The 2021 FCA business plan highlights the need to make payments safe and accessible as one of its five key priorities in the medium term. As a relatively broad remit, this incorporates a few key messages. Namely, ensuring the range of payment services available are safe for consumers, with appropriate consumer protection should the firm fail. This includes post-implementation monitoring and review of PSD2, including the highly technical strong customer authentication elements. It also means making sure that the full range of payment services are available to all customers, without preventing the use of cash.
While cryptoassets are one of the more high-profile payment options available, they may pose considerable risk to consumers. As an investment option, their volatility can offer big rewards for those with a high risk-appetite. As a payment option this volatility can prove problematic, although stablecoins are a viable alternative for foreign remittance payments among others, as they are pegged to either a fiat currency or other physical asset.
The FCA and HM Treasury have undertaken considerable work in this space to assess each type of cryptoasset, and regulate them depending on how consumers are using them. Essentially, those that are structurally similar to shares will be regulated as security tokens, and those closest to fiat currency will be regulated as either stable or e-money tokens. While the latter have been regulated for some time, it’s important to note that some stablecoins may meet the e-money criteria and become subject to the full gamut of e-money regulations. The volatility of better known exchange tokens, such as Bitcoin or Litecoin, limits their usefulness as a payment option and they aren’t fully regulated – which is perhaps surprising given the volume of security issues and crypto thefts in recent years. There are also moves underway to regulate the promotion of cryptoassets, in line with e-money, to enhance consumer protection.
The question of what’s regulated and why is an important one, as it will dictate the type of cryptoassets that can valuably contribute to the payments landscape moving forward. Stablecoins are a key area of opportunity, as reflected in the gradual shift toward central bank digital currencies and the UK’s own planned Britcoin. As these payment options become a more integral part of the financial landscape, bringing the relevant firms under FCA supervision will also introduce new expectations for consumer protection, with the potential for wind-down planning and operational resilience requirements in the future.
Looking beyond crypto, consumer protection is a key issue across the payments sector and aims to ensure clients do not lose money if a payment service provider fails. This is particularly important because unlike banks, building societies or credit unions, payment service providers and e-money firms are not included in the Financial Services Compensation Scheme. Additionally, the FCA found that payments and e-money firms were the least profitable across the financial sector, making them more vulnerable to insolvency under stressed conditions.
The FCA has previously reminded payment service providers and e-money firms to prepare robust wind-down plans, ensuring an orderly cessation of regulated activities with a focus on minimising customer harm and facilitating a smooth transition to a third party, where appropriate. Similarly, authorised payment and e-money institutions have been tasked with improving their safeguarding arrangements, including through an annual external audit. But it will take time for firms across the sector to meet these supervisory expectations and build effective mechanisms to protect consumer funds.
It’s also important to consider the impact on vulnerable customers. For some, such as small and medium sized enterprises or individual consumers, this means ensuring payment services are accessible and affordable. It also means protecting the UK’s cash infrastructure over time, which HM Treasury is currently consulting on. This will require maintaining branches and ATMs, or sourcing effective alternatives.
The UK’s economic recovery from COVID-19 and Brexit will take time, and the payments sector has the potential to be a key area of innovation over the coming years. However, this does depend on the financial strength of the sector, effective safeguarding and appropriate supervision. New regulation will undoubtedly emerge from HM Treasury’s Payments Landscape Review and it’s important to stay on top of all regulatory updates to maintain a competitive edge and continue to meet supervisory expectations.
Contact Paul Olukoya for further insight and guidance.