The future of the UK payments services and e-money regulatory regimes

Future authorisations regime for EMIs and PIs

Under the current regulatory framework, payment institutions (PIs) and electronic money institutions (EMIs) are authorised and supervised under two principal sets of legislation: the Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs), respectively. These regimes were originally derived from the EU Directives – namely the Second Payment Services Directive (PSD2) and the Second Electronic Money Directive (EMD2), laying down authorisation, prudential and conduct of business requirements tailored to the specific risks and business models of PIs and EMIs.

The PSRs and EMRs operate as sector-specific regimes, distinct from the broader Financial Services and Markets Act 2000 (FSMA) authorisations framework. Notably, this means that some of the FSMA cross-cutting provisions which apply to persons authorised under FSMA, including on Senior Managers and Certification Regime (SM&CR), for example, do not currently apply to EMIs and PIs by default. Furthermore, we note this current regime was intentionally designed and evolved over the years to facilitate innovation and competition in payments and e-money by creating a proportionate alternative to the bank- and investment-firm-centric FSMA regime.

The direction of travel set under, inter alia, the reforms introduced under Financial Services and Markets Act 2023, is that all EU-derived financial services legislation, including PSRs and EMRs, will be repealed and replaced with a more tailored UK regime. For EMIs and PIs, the government’s intention is that firm-facing prudential and conduct of business requirements would be set out in the FCA’s Handbook. But at this juncture, we understand that a policy choice still needs to be made about the future authorisations regime for EMIs/PIs, namely (i) whether it should move under FSMA, or (ii) a more bespoke authorisations regime.

Before turning to the potential advantages and disadvantages of adopting either policy option, it must be recognised that moving the authorisations regime for EMIs and PIs under FSMA would represent a significant policy departure from the current sector-specific approach. Overall, the principle of a balanced delegation of the responsibility for setting firm-facing rules to the FCA, to enable a more agile and responsive framework, is supported. Policymakers may wish to consider the following two overarching points:

• First, to remain consistent with the UK’s growth and competitiveness objectives, the industry considers it paramount that the future regime remains proportionate and explicitly tailored to the risks and business models of non-bank payment and e-money firms. There is a concern that a move under FSMA framework could encourage the extension of rules which were designed for other financial sectors and are ill suited to the EMIs and PIs.
• Second, any substantive change to the current sector-specific requirements for e-money and payment services firms – be it in the form of legislation such as FSMA or the FCA’s Handbook rules – should only be made when there is a demonstrable regulatory benefit and when proportionate in light to the added regulatory costs and burdens. A reform driven solely by convenience or a desire for consistency with other sectors – without evidence of deficiency in the effectiveness of the current requirements – would simply add cost and complexity for firms, undermining the very objectives the reform seeks to achieve

Moving the authorisations regime under FSMA

Anticipated legal architecture

If EMIs and PIs were brought under FSMA-style authorisation, we assume this would most likely involve the following key legal changes to the current regime: (i) E-money issuance and payment services would be designated as regulated activities under FSMA, and EMIs and PIs would need a specific Part4A permission to carry out each of their e-money/payment service activities; (ii) EMIs and PIs would become “authorised persons” under FSMA (in accordance with Section 31 of FSMA); accordingly, EMIs and PIs become subject to a broader set of provisions in FSMA and secondary legislation, as well as FCA Handbook rules which apply to other “firms” / “authorised persons”.

Transition to FSMA authorisation

A move under FSMA would require existing EMI/PI authorisations to be converted or replaced with FSMA Part 4A permissions, which – in the most extreme scenario – could require a wholesale re-authorisation of EMIs and PIs under FSMA. This would create uncertainty and administrative and costly disruption for established firms, going against the government’s objectives of promoting growth and competition. Accordingly, the government should ensure that the existing EMI and PI licenses are seamlessly transitioned to authorisations under the future regime – whether under FSMA or any other framework – without the need for re-authorisation.

Threshold conditions

FSMA firms must continuously satisfy “threshold conditions” (on resources, suitability, location of offices and effective supervision) as set out in Schedule 6 FSMA (Section 55B of FSMA) and as supplemented by the FCA’s guidance in ‘COND’ module of the Handbook for FCA-authorised firms. By contrast, the authorisation conditions for EMIs and PIs are mainly prescribed in legislation (Regulation 6 PSRs / EMRs) – and include requirements for which there is no direct FSMA equivalent, such as detailed minimum capital and safeguarding obligations. These would presumably have to be replicated in the FCA Handbook rules if EMIs and PIs were brought under FSMA. The FSMA threshold conditions, overall, are described in broad terms and less prescriptive, whereas the EMRs and PSRs conditions – whilst arguably could be less prescriptive – offer a degree of certainty, transparency and continuity in their application for EMIs and PIs. For example, if the authorisation conditions were moved under FSMA, it is not certain whether initial and ongoing own funds (capital) conditions (as set out in Regulations 6(3), 19 and Schedule 2 of the EMRs/ Regulations 6(3), 22 and Schedule 3 of the PSRs) would continue to be prescribed in legislation, or whether they would be replaced – with or without amendment – with the FCA Handbook rules. The resulting uncertainty over future own funds requirements would be in itself harmful to the growth and competitiveness of the sector. Even a subtle change in authorisation conditions (or the FCA’s expectations) as part of the transition under FSMA could have far reaching and unpredictable consequences for the sector. To preserve legal certainty and minimise disruption, there is a need for a clear balance to be struck – with an appropriate level of authorisation conditions for EMIs and PIs replicated in legislation, rather than left to the discretion of the FCA Handbook rules and guidance.

How we can assist

For assistance adapting to regulatory change, or advice on implementing and complying with existing payment services and e-money regulations, please contact a member of our team.