Long reads

Understanding the regulatory impact of the Financial Services and Markets Bill

The Financial Services and Markets Bill 2022-23 (the Bill) is currently making its way through the House of Lords. First introduced to Parliament last July, the Bill is expected to introduce significant and extensive changes to the UK’s financial services regulation post-Brexit.

Among other key proposals, the Bill has set out specific measures to address current regulatory limitations when dealing with authorised push payment (APP) fraud and proposals to regulate crypto assets.

How will APP fraud be addressed?

Currently, under regulation 90(1) of the Payment Service Regulations 2017 (PSRs 2017), payment service providers (PSPs) are not liable for fraudulent payment transactions if it has correctly executed such transaction in accordance with the unique identifier (such as an account number and sort code) as provided by customers. This means that even if a victim is scammed into sending money to a fraudster’s account, PSPs are not legally obliged to return the money since the victim has provided the bank account details and authorised the payment.

There have long been calls in the industry to address this issue and provide better protection for consumers and this has now been addressed in section 68 (Liability of payment service providers for fraudulent transactions) of the Bill. The Bill proposes to amend regulation 90 to enable the Payment Systems Regulator (PSR) to take action to require PSPs to reimburse APP fraud victims where “(a) the case relates to a payment order executed over the Faster Payments Scheme, and (b) the payment order was executed subsequent to fraud or dishonesty”.

The Bill also requires the PSR to:

  • draft and consult on proposals for the reimbursement of fraudulent Faster Payments within 2 months of the Bill coming into force; and
  • impose those requirements for reimbursement within 6 months of the Bill coming into force.

Subsequently the PSR launched various consultation papers, including:

  • the paper CP22/4: APP scams – requiring reimbursement (September 2022). The consultation proposed that the sending PSP is responsible for the reimbursement to all victims (except for some limited cases) but the cost can be allocated equally between the sending and receiving PSPs. The plan will need to be revisited after the House of Commons Treasury Committee disagreed with PSR’s proposed delegation of the mandatory reimbursement to Pay.UK; and
  • the paper CP22/5 on measures to improve transparency on APP scam data across banks and building societies (December 2022).

The above proposals show that improving consumer protection for APP fraud victims are high on the legislators and regulators’ agenda.

If the Bill is passed without any further amendments, PSPs will need to consider putting in place necessary processes, resources and systems to combat APP frauds and reimburse the victims as required.

Digital payment methods have increasingly been the preferred payment method by consumers due to the convenience, efficiency and a high level of security and while the new proposals will provide consumer protection it may also create friction in the execution of transactions as they become more heavily scrutinised for fraud. Although this could be considered an additional burden on PSPs, it presents an opportunity for the sector to embrace new technology and develop best industry practice to protect consumers against fraud and thus improve the confidence in the sector. PSPs may also consider mitigating the risk of having additional reimbursement liability by taking out appropriate insurance. 

How will crypto assets be impacted?

The Bill extends the application of the existing scope of Part 5 of the Banking Act 2009 to include payment systems using digital settlement assets to bring activities facilitating the use of certain stablecoins under the remit of the UK Financial Conduct Authority, and the existing regulatory regime for financial instruments will apply.

HM Treasury will have various powers to regulate certain stablecoins, such as amending or disapplying existing FCA or PRA rules in areas relating to financial stability to avoid relevant systemic stablecoin firms being subject to conflicting requirements.

The Bill has evidenced the UK legislator’s focus on regulating crypto assets including stablecoins which follows on from the regulatory wave that is expected to arise in the EU following the European Council’s approval of the Markets in Crypto Assets regulation (MiCA).

The definition of ‘crypto assets’ is expected to provide the much needed clarity on the legal status of crypto assets (which currently is a grey area). This will help to provide more certainty for businesses operating in the crypto world, including those providing payment services using crypto assets or other digital settlement assets.

It is anticipated that there will be further significant development in the use of “systemic important” stablecoins, as demonstrated by the recent consultation paper by the Bank of England and HM Treasury on digital pound.

What else can we expect from the Bill?

The Bill also covers other important areas such as dealing with retained EU law, establishing a framework for the designation of critical third parties, reforming the financial promotion framework, and establishing a framework for the protection of easy access to cash.

It is anticipated that the Bill will be passed later this year. Watch this space, as once it is passed the Bill will bring about significant changes to the UK’s financial service sector, and payment service providers will need to get ready for those changes.

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