investment and growth."

What’s next?

A consultation will take place over the summer with legislation following "as soon as possible" – until which time the PSR will maintain its current remit and continue to have access to its existing statutory powers. The plan is for the FCA to assume greater responsibility for the payments landscape, as well as supporting the interests of consumers and businesses.

The PSR, in a response to the announcement, said "legislation will take time, but we do not need to wait to realise the benefits of an even more streamlined regulatory approach. Doing so builds on recent work bringing the PSR and FCA closer together."

Osborne Clarke comment

Although the announcement does not come as a surprise in light of recent criticisms and government policy, the abolition of the PSR has elicited a mixed response from industry stakeholders – some of whom welcome the ambition to simplify the UK regulatory environment.

Others doubt whether eventual benefits will justify the inevitable disruption. The PSR operates from the same headquarters as the FCA. Led by the FCA director David Geale, it is effectively already functioning as a subsidiary.

Of particular interest will be how the PSR's specific directions are to be transferred over to the FCA regime – for instance, by new FCA handbook rules or technical standards – and how the resulting enforcement regime will work. If operational changes (such as reporting requirements) change as result of the transition, an avoidable cost to industry will have been created, so it will be in all stakeholders’ interests to maintain current practices as much as possible. Once released later in the year, the consultation paper should be carefully reviewed and responses submitted as necessary.

While changes are undoubtedly on the horizon for the financial services sector, it remains to be seen how significantly this announcement, being structural in nature, will impact the industry.