The Bill contains a number of provisions focussed on payments (including payment systems) and fintech. We outline a number of the key provisions below.
Alongside the Bill, there have been a number of other recent legal and regulatory developments in the payments and fintech space – both in the UK and internationally – including:
- HM Treasury's consultation and call for evidence on Payments Regulation and the Systemic Perimeter– which, in summary, sets out various proposals in relation to changes to the regulatory and systemic perimeters in relation to payments, and provides additional context as to how the government and HM Treasury might exercise some of the powers included in the Bill;
- the Law Commission's highly anticipated Digital Assets consultation paper – which, among other things, explores whether the law should be reformed to explicitly recognise a third category of personal property (in addition to things in action and things in possession) for digital assets; and
- CPMI and IOSCO's final guidance on stablecoin arrangements – which, in short, sets out guidance on the application of the Principles for Financial Market Infrastructures to systemically important stablecoin arrangements.
The provisions in the Bill should be understood in the broader context of the ongoing focus on the payments and fintech sectors, and the government's ambitions to maintain and grow the UK's position as a global fintech hub and leader in financial services.
Digital settlement assets
The Bill introduces the concept of "digital settlement assets" (DSA). The term "DSA" is used in a number of places in the Bill, including in relation to amendments to the Banking Act and the Financial Services (Banking Reform) Act 2013 (FSBRA) and in relation to certain new powers conferred on HM Treasury (each outlined further below).
The Bill defines a "digital settlement asset" as:
"a digital representation of value or rights, whether or not cryptographically secured, that— (a) can be used for the settlement of payment obligations, (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology)."
The same definition is tracked into the amendments to the Banking Act 2009 and FSBRA.
This definition is broad and, notably, not limited to cryptographically secured assets or assets using DLT. However, and notwithstanding the breadth of the definition, the Explanatory Notes show a clear focus on stablecoins which is unsurprising and consistent with the focus on stablecoins in HM Treasury's consultation and call for evidence, and its subsequent response.
The Bill also gives HM Treasury the power to amend the definition – the Explanatory Notes confirm the intention to enable HM Treasury to amend the definition "in the event that there are changes in the features, underlying technology or usage of these assets, so that the regulation can continue to have effect as intended." This seems to be an implicit recognition that technology and innovation in financial services is now developing at a pace and in a way which may require definitional amendments in the future, notwithstanding the broad and technologically-neutral way in which the definition of "digital settlement assets" has been drafted.
Digital settlement assets: the Banking Act 2009 and the FSBRA
The Bill amends the scope of Part 5 of the Banking Act 2009 to enable HM Treasury to recognise payment systems which use or involve DSAs, and certain service providers in relation to those systems (called "DSA service providers"). In essence, the effect is to expand the scope of those systems (and operators), and service providers to or connected with those systems, that can become subject to Bank supervision.
The term "DSA service provider" is given a prescriptive definition in the amendments to the Banking Act 2009, and captures (among others) persons who create or issue DSAs involved in the payment system, persons who provide services to "safeguard" DSAs, and persons which qualify as "digital settlement asset exchange providers" (which is itself specifically defined in the amendments).
The amendments to the Banking Act 2009 also extend the "specified service provider" (SSP) concept to include service providers to DSA service provider and service providers to (or connected with) payment systems that include arrangements using DSAs.
In addition to the amendments outlined in the Bill, the government is also consulting on widening the scope of Part 5 of the Banking Act 2009 further. The proposals, outlined in HM Treasury's consultation and call for evidence on Payments Regulation and the Systemic Perimeter, would enable HM Treasury to recognise (and bring into the scope of Bank supervision) certain "payment providers" and their service providers. For these purposes, "payment providers" are, in summary, those entities and actors within the payments chain that pose "systemic risk in [their] own right to the financial system or the UK economy". In other words, the proposals have the effect of extending Bank of England supervision beyond payment systems. The consultation acknowledges that some of these "payment providers" might also be subject to FCA's remit under the Payment Services Regulations or Electronic Money Regulations. The consultation explains that the proposal reflects the 'same risk, same regulatory outcome' principle – if actors in the payments chain pose systemic risk, they should be subject to the same supervision and regulation as other actors (like payment systems and other FMIs).
The Bill also amends the FSBRA to enable HM Treasury to designate payment systems which use DSAs, with the effect that those payment systems are subject to regulation by the Payment Systems Regulator (PSR).
Digital settlement assets: HM Treasury powers in relation to payments using DSAs
Finally, the Bill enables HM Treasury to make regulations (and confers a number of other and related powers on the Treasury) in relation to:
- the regulation of payments that include DSAs;
- the regulation of recognised payment systems that include arrangements using DSAs, recognised DSA service providers, and service providers connected with such recognised payment systems or recognised DSA service providers; and
- insolvency arrangements in respect of such systems and service providers.
The powers are very broad, but the Explanatory Notes to the Bill provide more context and indicate that (among other things) these powers could (and perhaps are likely to) be used to "[e]stablish an FCA authorisation and supervision regime, drawing broadly on existing electronic money and payments regulation, to mitigate conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins". As outlined above, the focus on stablecoins is not surprising.
The industry will, no doubt, keenly await the detail of any regulatory and supervisory regime(s).
Liability of payment service providers for fraudulent transactions
The Bill contains important provisions in the context of authorised push payment (APP) and other scams which are not currently protected under the Payment Services Regulations.
The Bill obliges the Payments Systems Regulator (PSR) to prepare and publish a requirement for payment service providers to reimburse victims in cases of payment orders made as a result of fraud or dishonesty which are executed over the Faster Payments Service (which, according to the PSR, is the payment system through which the "vast majority" of payments resulting from APP scams are processed).
To support action by the PSR, section 62 of the draft Bill also amends regulation 90 of the Payment Systems Regulations to make clear that it does not affect the liability of any PSP to reimburse victims under the requirement to be implemented by the PSR. This amendment is intended to address any (actual or perceived) concerns that regulation 90 – which provides that payments executed in accordance with the unique identifiers provided by the payer are deemed to have been executed correctly – might be a barrier to the exercise of any relevant powers.
Exactly how this mandatory requirement will be implemented by the PSR is still being developed and the PSR is expected to consult on its preferred approach to APP scam reimbursement in Autumn 2022.
Access to cash
The Bill introduces measures to support financial inclusion by ensuring people across the UK can continue to access cash, an issue that has received much attention recently, particularly in the context of difficulties that some faced during the pandemic.
This includes a power for the Bank to make rules to ensure the continued reasonable provision of cash withdrawal and deposit facilities, for example, by requiring designated firms to refrain from the closure of a cash access service where there is no suitable alternative.
The Bill also establishes a statutory oversight regime of wholesale cash distribution, with the Bank given formal oversight responsibility including through powers to require the provision of information, give directions to designated firms and publish principles and codes of practice that the industry must follow.