UK Proposals for Regulating Systemic Payment Activities

HM Treasury has opened a consultation on payments regulation and the systemic perimeter.  The consultation arose out of the Payments Landscape Review and the government’s commitment to consult on bringing systemically important entities within payment chains under Bank of England regulation.  Market developments and innovation have changed how risks are dispersed across payment networks. It is therefore likely, according to HM Treasury, that some entities operating in the payments space are not subject to systemic supervision by the Bank of England and as a result pose systemic risks to the U.K. financial system or even to those entities that are subject to Bank of England supervision.  This consultation makes various proposals to address such risks or issues. Responses to the consultation may be submitted until October 11, 2022.  The government will respond to that feedback in 2023.

The consultation considers whether systemic payments supervision by the Bank of England, provided for under the Banking Act 2009, should be extended to cover any source of material risk to U.K. financial stability, adopting the “same risk, same outcome” approach committed to by the government in the Payments Landscape Review.  The main change would be to extend the regulatory perimeter so that HM Treasury could recognize as systemic any entity offering or performing payment activities (and its service providers).  This differs from the existing perimeter, which focuses only on payment systems and their service providers.  Proposals are put forward for enhanced powers being granted to the Bank of England, including information gathering powers to assist it in monitoring systemic risks in the market.  In addition, the government is considering clarifying, in legislation, the circumstances in which the Bank of England may use its powers to limit the activity of a recognized payment entity, for example, where steps are needed to ensure a firm scales up safely.  The consultation also sets out proposals regarding the potential overlap of regulation between the Financial Conduct Authority and the Bank of England if the perimeter was so extended.

HM Treasury is also seeking views on whether a location requirement should be set for an entity recognized under the Banking Act 2009.  This issue was floated in the proposals regarding the regulation of stablecoins for payment.  The government decided not to address the issue then, in isolation, and therefore is asking for feedback on its proposed approach, which is set out in this consultation.  That proposed approach would be to clarify that the Bank of England can require a specific entity to establish itself in the U.K. where it is deemed necessary given the risks posed by the recognized entity.  Therefore, it is not proposed that an automatic location requirement would apply to recognized entities under the Banking Act.  This would be similar to a power that already exists over recognized third-country central counterparties or clearing houses under the E.U.'s and U.K.’s European Market Infrastructure Regulation.

Thought is also given as to how the regulation of service providers to systemic payment providers under the extended perimeter would interact with the regulation of critical service providers as presented in the Financial Services and Markets Bill.  The government’s view is that general IT and technology firms should generally be in scope of the critical third party framework, rather than the Banking Act 2009.

HM Treasury is also seeking views on how these proposals will align with the outcomes of the Future Regulatory Framework Review, including whether amendments are needed to the statutory objectives and accountability mechanisms of the regulators, or to the accountability mechanisms and rulemaking responsibilities, with respect to regulators’ oversight of payment-related activities. 

Finally, the consultation seeks feedback on extending the scope of application of a Senior Managers & Certification Regime to recognized payments entities, and to payment service providers and e-money firms, which the FCA has called for in its Regulatory Perimeter report.  The extension of the SM&CR to FMI is being taken forward separately and already in the Financial Services and Markets Bill.

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