This article was written for Northey Point by Jonathan Gilmour (Partner at Travers Smith) along with Natalie Lewis (Senior Counsel) and Vanessa Kalijnikoff Battaglia (Senior Counsel) and originally featured in our Payments, Payments, Payments newsletter – read, subscribe and share.
There is no doubt that innovation and technological development in the payments space is a hot topic. It is a topic which has been driven to the top of the financial technology agenda by rapid and dramatic change over recent years. Although the driving forces behind such developments are multifarious, they likely include, as their core pillars:
(i) increased consumer demand for (a) more varied, flexible and convenient payment options; and (b) tighter security of (and confidence in) the chosen method of payment; and
(ii) business demand for more streamlined processes to make, manage and collect payments.
It is clear that these changes offer opportunities and practical benefits for UK businesses and consumers, with many seeking to make payments faster and cheaper. However, such a rapidly changing technological landscape poses real and legitimate risks if it is not supported by a well-founded, clear and robust regulatory framework; a regulatory framework which acts not to stifle competition or innovation, but rather to facilitate dynamism, innovation and progress.
The Government’s spotlight is firmly on financial technology
Given the sheer pace of change within the payments space, the Government has made very clear its aim for the UK to stay at the forefront of payments technologies in order to blaze the trail globally in delivering better outcomes for consumers and businesses.
As part of this, a wholesale review of the payments landscape, led by HM Treasury, was announced in June 2019 (the Payments Landscape Review). The first stage in the review, a Call for Evidence which asked questions about the opportunities, gaps and risks that need to be addressed in order to ensure that the UK maintains its status as a country at the cutting-edge of payments technology, is now complete. As well as outlining the successes already achieved in the UK, the Call for Evidence also sought industry feedback on what more needs to be done in light of new opportunities and risks in the payments landscape, as well as how regulators may adapt to, and support, new payments initiatives.
Chancellor Rishi Sunak, in a statement to Parliament in November of this year, also shone a spotlight on the Government’s proposed approach to financial services following the UK’s imminent departure from the EU on 31 December. Hailing the start of a stimulating new chapter for UK financial services, the Chancellor laid out plans to bolster the dynamism, openness and competitiveness of the sector post-Brexit, including through financial technology and“highest standards of regulation”.
All regulation is not created equal
However, Government, regulators and market participants alike are increasingly questioning whether the current regulatory framework is fit for purpose amidst the ever evolving financial technology and payments landscape.
Arguably, in light of the recent proliferation of new payments firms, using fintech solutions to provide unique payments-related services or functionality, there is uncertainty as to whether the existing UK legislative and regulatory regimes (which were designed and largely implemented in a “previous payments era” some years ago) appropriately regulate and supervise these new payments activities.
We are, of course, concerned here not with the functions and services provided as part of traditional payment systems that are regulated and supervised by the Payment Systems Regulator (PSR) and the Bank of England (such as Bacs or the Faster Payments Service), but rather with the functions and services that are provided by payment service providers and other fintechs at the “lower levels” of the payments ecosystem. These are the broader “payments networks” consisting of players, processes and systems that operate outside the perimeter of a traditional “payment system”. Examples include the new-generation of “overlay services” administered by system operators and other fintechs, pioneered by the Payment Strategy Forum as part of their vision for more innovative and consumer-focused payment services. These services operate as part of a “payments network” but are one or more steps removed from the functions and facilities provided as part of the core payment system itself.
Clearly, participants (and potential participants) in such payments networks, and their customers, will want to know that in performing functions in relation to the network, the payment network administrators are subject to appropriate regulation. An extension of the UK legislative and regulatory regimes to cover these payment networks would improve market confidence in such networks, thereby increasing consumer demand for the services and payments products provided at these “lower levels” of the payments ecosystem.
It is hoped, therefore, that in line with its expectation of maintaining the “highest standards of regulation”, the UK Government will expand the scope of formal payments regulations to cover these broader payments activities and bodies which manage or administer such activities within a payments network. Such an expansion would help to provide a well-founded, clear and robust legal basis for these broader payment networks, and ought to open-up access to and spur competition for challenger payment institutions, electronic money firms and other fintech companies throughout the payments chain who wish to take part in such payments networks. The core aim must be for any such regulation to promote (and not damage) innovation and competition, but do so in a manner which protects the integrity of the payment systems, broader payments networks and markets that they serve.
For the UK to remain at the forefront of new innovations and developments in payments and fintech, it will be vital over the coming months for the payments and fintech communities to keep applying the pressure and to take advantage of the Government’s and regulators’ increased focus on supporting innovation in payments. Both the Government and the PSR have openly shown their support for the design and implementation of a new payments architecture, which together with other payments initiatives (including Open Banking, Confirmation of Payee, and Request to Pay) should kick-start competition and innovation in the fintech and payments space. Indeed, the PSR’s proposed new strategy is dubbed “a new strategy for a changing world”.
Yet, at the same time (and as was made clear by the Chancellor’s announcement) the UK must ensure that such innovation and change does not come at the expense of the “highest standards of regulation”. It is the strength of its regulatory regime that has set the UK apart from other countries in driving change and supporting the development of new payments products and networks in a way that continues to promote market confidence in UK payments products and services. Indeed, the UK Government was the first off the mark globally in setting up an economic regulator for payment systems (the PSR) and bringing UK payment systems under formal regulation.
There is clearly a delicate balance to be struck and any new regulation should not be allowed to stifle the market. The UK should seek to implement a robust, but proportionate, regulatory framework which attracts and supports new payments products and financial technologies. We certainly look forward to the outcome of the Payments Landscape Review to see how the Government intends to tackle this delicate balance in light of the industry’s feedback.
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Thanks to Johnathan and the team at Travers Smith for this article, if you’d like to feature in this newsletter please contact Mike at Northey Point.
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