UK digital payments regulatory outlook

Read time: 7 mins Added date: 08/10/2024

Samantha Emery, Director of Payments Industry and Development, and Cicely Dudley, Senior Manager, Payments Industry and Regulation, summarise the key developments in the UK payments regulatory landscape.

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Future of Payments Report

Following the Chancellor’s 2023 Mansion House speech, HM Treasury issued a Call for Input (Future of Payments Review) to gather industry’s views on how payments are likely to be made in the future, and the steps needed for the UK to continue to deliver world-leading retail payments for customers. The Review was led by an independent advisor, Joe Garner, who conducted extensive industry engagement.

The Future of Payments Report (PDF, 14.9MB) concluded that the UK payments landscape is in a good position, with a strong, long-term track record of reliability, security, and safety. It also noted that the UK has smooth and secure customer experiences when paying for goods and services at both Point of Sale and online.

However, it highlighted a lack of vision and strategy within the UK’s complex payments landscape and stressed that it is vital to simplify this and provide a coherent and clear vision for the future. The report also discussed how account-to-account solutions were more widely used in other countries, and that the UK should continue to explore this functionality.

The report noted that the strongest piece of feedback it received was the UK’s payments landscape lacks vision and clarity of priorities. The report’s primary recommendation was for the Government to develop a National Payments Vision and strategy, to provide the high-level forward-looking direction to the industry and with the primary aim of simplifying the landscape over time.

The report also recommended improvements to:

1. Customer experience: current Strong Customer Authorisation requirements being incorporated in regulatory rules rather than technical standards.

2. Open Banking: improvements to support access to and usability of retail account-to-account payments; delivering a sustainable commercial model; and providing customer protections.

3. Regulatory oversight and alignment: including HM Treasury creating a regulatory framework that is strong, efficient, and supports greater innovation.

National Payments Vision and strategy

In March 2024, the Government confirmed its commitment to maintaining the UK’s reputation for a world-leading payments ecosystem, accepting the Future of Payments Review’s recommendation to publish a National Payments Vision. The general election and subsequent change in Government has delayed this. However, the Economic Secretary to the Treasury confirmed the Government would publish a National Payments Vision over the forthcoming months.

We look forward to the publication of the Government’s National Payments Vision. To be successful, our view is the UK payments landscape should be based on a set of key outcomes to help drive effective decision-making, prioritisation, and sequencing by regulators and authorities:

good customer journeys, ensuring choice and access to timely payments and having clear protections in place when things go wrong.
payment resilience and safety, ensuring payments systems are available, secure, and safe when processing transactions.
actions to boost innovation, ensuring the payments ecosystem can adapt to emerging innovations and data rich transactions whilst supporting changing customer behaviours; and
underpinned by a sustainable commercial model with legal certainty across all payment systems, ensuring recovery of costs and sufficient rate of return to incentivise innovation and the ability to reinvest in future payments infrastructure to benefit our customers.

As technology advances, we envisage a future of smarter money where intelligence is embedded into the payments system, assets and liabilities can be represented in algorithms and used to create new safer markets and new forms of digital exchange both domestically and cross-border. To support the future of smarter money we believe the UK needs to build a capable core, starting with making strategic decisions about the technology foundation.

In addition, the UK needs to create the right operating environment that embraces global messaging standards and supports new services (such as Open Banking), which are underpinned by multilateral agreements providing a level playing field for access, the appropriate protections for the service involved and a commercial model that encourages investment across the value chain.

The National Payments Vision should define clear guiding principles such as safety, simplification, co-ordination, inclusivity, and innovation so that regulators and industry are more aligned in delivery.

By harnessing the new global payments messaging standard ISO 20022, the UK will bring the benefits of this richer data standard for customers and greater payments interoperability for Payment Service Providers both domestically and globally. The Bank of England considers international connectivity in its Discussion Paper detailed below.

Bank of England payments strategy

The Bank of England has published a wide-ranging discussion paper on the future of money and payments. The paper, published in July, sees the Bank of England discuss the payments landscape and the complex challenges it believes it faces. These include the ongoing renewal of its wholesale infrastructure (Real Time Gross Settlement - RTGS), drives to enhance cross-border payments and interoperability, global innovations on central bank money (including stablecoins and Central Bank Digital Currencies), and the need to modernise domestic interbank payment systems.

The paper states that developments in money and payments present “risks and opportunities” for central banks’ monetary and financial stability objectives. It also discusses retail innovations, in particular the use of interbank payment systems to make retail payments (quoting examples as seen in India and Sweden), and the emergence of programmability and Distributed Ledger technologies within payments.

The Bank of England sets out its thinking in four key areas:

1. Financial stability risk appetite for wholesale settlement in central bank money – which must be able to interact with new technologies and co-exist with commercial money.

2. Exploring innovations in wholesale central bank money – designing and seeking feedback on functionalities and through a series of experiments.

3. Outcomes sought in retail payments – singleness of money and sustained innovation within a resilient and sustainably funded payments ecosystem. Supports access to alternative forms of payments, including account-to-account, and notes achieving this requires clear and renewed leadership by UK authorities.

4. Maintaining ‘safe openness’ of the UK economy – by facilitating international connectivity (e.g. via messaging standards) and engagement with international partners.

The Bank’s discussion paper demonstrates leadership and outlines the critical objectives and outcomes that must underpin the overall payments vision. We agree that achieving a robust and dynamic UK payments strategy to serve business and consumers, and hence the UK economy, is a team sport involving players across government, authorities and business.

We welcome the Bank’s initiative and agree that clear and renewed leadership by the UK authorities is required for the UK to remain at the forefront of payments innovation. The paper notes that following publication of the National Payments Vision the Bank will work closely with regulators and the industry to deliver the outcomes identified. We look forward to further engagement with both the Government and the Bank on this.

Enhancing existing domestic payment systems

Industry work to begin building the New Payments Architecture, set to be the UK’s next-generation payments platform for retail interbank systems, has been paused following the publication of the Future of Payments Report. We await confirmation of how and when the UK’s interbank systems will be updated.

Whilst a decision on the future of the payments infrastructure in the UK is being considered, the UK’s domestic payments operator, Pay.UK, is exploring options to consider opportunities for potential enhancement to the existing Faster Payments and Bacs systems, to maintain resilience and a path to deliver end user benefits.

Pay.UK has proposed and published enhancements for regulatory consideration, categorised in five key themes; resilience and systemic risk, fighting financial crime, lowering barriers to entry, operational benefits, and an alternative to cards; which have been split over two phases; short term (0-2 years) and medium / long term (3-10 years).

The short-term benefits to banks and customers will include improved resilience, access to data, operational improvements and global ISO20022 capability for Faster Payments and Bacs. The longer term will look to simplify the central infrastructure across all current payment systems and align to the National Payments Vision outcomes.

Pay.UK has stated it will continue to work closely with the regulators and payments industry to further refine its plans and next steps.

International functionality

UK payments continue to align with international developments, with CHAPS moving to IS020022 standards. This has initially been undertaken on a like for like basis, with a plan for Legal Identifiers for financial institutions to be introduced along with purpose codes. This push for international alignment is also supporting efforts to upgrade domestic infrastructure, with the desire for domestic payments to also utilise the shared international standard. The UK is also closely monitoring and participating in other global developments, such as the Bank for International Settlement’s Innovation agenda.

The Bank of England’s Real Time Gross Settlement roadmap continues to explore upgrades to further support cross-border interoperability. Part of this is a consultation on proposed extended hours, which the BoE is due to consult on in 2025. This will seek to address an element of cross-border payment friction and reduce average end-to-end elapsed time for a payment to complete its journey.

Authorised Push Payments fraud

Authorised Push Payment scams happen when a person or business is tricked into sending money to a fraudster posing as a genuine payee. Fraudsters are exploiting instantaneous payments and using sophisticated social engineering, including via social media and telecommunications, to target victims of fraud, quickly moving funds out of reach.

In May 2023, the Payment Systems Regulator (PSR) announced it would enact mandatory reimbursement to customers from Payment Service Providers (PSPs) for Authorised Push Payment scams. All in-scope sending Payment Service Providers will be required to reimburse Authorised Push Payment scam victims in full within five working days of a claim. The cost of the fraud loss will be split 50:50 between the sending and receiving PSPs involved in the transaction, with the receiving firm reimbursing the sending firm with 50% of the amount returned to the victim.

In December 2023, the PSR published its final policy statement outlining the approach to combating scams and introducing key changes to the regulatory framework, whilst also confirming the industry implementation date for mandatory reimbursement of 7th October 2024. The final elements of the policy are detailed below, following further consultation on the maximum level of reimbursement for Faster Payments and CHAPS.

Excess: Payment Service Providers may apply an optional fixed excess of £100. This does not apply to claims made by vulnerable customers.
Maximum level of reimbursement: set at £85,000, applying to all in-scope customers, with no exceptions for vulnerable customers. If the sending Payment Service Provider takes a decision to reimburse their customer above this limit, the receiving Payment Service Provider would not be liable for 50% of this enhanced figure.
Consumer standard of caution: For a claim to be valid and qualify for reimbursement, the customer is expected to have exercised a minimum degree of caution – known as the consumer standard of caution. The four requirements incorporated in the standard are 1) to have regard to interventions from the PSP, 2) report the scam promptly 3) share relevant information with the PSP and 4) consent to police reporting.
The Payment Systems Regulator has introduced a provision for the sending Payment Service Provider to ‘stop the clock’, allowing extra time to gather information from the receiving Payment Service Provider to inform the case assessment.

The Payment Systems Regulator and the Bank of England have also confirmed that the Authorised Push Payment Scam mandatory reimbursement policy will also apply to CHAPS payments from the same date, to ensure customers receive a cohesive approach when faced with these frauds. This approach will also help with reducing the likelihood of criminals switching from Faster Payments to CHAPS.

Confirmation of Payee

Confirmation of Payee provides payers with greater assurance that payments are being routed to the correct account, by checking and confirming the name on the account before funds are transmitted. CoP is designed to mitigate loss from Authorised Push Payment (APP) Fraud as well as aiming to reduce misdirected payments. Pay.UK, as the UK’s Payments Systems Operator maintain the rules and standards for the service, with the server directory managed by Open Banking Ltd.

Following introduction by the largest UK banks in 2020, the Payment Systems Regulator in 2022 issued Specific Direction 17, which requires a further c400 Payment Service Providers operating within the UK to join Confirmation of Payee. This expansion is expected to complete by the end of this year, further growing the service, and providing coverage for 99% of Faster Payments transactions in the UK.

Future focused – digital assets and settlement

The Digital Pound: Countries across the world have seen developments in the consideration and implementation of a Central Bank Digital Currency (CBDC). Against this backdrop, HM Treasury and the Bank of England launched a joint consultation in February 2023, setting out the reasons and possible options for a retail CBDC, otherwise known as a Digital Pound, which the Bank of England considers is likely to be needed in the future.

The Digital Pound Consultation received strong public interest with over fifty thousand responses from members of the public, businesses, civil society, and academia. The Bank of England’s response acknowledged concerns raised regarding the implications of a Digital Pound on access to cash, users’ privacy, and control on their money, and recognised that building public’s trust in a Digital Pound will be of critical importance.

While the Bank of England has confirmed that no decision on whether to progress with a CBDC has been made at this time, further exploration of technology and policy requirements for a Digital Pound are progressing, and the Design Phase will run through to 2025.

The Bank of England has said any decision to proceed will depend on how trends in money and payments evolve; it will consider the pace of innovation in commercial bank money, in particular commercial bank money used in retail payments, as well as how its own wholesale infrastructure may support retail innovations, when assessing the need for a retail Central Bank Digital Currency. Parliamentary approval will be sought before any decision is made to proceed, and primary legislation will need to be introduced if and when a Digital Pound is launched.

Regulated Liability Network: To promote innovation and new functionality within the UK payments landscape, including exploring the potential benefits of enhanced deposits or programmable payments, an industry group of banks and UK Finance (working in partnership with technology providers) undertook a project to investigate the Regulated Liability Network concept, the use of shared ledger technology to manage and record regulated financial transactions, and test if it could push forward innovation in money and payments in the UK.

An experimentation phase was mobilised to test different technology approaches, architectural designs and explore the value of ‘programmable payments’ using three use cases: 1) peer to peer payments, 2) automated exchange and settlement of the home buying journey and 3) digital asset settlement.

The key findings from the experimentation phase demonstrated that programmable payments and settlement can be delivered and could enable the tested use cases via a platform for innovation. This platform for innovation could deliver increased functionality which is not currently available in the UK market, transforming customer journeys and business processes across a range of use cases, in addition to those tested as part of the experimentation phase. Next steps on the programme are due to be announced in late 2024.