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The UK’s finance ministry has confirmed plans to review the applicability of the current payments regime, including new regulatory powers and the potential introduction of the Senior Managers and Certification Regime (SM&CR).
Despite the recent UK political upheaval, including the departure of the Chancellor of the Exchequer, HM Treasury (HMT) has pressed ahead with plans to revise the current regulatory approach to payment service providers.
In a public consultation open until October 11, the government has suggested expanding the Bank of England’s supervision of systemic risk relating to payments beyond just payment systems and their associated service providers.
“This is a significant consultation that affects all parts of the UK payments sector,” Max Savoie, partner at Sidley Austin, told VIXIO.
At its core, this is about setting the objectives and parameters of the post-Brexit regulatory framework, he said. “The outcomes are likely to determine the nature and scope of substantive rule changes over the coming years.”
What does HMT want?
“There is no regulation that applies to all actors throughout the payment chain that pose systemic risks to the financial system at large or to the UK economy,” HMT points out, in spite of individual regulation that applies to payment service providers and e-money.
Guided by a principle of "same risk, same regulatory outcome", the government has suggested that the Bank of England should have responsibility for supervising systemic actors within the payments chain, and has ruled out a new regulatory framework, instead implying that amendments should be made to the Banking Act 2009.
In particular, HMT has said that the Banking Act could be widened to introduce an additional category of a payments provider.
This is defined as an entity or actor within the payment chain that poses a systemic risk in its own right to the financial system or UK economy, and which may or may not have a relationship with an already-supervised payment system.
The government has suggested that action is needed given “the speed of innovation and degree of market change within even the last 5-10 years”, adding that “it is entirely possible” that a market actor or new business model could take a market leading position within payment chains, upon which consumers and/or businesses depend.
The consultation also proposes to give the Bank of England broad powers to determine location requirements, such as the extent to which a firm must operate from a UK establishment for firms considered to be systemically important under the expanded regime.
“This could be a critical point for any international firms that are designated under the new regime, as the Bank of England could limit their ability to rely on intra-group and external services provided from outside the UK,” suggested Savoie.
Savoie pointed out that the European Banking Authority has proposed a similar extension of prudential requirements for significant e-money institutions and payment institutions in its recent advice to the European Commission on revising the Payment Services Directive (PSD2).
“It will be interesting to see how these related UK and EU regimes develop, as divergence could create level-playing-field issues for the sector and may impact decision-making around the types of services and activities provided in these markets by some international firms,” said Savoie.
Regulating the regulators
Within the consultation, HMT has said that it expects a collaborative approach from the relevant regulators — the Bank of England, the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) — in regulating payments institutions, e-money and stablecoins.
HMT has proposed that the regulators be required to set out how they will work together through a memorandum of understanding to reflect their new supervisory responsibilities, reflective of principles that already exist for the co-supervision of investment firms.
This comes in the form of a “duty of cooperation” for the three supervisors when exercising their respective functions.
“It is the government’s view that this co-supervisory model would be an appropriate framework to extend across payments supervision if the Bank’s systemic regulatory perimeter was extended,” the consultation says, suggesting that this would help improve transparency and predictability, as well as enable a more coordinated approach.
Although not extending the PSR’s regulatory objectives, HMT has suggested that it wants to clarify the regulator’s role in supervising payments systems.
This includes allowing the regulator to impose fines for misleading information.
Currently, the PSR can only impose fines if an entity it supervises fails to comply with supervisory action (which are set out via its General and Specific Directions).
In addition, the government has suggested allowing the PSR the ability to compensate service users who have been harmed by entities that it has taken enforcement action against. At present, surrendered monies are received by the Treasury.
SM&CR
The government’s wide-ranging consultation has also weighed into the debate surrounding whether payments and e-money institutions should be in the scope of the Senior Managers and Certification Regime (SM&CR).
This has long been on the wishlist of the FCA in particular, but has inevitably garnered criticism from payments players, with one telling VIXIO that “more compliance would stifle innovation”.
“E-money institutions and payment institutions should not underestimate the impact of being required to comply with the SM&CR,” said Savoie.
Both categories of authorised non-bank payment service providers are currently subject to certain governance requirements, including requirements for regulatory approval of directors and persons responsible for e-money issuance and payment services.
However, Savoie said, the application of the SM&CR would be a significant extension of those requirements. “It is a far more prescriptive regime and covers a broader range of staff and activities.”
“The application of the SM&CR would also likely result in greater regulatory scrutiny of governance within non-bank payment service providers, including on issues such a dual-hatting and board oversight of compliance and risk management procedures.”
The government appears open-minded on which direction to take, suggesting that it is looking for views, rather than making an outright proposal.
“The government recognises the very strong growth witnessed in the payment services and e-money sector in recent years and the importance of both supporting continued market development while ensuring the regulatory framework for financial services remains agile, consistent and effective, and protects consumers,” HMT says, adding that it wants feedback on how proportionate extending the SM&CR’s scope should be.
