U.K.

National payments vision

HMT has published its National Payments Vision (NPV), outlining the government’s plans for bolstering the U.K. payment’s sector. The NPV responds to the findings of the independent Future of Payments Review 2023, led by Joe Garner, and takes action to address key issues across the landscape. In the NPV, the government has outlined its priorities for U.K. payments through a joint remit letter to the FCA and Payment Systems Regulator (PSR) and welcomes the regulators’ commitment to revise their existing memorandum of understanding on cooperation in relation to payments regulation. Another significant objective is ensuring payments infrastructure is resilient. The government has also concluded that the New Payments Architecture programme is not sufficiently agile. It is therefore establishing a Payments Vision Delivery Committee which will, through work led by the Bank of England and the PSR, clarify the upgrades required to the existing Faster Payments System, assess longer- term requirements and the appropriate funding and governance arrangements needed to deliver this— including proposals to reform Pay.UK.

The government has also provided direction on two priority areas: Open Banking and tackling fraud. The NPV seeks to clarify regulatory responsibilities for Open Banking, transitioning away from current arrangements to the FCA acting as the U.K.’s regulator in the future (see the item below on Open Banking for further information).

The NPV also reaffirms the government’s commitment to continue exploring a potential retail central bank digital currency (see the FinTech/Digital assets section for more information on the digital pound). To further build the effectiveness of payments fraud regulation, the FCA will lead work to manage existing overlaps between itself and the PSR, and the PSR has committed to an independent post implementation review of the authorised push payment fraud reimbursement rules, after 12 months.

Alongside the NPV, HMT also published a letter it sent to the FCA and PSR setting out recommendations for the regulators in relation to payments regulation. HMT’s priorities for the regulators include: (i) enhancing coordination to address congestion in the regulatory landscape, including through the FCA's commitment to lead work on enhancing the management of overlaps between the FCA and PSR's exercise of their functions, including on fraud and Open Banking policy;(ii) supporting the development of Open Banking. In this regard, the government welcomes the FCA’s commitment to fulfil the function of the U.K.’s regulator for Open Banking, whilst ensuring mechanisms to support cooperation with the PSR on matters related to designated payments systems; (iii) ensuring high standards of consumer protection and that people and businesses can make payments efficiently and safely; and (iv) driving an agile approach to delivering the U.K.'s retail payments infrastructure needs, including through work of the Payments Vision Delivery Committee to examine and refresh the requirements for the U.K.'s retail infrastructure and the governance and funding arrangements required to deliver this.

Changes to safeguarding requirements for payments and e-money institutions

The FCA’s long-awaited consultation on changes to the safeguarding regime for payment and e-money institutions was published in September last year. As expected, the FCA proposes to bring the safeguarding regime more closely in line with the FCA’s Client Assets Sourcebook (CASS), which many other financial institutions, such as brokers and custodians, must comply with when they hold client money and assets.

The FCA proposes to make changes to the safeguarding regime in two stages, the interim and end-state, and is consulting on rules and guidance for both stages of the proposed regime. The interim rules aim to: (i) support a greater level of compliance with existing safeguarding requirements in the Electronic Money Regulations 2011 (EMRs) and Payment Services Regulations 2017 (PSRs); (ii) support more consistent record keeping; and (iii)    enhance reporting and monitoring requirements to identify shortfalls in relevant funds and improve supervisory oversight.

The proposed end-state rules replace the safeguarding requirements of the EMRs and PSRs with a ‘CASS’ style regime where relevant funds and assets are held on trust for consumers. This second stage will address remaining shortcomings of the regime when the revocation of the safeguarding requirements in the PSRs and EMRs by the Financial Services and Markets Act 2023 is commenced.

The deadline for comments was 17 December 2024. The FCA plans to publish final interim rules with an accompanying policy statement within H1 2025. The FCA recognises that some of these proposals are a significant shift in how payments firms safeguard their relevant funds and so proposes to give firms a transition period of six months to implement the changes in the interim rules from when the final version is published, and 12 months to implement the final end-state rules. The FCA will publish the final end-state rules (including new rules for when a payments firm fails or where a third party used for safeguarding purposes fails) when the government commences it revocation of the safeguarding requirements in the EMRs and PSRs. The end-state rules will then apply after a 12-month transition period.

Following this consultation, the FCA plans to continue to work with HMT to review and consult on the rest of the regime currently set out in the PSRs and EMRs. The FCA also plans to introduce rules for where a payments firm fails and enters an insolvency regime other than the Payments and Electronic Money Special Administration Regime (PESAR), and to make rules to mitigate the impact of the failure of a third party used for safeguarding purposes. The FCA will consult on these rules separately, at a later stage but before implementing the end-state rules.

APP fraud mandatory reimbursement requirement

The U.K.’s authorised push payment (APP) fraud reimbursement scheme came into force on 7 October 2024. It requires in-scope payment service providers (PSPs) sending payments through either the Faster Payment System (FPS) or the Clearing House Automated Payment System (CHAPS) to reimburse their customers (consumers, micro-enterprises or small charities) if they are the victim of an APP scam, subject to certain exceptions such as the consumer standard of caution. The sending PSP will have to reimburse the victim and the receiving PSP must send 50% of the cost of a reimbursement claim to the sending PSP. Sending PSPs will be allowed to apply an excess up to GBP100 to a claim under the policy, except for claims made by vulnerable consumers. In addition, the sending PSP is not obliged to reimburse above the maximum level of reimbursement, which the PSR has recently reduced to GBP85,000, for a single APP scam case or to reimburse any APP scam claim where the customer submits the claim more than 13 months after making the last payment in the case. If the PSP has evidence or reasonable grounds for suspicion of either first party fraud or gross negligence on the part of the claimant, it will also have more time to investigate and can delay the payment.

The consumer standard of caution exception only applies where the claimant is grossly negligent in one of four specific circumstances. These are the requirement to have regard to interventions by the PSP, to make prompt notification to their PSP, to respond to reasonable requests for information from their PSP and to report (or permit their PSP to report) to the police. This exception does not apply to vulnerable consumers.

To implement the reimbursement requirement, the Payment Systems Regulator (PSR) has published four legal instruments: (i) Specific Requirement 1—imposed on Pay.UK to include the reimbursement requirement in the Faster Payments scheme rules; (ii) Specific Direction 19—given to Pay.UK to create and implement an effective compliance monitoring regime; (iii) Specific Direction 20—given to direct and indirect participants in Faster Payments, obliging them to comply with the reimbursement requirement and the reimbursement rules; and (iv) Specific Direction 21—given to direct and indirect CHAPS participants to reimburse APP scam payments and comply with the CHAPS rules. In addition, Pay.UK has published amended FPS rules and its FPS Reimbursement Rules: Compliance Monitoring Regime. The Bank of England has added the CHAPS reimbursement rules as an annex to the CHAPS Reference Manual.

In July 2024, the PSR published its final rules on compliance and monitoring in relation to the FPS APP fraud reimbursement requirement. As the operator of Faster Payments, Pay.UK is responsible for monitoring all directed PSPs’ compliance with the FPS reimbursement rules. Although Pay.UK is responsible for monitoring compliance with the FPS reimbursement rules, enforcement remains the responsibility of the PSR. Pay.UK is also providing the reimbursement claim management system (RCMS) and will be requiring all members of Faster Payments (those who are direct participants) to use it by 1 May 2025. This will allow PSPs to effectively manage FPS APP scam claims, communicate in respect of claims and more easily comply with data reporting requirements.

The Payment Services (Amendment) Regulations 2024 amend the Payment Services Regulations 2017 (PSRs) by allowing PSPs to delay the sending of an in-scope payment where they suspect that the payment order is subject to fraud or dishonesty. The amendments apply only with respect to outbound authorised push payments wholly executed in the U.K. in GBP. The Regulations entered into force on 30 October 2024. Following the publication of the Payment Services (Amendment) Regulations 2024, the FCA also published finalised guidance for firms that enables a risk-based approach to payments when deciding whether to delay a payment. The FCA has updated its Payment Services and Electronic Money Approach Document to include the new finalised guidance which came into effect on 22 November 2024.

The PSR has committed to publish a post-implementation review after 12 months of the APP fraud reimbursement policy being in force and we expect to see the results of this in 2026. It will also review the maximum reimbursement level in Q4 2025. The government has also confirmed that it will release an expanded fraud strategy in 2025.

Our guide to the U.K.’s APP fraud mandatory reimbursement scheme can be found here.

Open banking

Open Banking is a key focus area in the U.K. government’s National Payments Vision (NPV) (see item on the National Payments Vision above) and looking ahead to 2025 and beyond, the government has clarified its new regulatory responsibilities and priorities.

The 2017 Competition and Markets Authority (CMA) Order on Open Banking required the nine largest U.K. retail banks to make customer data available for use by authorised third-party providers, through a standard set of Application Programming Interface (API) standards. However, the government now believes that there is significant opportunity for Open Banking to grow beyond the scope of the CMA Order, following the successful implementation of the roadmap in September 2024. For Open Banking to scale and help deliver more competition and innovation in the market, the government believes that it needs to transition to a sustainable long-term regulatory framework. The government is committed to delivering this framework and intends to use incoming smart data powers in the Data (Use and Access) Bill, currently progressing through parliament, to do so. Ahead of that framework being delivered, the FCA and the Payment Systems Regulator (PSR) have been working via the Joint Regulatory Oversight Committee (JROC) and with industry to develop Open Banking beyond the scope of the CMA Order.

However, for Open Banking to further flourish and successfully deliver seamless account-to-account payments, the roles of the regulators need to be clear. Going forward, JROC will be wound down at the earliest opportunity and the government has asked the FCA to be the U.K.’s sole regulator for Open Banking. The government expects the FCA to engage as appropriate with the PSR, including in relation to the interaction of Open Banking overlay services with underlying payment rails which are designated as PSR regulated payment systems.

Under the JROC, the PSR led work over the course of 2024 seeking to develop a commercial model for the phase 1 use cases for Variable Recurring Payments (VRP). The government now expects this model to be delivered quickly and in a way that supports effective competition. Following the delivery of the VRP phase 1 pilot, the government expects the FCA to work closely with the PSR, drawing on its expertise as an economic regulator, as the FCA takes forward work on the overall framework for commercial Open Banking payments, including VRP. The government expects the FCA and the PSR to ensure a fully effective handover of the commercial model once phase 1 is delivered.

The government also believes it is crucial that seamless account-to-account payments—enabling consumers to pay for goods and services in shops and online directly from their bank account without using a card—are developed. The government considers unlocking Open Banking enabled account-to-account payments for e-commerce to be a strategic short to medium term priority and has tasked the FCA with agreeing a sustainable commercial model and consumer protections.

Innovation in money and payments

In 2024, the Bank of England published a discussion paper on its proposed approach to innovation in money and payments. It explains that innovations in money and payments present risks and opportunities for central banks’ monetary and financial stability objective and that central banks must be quick to engage with them and prepare for their implications.

The Bank of England’s proposed approach includes developing additional functionalities for the Real-Time Gross Settlement (RTGS) service such as extending settlement hours and a synchronisation interface that would allow RTGS to connect to external ledgers, including those based on programmable platforms, and settle assets in central bank money. Central bank money could interact with programmable platforms through the use of so-called ‘wholesale central bank digital currency’ (wCBDC) technologies. To inform this work, the Bank of England proposes a programme of experiments to test the use cases, functionalities and prospective designs of both wCBDC and synchronisation, and their relative merits.

The Bank of England is seeking views on its overall approach and on specific topics including: (i) the benefits and risks of programmable platforms and the likelihood of them being taken up at scale by wholesale markets; (ii) the pace of innovation in private money, particularly commercial bank money; and (iii) the use of tokenised deposits and stablecoins for wholesale transactions. The deadline for comments was 31 October 2024. The Bank of England will share its feedback to the discussion paper during 2025. It will also continue with its proposed roadmap for RTGS.

PSR market reviews into card fees

The Payment Systems Regulator (PSR) is carrying out two market reviews into card fees—one on card scheme and processing fees and one on cross-border interchange fees. The market review of card scheme and processing fees looks in detail at the levels, structure and types of scheme and processing fees. The PSR published a report setting out its interim conclusionson card scheme and processing fees in May 2024. The PSR’s provisional findings include that the two largest payment system operators do not face effective competitive constraints. In respect of core scheme and processing services, there is currently no effective competition to these payment system operators. In some optional services, competition and choice is limited and alternative providers, when present, cannot match the schemes’ one-stop shop solution for core and optional services. Potential remedies considered by the PSR include: (i) regulatory financial reporting in respect of the card schemes’ U.K. activities, in order to provide the PSR with more detailed and accurate information of the profits the card schemes are earning from their U.K. businesses; (ii) measures that would require the card schemes to set out the reasoning and evidence justifying any price increases (or pricing for new services); and (iii) measures to improve the quality of information available to acquirers and merchants, in particular SMEs, to make it more suited to their particular needs, which address the information and transparency problems the PSR has identified. The PSR states that its provisional findings also highlight the importance of the PSR’s work to unlock account-to-account payments, and Open Banking in particular, to facilitate greater choice for merchants for retail payments in the longer-term. The PSR intends to publish its final report in Q1 2025.

The PSR’s second market review focuses on consumer cross-border interchange fees between the U.K. and the EEA. The PSR wants to understand the reason behind the increase in fees associated with some U.K.-EEA payments, as well as to engage with businesses to better understand how the increases are impacting them. The PSR published a report setting out its interim conclusions on U.K.-EEA consumer cross-border interchange fees on 13 December 2023. A year later, on 13 December 2024, the PSR has published its final report. The final report finds that due to a lack of competition, cross-border interchange fees have increased since 2021/2022 and are costing businesses GBP150-200 million extra annually. The PSR did not identify any justifications for the increases and found that the potential detrimental consequences for services users were not considered. Alongside the report, the PSR also launched a consultation on a potential price cap remedy on outbound interchange fees. The PSR proposes a two-stage intervention. Stage 1 would consist of an initial, time-limited cap, set for a transitional period while an appropriate methodology for determining the most appropriate level of the price cap is developed and implemented. For stage 2, during the stage 1 period, the PSR would undertake work to develop an appropriate and longer-lasting cap, which might be higher, lower or the same as the cap set during the stage 1 period. The PSR is currently leaning towards a stage 1 cap of 0.2% for card-not-present consumer debit transactions and 0.3% for card-not-present consumer credit transactions. The PSR envisages that the Direction imposing the stage 1 price cap would include a maximum six-month implementation period. The PSR envisages that stage 1 would last, including the implementation period, a maximum period of 30 months, with a commitment to review the continued application of the price cap no later than 24 months from the commencement of the direction imposing the stage 1 price cap. The deadline for comments is 7 February 2025.

Buy-now, pay-later

Over three and a half years after the Woolard Review highlighted the potential risks of unregulated, but easily available, interest free credit facilities, HMT has published draft legislation to bring Buy-Now, Pay-Later (BNPL) lending inside the U.K.’s regulatory perimeter. The consultation sets out HMT’s intended policy approach to regulation along with the draft legislation. HMT explains that the proposed legislation aims to ensure people using BNPL products receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise.

HMT is intending to: (i) take certain agreements, referred to as “regulated deferred payment credit agreements”, out of the scope of the exemption in article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; (ii) disapply certain information requirements in the Consumer Credit Act 1974 in respect of these agreements. The FCA will develop rules on a disclosure regime for BNPL agreements in line with its Consumer Duty; (iii) amend the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to ensure that financial promotions communicated by unauthorised persons offering third-party BNPL agreements will need to be approved by an authorised person; and (iv) establish a temporary permissions regime that will allow unauthorised firms to continue to conduct their BNPL lending activities until their application for full authorisation has been processed.

The consultation also responds to feedback HMT received to its previous consultation that ran between February and April 2023. The deadline for comments was 29 November 2024. After reviewing feedback, HMT aims to bring forward the legislation as soon as possible. The FCA will then consult on detailed rules, focusing on the disclosure requirements that should apply to BNPL agreements. Firms will be subject to full regulation 12 months after the legislation is made.

For more information on the BNPL consultation, please see our blog post here.

EU

PSD3 package

On 28 June 2023, the European Commission published the texts of legislative proposals that it adopted concerning reforms to EU payment services. The first proposal is a Directive on payment services and electronic money services (PSD3) which will modernise and repeal the revised Payment Services Directive (PSD2) and the revised Electronic Money Directive (EMD2). The package will also establish a new Payment Services Regulation (PSR). PSD3 establishes the licensing and supervisory requirements for payment institutions. The PSR lays down the conduct rules for payment service providers offering payment and electronic money services in the EU. The package of measures consists of: (i) merging the legal frameworks applicable to electronic money services and to payment services; (ii) strengthening measures to combat payment fraud, by enabling payment service providers to share fraud-related information between themselves, strengthening customer authentication rules, extending refund rights of consumers who fall victim to fraud and making a system for checking alignment of payees’ IBAN numbers with their account names mandatory for all credit transfers; (iii) allowing non-bank payment service providers access to all EU payment systems, with appropriate safeguards, and improving their access to bank accounts; (iv) improving the functioning of Open Banking, especially as regards the performance of data interfaces, removing obstacles to Open Banking services and ensuring consumer control over their data access permissions; and (v) further improving consumer information and rights. Please see our bulletin for further information.

The European Parliament announced that it had adopted its position at first reading on the proposed PSD3 and the proposed PSR in April 2024. The European Parliament voted to adopt the proposed texts of PSD3 and PSR that were set out in reports adopted by ECON in February 2024. The texts of these reports were published in March 2024. The European Parliament closed the first reading without agreement with the Council.

The European Central Bank (ECB) has also published an opinion on the proposed PSD3 and PSR, together with drafting amendments to the legislative proposals and an accompanying explanatory text. In the opinion, the ECB addresses the following topics: (i) access to payment systems; (ii) safeguarding of users’ funds at ESCB central banks; (iii) safeguarding of users’ funds at credit institutions or through safe asset investments; (iv) fraud monitoring and reporting; (v) strong customer authentication; (vi) open banking; (vii) the European Banking Authority’s temporary intervention powers; (viii) regulatory technical standards on authentication, communication and transaction monitoring mechanisms; (ix) FX management; and (x) availability of cash.

The European Commission, European Parliament and Council will begin trilogue negotiations on the proposed PSD3 and PSR in Q1 2025. Key areas still for discussion include fraud prevention and transparency requirements. Liability of internet platforms to prevent and fight payment fraud will be a hot topic in negotiations going forward—with several Member States keen to force some liability onto tech firms.

During the course of 2025, the European Commission, the European Parliament, the Council and EU Member States will work towards finalising the new rules. PSD3 will subsequently have to be transposed into national law by the EU Member States. There are currently no clear timelines on the negotiations. However, the legislation is expected to apply 18 months after publication in the Official Journal, which is not likely to be until 2026/27.

Instant payments

Regulation (EU) 2024/886 on instant credit transfers in euros (the Instant Payments Regulation) entered into force on 8 April 2024 and aims to improve the availability of instant payment options in euro to consumers and businesses in the EU and in EEA countries. The date on which the various obligations begin to apply depends on the type and location of the payment service provider (PSP). For example, PSPs in the Eurozone have shorter implementation deadlines than those outside and non-bank PSPs, payment and e-money institutions, have more time to comply with the new obligations than banks and other PSPs. The Instant Payments Regulation amends the SEPA Regulation to set out new rules on the execution of instant credit transfers as well as obligations for PSPs to provide a verification of payee service to payers (checking that the IBAN and the name of the payee match) in respect of all credit transfers (instant and non-instant). The Instant Payments Regulation also amends the rules on charges for cross-border payments and on the possibility for a PSP to levy additional charges when a user does not provide an IBAN and a Bank Identifier Code (where applicable) as set out in the Cross-Border Payments Regulation.

In addition, the Instant Payments Regulation amends the Settlement Finality Directive and revised Payment Services Directive (PSD2) to introduce rules on direct access to payment systems for non-bank PSPs and new requirements for these non-bank PSPs and payment systems in relation to offering the services of sending and receiving instant credit transfers. Amendments to the Settlement Finality Directive and PSD2 must be transposed by EU Member States in their national legislation and be applicable by 9 April 2025.

The first set of obligations under the Instant Payments Regulation applied on 9 January 2025. From this date, traditional banking PSPs located in the euro area are required to provide a payment service of receiving instant credit transfers, as well as charging the same or lower fees for instant payments as for regular transfers. They will also be required to provide a payment service of sending instant credit transfers in euro and provide the service of verification of payee by 9 October 2025. Traditional banking PSPs located outside the Eurozone will be required to provide a payment service of receiving instant credit transfers in euro, as well as charging the same or lower fees for instant payments as for regular transfers, by 9 January 2027.

Traditional bank PSPs located outside the Eurozone will be required to provide a payment service of sending instant credit transfers and the service of verification of payee where they are the payer’s PSP by 9 July 2027. Non bank PSPs from the Eurozone that already provide a service of receiving/sending credit transfers in euro will be obliged to offer a service of receiving/sending instant credit transfers in euro from 9 April 2027, and non-bank PSPs from outside the Eurozone that already provide a service of receiving/sending credit transfers in euro will be obliged to offer a service of receiving instant credit transfers in euro from 9 April 2027 and also to provide a service of sending instant credit transfers in euro from 9 July 2027. All PSPs, whether located inside or outside the Eurozone, are subject to an obligation to perform daily sanctions screening to verify whether any of their payment service users are subject to targeted financial restrictive measures in the context of the offering of the service of receiving/sending instant credit transfers in euro (this obligation began to apply from 9 January 2025).

For more information on the Instant Payments Regulation, please read our brochure here.

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