This article first appeared in the December 2023 issue of Butterworths Journal of International Banking and Financial Law.
In June, the European Commission published a set of proposals to modernise the payment services sector and bring it into the digital age. The package included proposals for a revised EU Payment Services Directive (PSD3) and a new set of EU Payment Services Regulations (EU PSRs and, together with PSD3, Payments Proposals). This In Practice article outlines some of the proposals and what they mean for the UK as it diverges from the EU payment services framework.
Payments Proposals
Directive (EU) 2015/2366 on payment services in the internal market (PSD2) currently governs the provision of regulated payment services within the EU. PSD2 applies to both payment services and to the payment service providers (PSPs), including banks and payment institutions (PIs), that provide them.
The Payments Proposals seek to build upon PSD2. Some of the provisions currently included in PSD2 (specifically in relation to information requirements and PSPs’ rights and obligations) will be moved from PSD3 to the EU PSRs and thus will have direct effect in member states. Revisals to the Payments Proposals include, amongst others:
- Seeking to improve the framework for safeguarded funds, including addressing concentration risk by requiring PSPs to safeguard funds with more than one credit institution and adopting regulatory technical standards on risk management of safeguarded funds.[1]
- Strengthening anti-fraud measures, including: (i) reimbursing customers for losses arising from impersonation fraud;[2] and (ii) introducing transaction monitoring measures to improve the detection and prevention of fraudulent transactions, and fraud data sharing arrangements.[3]
- Further facilitating open banking, including requiring PSPs offering payment accounts accessible online to also provide at least one dedicated interface for the purposes of data exchange with account information and payment initiation service providers (AISPs and PISPs).[4]
- Improving access to payment systems, including the possibility for PSPs to participate directly in payment systems and requiring payment system operators to have in place rules and procedures on access.[5]
UK payments landscape
The Payment Services Regulations 2017 (UK PSRs) transposed PSD2 into UK law.
In December 2022, HM Treasury published a policy statement which introduced the government’s Smarter Regulatory Framework programme (SRF) and identified PSD2 as one of the pieces of legislation to be repealed as part of Tranche 2 of the SRF.
In January 2023, the Treasury published a review and call for evidence on the UK PSRs. The key areas for consideration (and potential reform) in the call for evidence include, amongst others:
- Achieving agile and proportionate regulation which facilitates competitiveness and growth, including considering whether: (i) the definitions and scope of the payments regime are future-proofed; and (ii) the regime for PISPs and AISPs, and related requirements for access to payment accounts, support competition and growth.
- Protecting consumers, including from: (i) firm insolvency, by developing and delivering a new safeguarding regime (on which the Financial Conduct Authority (FCA) has been invited to consult later this year); and (ii) fraud, by ensuring the payments regime can keep pace with sophisticated crime, eg through a more outcomes-based approach to the authentication of payments.
- Fostering competition in the interest of consumers, including: (i) promoting open banking; and (ii) facilitating fair access to payment systems by ensuring that there is only one single and effective regime in place governing such access.
As part of Tranche 2 of the SRF, the government is working to repeal the retained EU rules on payments and grant wider rulemaking powers to the FCA in relation to payments regulation. Thereafter, the government will look to build a new regulatory framework that, where necessary, will replace the UK PSRs. Work on the reforms has already commenced, with the Joint Regulatory Oversight Committee publishing its recommendations for the next phase of open banking in the UK, and the Payment Systems Regulator mandating reimbursement by PSPs of APP fraud within Faster Payments.
The government expects to progress Tranche 2 by the end of this year.
Comment
It is clear that both the UK and the EU have identified similar areas for improvement in the payments sphere. This suggests a degree of parallelism between the EU and UK regulators, resulting from the existing PSD2 framework (and complemented by the UK-EU Memorandum of Understanding on Financial Services Cooperation signed in June 2023). However, it also provides an opportunity for the two markets to diverge on some key aspects of payments regulation.
The full extent of the UK changes to the payments regime is not yet clear. Nevertheless, with the government’s stated vision to make the UK an innovative and competitive global financial centre, it could seek to differentiate itself from the EU and build a more flexible payments framework (as demonstrated, for example, by the government seeking to repeal ‘burdensome’ customer information requirements contained in the UK Payment Accounts Regulations 2015). This will need to be balanced against the need for payment services to be provided on a cross-border basis and the UK retaining access to the Single Euro Payments Area, which may require (at least some) alignment with the EU framework.
One thing is clear: this is an exciting, if transitional, time for payment services.
[1] Article 9 PSD3
[2] Article 59 PSD3
[3] Article 83 PSD3
[4] Article 35 EU PSRs
[5] Article 31 EU PSRs
The authors
and then 