UK Government confirms plans to abolish the Payment Systems Regulator

The UK Government has confirmed plans to abolish the Payment Systems Regulator (PSR), a move that is expected to have wide-ranging implications for the industry. It is not clear when the PSR will be abolished, but we expect it will likely take until at least the end of 2025. This article examines what this means for the sector in the short and medium term, the potential impact on ongoing initiatives, and some of the potential benefits of this shift.

Short- and Medium-Term Impact on the Industry

The immediate aftermath of the decision is likely to bring disruption and distraction. Organisations regulated by the PSR may experience uncertainty regarding regulatory oversight. Key personnel within the PSR might leave, leading to potential knowledge gaps during this transition period and making business as usual challenging, as companies adapt to new regulatory frameworks and processes. There are also some concerns that the abolition of the PSR may lead to a reduction in focus on the promotion of competition in the payments industry.

Impact on Ongoing Initiatives

One of the critical areas of concern is the effect this move will have on the PSR’s ongoing initiatives. The Open Banking payments initiative, which is at a critical juncture in its development, is especially vulnerable to disruption. The transition process may divert attention and resources away from these projects, causing delays and potentially stunting progress at a time when innovation and stability are crucial.

Open Banking, designed to increase competition and choice in the banking sector, currently benefits from the PSR’s focused oversight. The Open Banking payments initiative’s progress on issues such as developing a commercially sustainable framework for the wider adoption of open banking payments (e.g. commercial VRPS), enhancing transaction security, expanding service capabilities, and fostering partnerships with fintech companies could potentially be slowed down due to regulatory uncertainty and the re-evaluation of its guidance under new supervisory bodies.

Potential Benefits of the Regulatory Changes

Despite the challenges, there are potential benefits to be considered. One potential advantage is the reduced reporting requirements for firms, which could streamline operations and reduce administrative burdens. In practice, that saving may be limited given that the FCA and PSR currently ask for slightly different metrics relevant to their respective remits, but there is some overlap (plus the burden of creating and filing separate reports) that if removed would be particularly welcome to smaller payments firms.

There is also the potential streamlined approach could reduce bureaucratic redundancy and improve the speed at which policy decisions are made. Firms may benefit from more consistent communication and less fragmentation in regulatory requirements, potentially leading to more predictable regulatory environments and faster adaptation to new rules. For instance, to date the limitations on the PSR’s mandate has meant that certain policy decisions that involve aspects outside that mandate, have to be referred out to the FCA: one would hope that merging the two regulators would remove such barriers and resultant delays.

City Minister Emma Reynolds MP has written to the Treasury Select Committee regarding the government’s plans.

Her letter indicates the government’s belief in developing a streamlined and more efficient regulatory structure. Reynolds’ communication emphasises an intention to foster innovation, enhance regulatory coherence, and maintain the UK’s competitive edge in financial services post-Brexit.

Existing Collaboration Between the PSR and FCA

It is important to note that the PSR and the FCA already collaborate closely. The recruitment of a joint Executive Director for Payments and Digital Finance for the FCA and Managing Director for the PSR is a testament to their cooperative efforts. This pre-existing relationship could ease the transition and integration process, mitigating some of the upheaval expected from the abolition of the PSR. Both agencies have already collaborated on joint initiatives to address systemic risks, enhance consumer protection, and ensure the resilience of payment systems.

Legislative Requirements and Timeline

The process of folding the PSR into the FCA requires significant legislative action, some of which may involve transferring certain functions to the Bank of England or the Prudential Regulation Authority (PRA). The legislative process will likely extend until at least the end of the year, with a consultation process scheduled over the summer. Such a timeline offers a window for organisations to prepare and adapt to the forthcoming regulatory changes.

Impacted entities should seek to actively participate in the consultation process to ensure their interests and concerns are adequately addressed in the new regulatory framework.

Conclusion

The abolition of the PSR represents a significant shift in the UK’s regulatory landscape. While the transition period will undoubtedly bring challenges, the long-term implications, including potential benefits, will depend on how the FCA manages its expanded role and responsibilities.

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