The practical impact on firms is yet to be seen, and the details published so far leave it unclear as to whether this merger of regulators is part of a more fundamental redesign of the regulatory framework for the payments ecosystem. There is a risk that poorly executed implementation of the reforms results in greater regulatory burden, cost or uncertainty, and firms will welcome any opportunities to engage with the reform process to improve its outcomes.
With that in mind, we set out below an overview of the proposals, with a list of some of the big picture questions that Government, regulators and stakeholders may be asking in the coming weeks and months. We would welcome your views on these, and as always please feel free to contact us to discuss.
What has happened?
The UK Government has announced that the PSR “will mainly be consolidated into the Financial Conduct Authority (FCA) making it easier for firms to deal with one port of call. It follows complaints from businesses that the regulatory environment was too complex – with payment system firms having to engage with three different regulators, costing them time, money and resource.”
Primary legislation is needed for the restructuring, which will take time, and the Government says there will not be “any immediate changes to the [PSR’s] remit or ongoing programme of work [and it] will continue to have access to its statutory powers until legislation is passed by Parliament to enact these changes. In the interim period, the [PSR] and the [FCA] will work closely to deliver a smooth transition of responsibilities to ensure the market remains competitive”.
Background
The PSR’s remit is principally to regulate payment systems and their participants under Part 5 of the Financial Services (Banking Reform) Act 2013 (FSBRA), amongst other legislation. The PSR has a broad range of interventionary powers in pursuit of competition, innovation and service user objectives but does not operate as a licensing authority in the way that the FCA does. The PSR has been highly active in its interventions, most recently through, for example, roll out of an authorised push payment (APP) fraud compensation scheme, and a range of directions and reviews into the cards market.
Key questions
Ahead of the Government publishing its detailed proposals, key areas of consideration and impact include:
- Will all of the PSR powers and functions survive, given the Government objective of rationalising regulation?
- Will the FCA assume all transferred powers and functions, or will some also transfer to, for example, the Bank of England (which supervises payment systems under the Banking Act 2009) or the Competition and Markets Authority (which has a joint remit with the PSR in certain areas)? Such other regulators may be more suitable for certain functions, but this needs to be balanced against the Government objective of rationalising the number of regulators.
- Alternatively, will any PSR powers be reserved for Government, consistent with the Prime Minister’s recent comments on taking back decision-making from regulators?
- The PSR has had a dedicated focus on the payment systems industry and, since it became operational only a decade ago, has at times been accused of excessive intervention in an effort to establish its reputation as a regulator. Once its functions are taken on by the FCA, which has a much broader remit, potentially the FCA will be more discerning in its interventions and appropriately lighten the regulatory burden on firms.
- Conversely, might the FCA look to expand the requirements on payment systems? Would the FCA look to regulate payment systems in a similar way to how it currently regulates recognised investment exchanges, i.e. effectively (if not technically) by bringing them within a licensing regime? The answers to these questions may depend on how the FCA implements Government expectations to reduce the complexity and burden of regulation, and whether the Government decides to maintain the existing legislative framework under FSBRA etc. or to consolidate the current PSR regime into the Financial Services and Markets Act 2000.
- Will the statutory objectives of the FCA or other successor regulators be updated to reflect the current objectives of the PSR, or will the transferring powers be exercised through the lens of those regulators’ existing objectives? If so, this may change the priorities for action. Given the FCA’s increasing focus on competition and economic regulation in recent years, including through the Consumer Duty, possibly it will be keen to embrace the PSR’s competition objective.
- Will regulation by the FCA or other regulators improve the process by which the PSR has consulted with stakeholders and produced draft Directions?
- There are a number of in-flight initiatives (e.g. consultation on Specific Direction 3) and other upcoming PSR exercises (e.g. first year review of the APP fraud regime), and there is a question as to how these will be affected by the announcement.
- It is unclear how this restructuring fits into the National Payments Vision, which the Government is in the early days of implementing. Presumably influence will shift from the PSR to the FCA and Bank of England. Another important question is whether industry and other stakeholders will have an opportunity to engage on the above questions via the Payments Vision Delivery Committee.
Conclusion
Many of the above questions turn on whether the Government’s overall objective is a ‘quick fix’ – to reduce the number of regulators but with only limited benefits such as some cost savings and and more consistent regulation – or a more fundamental redesign and rationalisation of the UK payments regime to make it more fit for purpose.
Such a redesign may deliver better outcomes for industry in the long term, depending on the quality of the outputs and the timing of implementation. But it would require more carefully considered primary legislation, which could take months or years to implement, at a time when business cannot afford long delays in achieving the structural changes envisaged by the National Payments Vision. The world will be watching.
In the interim, industry will more immediately be impacted by how the FCA and PSR work together in planning for transition and managing in-flight initiatives, and we’ll be looking out for the Government’s and regulators’ proposed action plans.