UK to widen payment services oversight

Mark Taylor

Mark Taylor

Senior Editorial Manager

Any service provider in the multi-trillion-pound payment chain viewed as a “systemic risk” to the UK’s financial system will be regulated under a widening of the Bank of England’s (BoE) powers.

The government is concerned that new entrants to the payments market, including digital currency providers, are not subject to appropriate supervision despite potentially posing significant threats to the UK’s financial system.

Last year, the UK’s payment system operators processed a record 10.7 billion transactions and a total value of £8.7 trillion, while the BoE’s same-day, high-value sterling payment system had a volume of 50.8 million transactions, worth approximately, £98.6 trillion.

Since 2015, the number of firms with direct access to payment systems has grown from 10 to more than 40, but policy has not evolved to account for innovation.

Regulation must stay pace with this continued growth, HM Treasury said in its response to a consultation on payments regulation and the systemic perimeter.

Companies including VISA, MasterCard, American Express, Barclays, Lloyds and HSBC responded to the call for information, along with industry lobby groups, payment providers, WorldPay and PayPal, and representatives from crypto stalwarts, Circle.

The government is suggesting a “same risk, same regulatory outcome” approach, which will enable the BoE to identify any part of the transactional chain deemed worthy of further oversight.

Where an entity may fall within both the systemic payments perimeter and the new critical third parties’ regime under the Financial Services and Markets Act 2023, HM Treasury will decide on an individual basis which is most appropriate.

What is the systemic perimeter and which firms are inside?

Technological advances in the payments sector have meant players other than banks and payment systems, some of which are entirely unregulated, are increasingly conducting payment activities.

“Although these firms are becoming more important in payment chains and have the potential to create systemic risk, they are not currently supervised from a financial stability perspective,” said Ben Thornhill, financial services expert at Deloitte. “Therefore, as expected, HM Treasury proposes to bring new types of systemically important firms in payment chains within BoE oversight.”

Government thinking is systemic risk is no longer contained to the BoE’s existing perimeter of supervising systemically important payment systems and their specified service providers. It has proposed reforming the Bank’s perimeter to reflect a more holistic assessment of systemic risk across the payments sector.

“As a wider array of payments entities perform increasingly systemic activities, so too the potential that their own disruption could pose material risks to the UK’s financial system or the wider economy,” HM Treasury said.

The Banking Act 2009, which legislates the power held by the BoE, will be updated to include an additional category of payments ‘providers’.

The new category would capture a broader category of firms that perform an essential role in payments, where disruption to their services could materially affect financial stability or have serious economic consequences.

HM Treasury has admitted its guidance on what constitutes systemic importance has historically not been clear, and it will produce further information on how that assessment is reached at a later date.

Firms with an offshore presence but that are serving the UK will also fall under the regulatory radar, however, HM Treasury will decide on an individual basis as to the level of supervision.

Broader supervision changes

As part of its response, the Treasury is recommending a rebalance of regulatory powers.

A new systemic payments regime and how it is accessed by providers will be created requiring fresh legislation and a redrafting of the Payment Systems Regulator (PSR) remit. The existing framework will be revoked, to be replaced with a new approach built around innovation, competition, resilience and stability.

The UK government will publish draft legislation to implement the changes to the systemic payments’ services regime at a future date, after which the BoE will publish its own proposed approach to supervision.

The consultation response was met with broad support by the industry. HM Treasury plans to consult further and implement proposed changes at a future date.

Several reforms to payment services supervision have already been taken under the Financial Services and Markets Act 2023, including a proposal to grant the FCA and PSR appropriate powers in relation to retained EU payments law. This has been reflected in a new statutory instrument (the Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023).

The government plans to review the Payment Services Regulations 2017 and the Electronic Money Regulations 2015 as part of its Future Regulatory Framework Review, with progress expected to be made during the course of 2023.

Will payments firms be subject to the Senior Managers’ Regime?

Despite regulatory efforts to bring payments more in line with banking supervision, Treasury officials are pausing a final decision on whether the Senior Managers and Certification Regime (SMCR) will apply to the payments industry.

The SMCR was drawn up to improve conduct and standards in the banking sector following years of scandal, corruption and crisis, putting accountability on senior managers for incidents that occur under their watch and enforcing a culture of compliance.

The SMCR framework is currently under review and may be revised significantly, the government said.

How will stablecoins be regulated?

As part of the realignment of regulatory powers, the BoE will also gain primacy over the FCA in most matters relating to digital payments. The government noted the “financial and monetary stability risks posed by new forms of digital money such as stablecoins” as the basis for its decision.

The BoE is the primary supervisor of a digital asset company’s prudential management, operations and governance matters in relation to financial stability, while the FCA must stick mainly to its position as a conduct enforcer. 

Under the proposals, the central bank will have the authority to intervene in cases where the FCA may consider taking action against a stablecoin designated “systemic”. The Prudential Regulation Authority, the BoE’s capital supervisory arm, could also step in to prevent FCA actions that might lead to financial stability concerns.

Full details of how the regulators will work together are still to be finalised.

CUBE Comment

The digital payment sector has evolved at such a pace in recent years that regulatory intervention was inevitable given the range of service providers with access to open banking data.

On the heels of wider reforms in Europe, the UK’s decision to review the payments network and realign the boundaries of which businesses are providing systemically important services is unsurprising. However, there is still a level of uncertainty over the legislative changes that promise to redraw the landscape and payment services firms should ensure they are fully abreast of what is on the horizon.

For fast-moving payments firms entering a new era of compliance, CUBE’s industry-leading proprietary automated regulatory intelligence platform can help you plot a path through the coming storm of regulations.