UK Government Consultation On Abolishing The Payment Systems Regulator

In March this year, the Chancellor of the Exchequer announced the Government's intention to abolish the Payment Systems Regulator (PSR) and move its functions primarily to the Financial Conduct Authority (FCA). HM Treasury set out its plans to do this in a consultation paper published in September. The consultation closes on 20 October. What follows is a brief summary of the proposals and our views on why they matter for payments firms.

Summary of proposals

Roles and responsibilities of regulators

• The PSR's functions will be integrated within the FCA's current framework in the Financial Services and Markets Act 2000 (FSMA), to the extent this is practicable. Where this is not the case, the Government expects the relevant functions would be set out in a new part of FSMA. This approach will not result in new categories of persons being brought in scope of payment systems regulation: the FCA's payment systems regulatory regime will apply to the same categories of persons as the PSR's current regime in the Financial Services (Banking Reform) Act 2013 (FSBRA).
• The FCA will continue to perform its wider role as a conduct and prudential regulator, including its existing functions in relation to payment services and e-money legislation, as it does currently. The Government is not seeking to alter these functions, or to expand or reduce the FCA's remit in relation to these functions.
• All designated payment systems that are currently regulated by the PSR will continue to be regulated and transferred over to the FCA's oversight once it takes on the PSR's functions.
• No new regulated activity will be created in connection with payment systems regulation and therefore there will be no new categories of person requiring Part 4A permission under FSMA to carry on any new regulated activity as a result of moving the PSR's functions into the FCA. Instead, the Government is proposing to retain the use of a designation regime in the new framework. It considers this to be preferable to an authorisation regime because it enables more targeted regulation, supporting proportionality and reducing regulatory burdens.
• The roles and responsibilities of the Bank of England and the PRA in relation to payments will not change: they will continue to perform their current functions.

Regulatory objectives

• Under the new regulatory framework, the FCA should have objectives in relation to payment systems that are equivalent in scope and substance to those of the PSR. The Government proposes to achieve this by integrating the substance of the PSR's FSBRA objectives within the FCA's current framework in FSMA, to the extent this is practicable. It is considering the best approach to achieve this outcome, including the possibility of expanding the FCA's current operational objectives to have equivalent effect, or whether the FCA may require new objectives.
• As part of the integration, the Government is also proposing to (i) apply the FCA's strategic objective and the competitiveness and growth secondary objective to payment systems, with any modifications as may be necessary, and (ii) give the FCA "have regard" requirements under the new framework that are equivalent in scope and substance to those of the PSR under FSBRA. (Again, the Government is considering the best approach to achieve this, including whether provisions in the FCA's current framework in FSMA can be expanded to have equivalent effect or if new provisions may be required.)
• The substance of the PSR's regulatory powers under FSBRA will be integrated within the FCA's current framework in FSMA, to the extent this is practicable. Where it is not practicable, the Government expects the relevant provisions would be set out in a new part of FSMA. It is considering the best approach to achieve this. In some cases, the Government expects to enable the FCA to use its existing powers, with appropriate modifications so they can be used in relation to regulated payment systems and participants. Where the FCA does not have comparable powers (such as a power to require the granting of access, a power to require the disposal of an interest or a power to require participants to vary certain agreements), the Government will seek to ensure it has recourse to powers that are equivalent in substance when acting in relation to payment systems.

Regulatory powers

• The Government is still considering whether it would be preferable for the FCA to act in relation to payment systems on the basis of:
  • direction-making and requirement-making powers, similar to the PSR today;
  • rulemaking and requirements-based powers, similar to how the FCA generally acts in other areas of financial services regulation; or
  • both sets of powers.
• The Government is also considering making targeted amendments to the toolkit of regulatory powers that would be available to the FCA. A specific example is delivering a simpler framework for governing access to payment systems. In the Government's view, a single regime, reflecting the provisions currently under FSBRA, would be easier to enforce, navigate, reduce duplication and ambiguity, and deliver more consistent outcomes. It considers the regime under the Payment Services Regulations 2017 (PSRs 2017) would benefit from removal and it is considering the best legislative approach to remove it and deliver a single access regime.

Other features of the new framework

• The Government proposes to apply oversight and accountability provisions to the FCA when it acts in relation to payment systems that are broadly equivalent in scope and substance to those of the PSR under Part 5 of FSBRA. It is proposing to do this by integrating the substance of these provisions within the FCA's current framework in FSMA to the extent this is practicable. Where it is not practicable, the Government expects the relevant provisions would be set out in a new part of FSMA.

Why the proposals matter

The Government has committed to move at pace to give industry clarity over these changes. At first glance, the proposals appear to be largely a "lift and shift" movement of the PSR's powers to the FCA, which would seem consistent with making a clear and quick change to the regulatory framework.

Firms may welcome this. However, elements of the consultation bear unpacking and consideration as they could result in meaningful change (and uncertainty) for firms. For example, there is a question of whether the FCA will have direction and requirement-making powers (as the PSR does today), rulemaking and requirement-making powers (as the FCA does today), or a mixture of both types of powers. This will be important for some market participants because it may impose a significant regulatory-cultural shift if, for instance, they are currently subject only to the PSR's powers and not FCA rulemaking and requirement-making powers.

The consultation also has a noticeably narrow focus as it is currently only seeking feedback on the "core design" aspects rather than technical issues that relate to consolidation. Given that legislative change will be required to implement the proposals, there will need to be a further round of consultation on the details (where the devil typically sits). This exercise may be particularly complicated where the proposals require substantial legislative change, such as in relation to the point about the nature of the FCA's new powers and as regards the proposed consolidation of the access to payments systems regimes in FSBRA and the PSRs 2017 into a single regime. Firms should therefore look out for HM Treasury's response to feedback to the current consultation and carefully consider any subsequent consultations and policy statements. The Government has indicated it will bring forward legislation to implement its final policy when Parliamentary time allows.

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