The payments landscape in the UK will see flurry of regulatory changes this year, including various consumer protection measures in response to the increasing amount of fraudulent activity in the system. Key changes include the further rollout of confirmation of payee requirements and the mandatory reimbursement rules in relation to authorised push payment (APP) fraud. In addition, following HM Treasury’s publication of the Future of Payments Review in November 2023, we may see a more ambitious programme of enhancement to the digital payments landscape going forward. In this article we highlight some of the changes to come.
Future of Payments Review
This review considers the digital payments landscape and provides recommendations to the Government with regards to the future of payments in the UK. The review notes that the UK needs to cut through the complexity of the payments landscape and work towards a new shared vision consistently over the long term. To address this, the primary recommendation is that the Government develop a national payments vision and strategy to bring clarity to its future desired outcomes for UK payments. It is intended that this should sit above existing work, with a key objective to simplify the current plans and landscape. On March 8 2024 the Government announced that it has accepted this recommendation and will publish a national payments vision this year.
The review also sets out 10 conclusions and related recommendations in the three key areas of:
- Consumer Experience,
- Open Banking, and
- Regulatory Oversight and Alignment.
In the area of Consumer Experience, one proposal aimed at making commercial arrangements more sustainable is to create a viable alternative to the card schemes, such as by using Open Banking. The review notes that the UK is the only country in Europe that does not have a digital alternative to the card schemes.
The EU is making considerable progress on its retail payments landscape. The Instant Payment Regulations, adopted on 8 February 2024 and published on 19 March 2024, amend the SEPA Regulation to ensure that all EU citizens and businesses with a bank account can access affordable, secure, and barrier-free instant payments in Euro. It will be interesting to see if the UK decides to follow a similar approach.
Feedback received as part of the review was that major initiatives implementation and Open Banking are too “regulatory led”. The review considers that better outcomes would be achieved with a more supporting and collaborative relationship between regulators and industry.
If the conclusions and recommendations from the review are implemented we are likely to see significant change in the UK payments landscape in the years ahead.
Further roll out of Confirmation of Payee
In October 2022, the Payment Systems Regulation (the PSR) published a specific direction (the Direction) on expanding confirmation of payee (CoP) to 400 new payment service providers (PSPs), some of which had to comply by 31 October 2023 (Group 1) and the rest by 31 October 2024.
From 31 October 2024, PSPs that meet the definition of Group 2 PSPs will be required to have and use a system to send CoP requests for its customers and respond to CoP requests made to it, where both the payer’s and the payee’s accounts are UK accounts.
A PSP is a Group 2 PSP if it:
- Is a participant in either Faster Payments or CHAPS,
- Is not a Group 1 PSP: these are listed in the schedule of the Direction,
- Did not have a CoP system in place when the Direction came into force on 24 October 2022,
- Conducts “relevant business”, and
- Is a building society or has a unique sort code listed on the Extended Industry Sort Code Database.
Regarding the requirement to conduct “relevant business,” a PSP conducts relevant business if it provides UK accounts and not all of its transactions are exempt transactions. Exempt transactions include transactions where the PSP is sending funds on its own behalf, and payments from an account which has been established to repay a lending product and has no other purpose. It is important to note that non-payment accounts can also fall within the scope of the PSR’s Direction. A PSP would still have to send and receive CoP requests in respect of non-payment accounts such as savings accounts. However, mortgage accounts and credit card accounts are excluded if they fall within the loan exemption.
The PSR expects firms to implement a CoP system well ahead of the deadline, rather than targeting the last possible date for implementation. They also expect PSPs to build contingencies into their plans to make changes or work through any technical issues prior to the implementation. Directed parties will be required to notify the PSR in writing within 28 days of having put the CoP system in place.
PSPs can enter into arrangements with another person to provide the system on their behalf. However, this does not remove the PSP’s obligations to comply with the obligations.
Rules on terminating a payment services contract
In September 2023, the FCA published a report regarding access and closures with respect to UK payment accounts. In this report, the FCA noted that a firm is generally free to terminate an account for legitimate commercial reasons and may also be legally required to terminate an account, such as for anti-money laundering reasons. However, firms must comply with their legal obligations under the Equality Act 2010, which includes a prohibition on firms discriminating against people or companies based on protected characteristics. Firms are also prohibited from discriminating against UK-based consumers under the Payment Accounts Regulations.
In October 2023, HM Treasury published a policy statement on the government’s plans to reform rules relating to payment services contract termination. At present, the Payment Services Regulations 2017 require PSPs to provide payment services users with at least two months’ notice of a termination of a framework contract.
On 14 March 2024 the Treasury published the long-awaited draft SI and accompanying policy document, The Payment Services and Payment Accounts (Contract Terminations) (Amendment) Regulations 2024. These had been expected by end Q4 2023. They amend the PSRs as follows:
- PSPs must provide at least 90 days’ notice to terminate a framework contract, and
- PSPs must provide reasons in the notice that are sufficiently detailed and specific to enable to the payment service user to understand why their contract is being terminated. These can include “reason codes”, but firms will need to consider whether these are sufficiently specific.
The requirements will apply to PSPs within the scope of regulation 51 of the PSRs, which contains the existing rules governing provider-initiated framework contract terminations.
There are various exemptions to these requirements, such as if the PSP believes the account is being used for serious crime, or where other legal requirements prevail (for example, where the firm needs to protect a member of staff).
The new Regulations also amend the Payment Accounts Regulations 2015 so that if a firm refuses an application for a basic bank account, they also need to provide detailed and specific reasons.
The Treasury expects the SI to be laid in the summer, and for the changes to come into force as soon as possible subsequently.
Changes related to APP Fraud
The PSR and the Bank of England are introducing a mandatory reimbursement scheme for consumers, micro-enterprises and charities who are victims of authorised push payment fraud. The scheme will come into force on 7 October 2024 and will apply to Faster Payments and retail CHAPs payments made after that date. More information about the reimbursement scheme can be found in our article at the following link.
In addition, on 12 March 2024, HMT published the Payment Services (Amendment) Regulations 2024 and accompanying Policy Note, which allows a payment service provider to delay crediting a transaction to a payee’s payment service provider’s account where:
- The payment service provider has established that there are reasonable grounds to suspect a payment order from a payer has been placed subsequent to fraud or dishonesty perpetrated by a person other than the payer, and
- Such grounds are established no later than the end of the business day following the time of receipt of the payment order.
The delay must not be any longer than necessary to achieve the purpose required and cannot be longer than the end of the fourth business day after the time of receipt of the payment order.
Unless it is unlawful to do so, PSPs are required to inform the payer of the fact of the delay, the reasons for the delay and any information or action required by the payer to enable the payment service provider to decide whether to execute the order.
The amendments to the PSRs will come into force on 7 October 2024, the same day as the APP rules. Payment service providers will have to consider how the changes to the authorised push payment fraud rules and processing time for fraudulent transactions affect both their terms and conditions and their processes.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2024
