Increasing demand for frictionless payments and advances in technology have created opportunities for new players in payment chains. The unbundling of activities that were traditionally the sole purview of banks and payment systems has led to payment chains becoming longer, more complex and more interconnected. Parallel chains that do not rely on traditional rails have also emerged. These market changes raise new systemic risks and regulators are responding accordingly. For example, the UK government plans to expand the scope of regulation aimed at systemic risks and the oversight of electronic payments is being tightened in the EU. 

Reform to the UK’s systemic perimeter

Last year, following its Payments Landscape Review, HM Treasury consulted on bringing new payments players into the scope of Bank of England regulation. Instead of regulating specific types of entity, the suggestion was to move to an approach which gives the Bank freedom to assess stability risks across payment chains end-to-end. Any entity that it decides meets systemic thresholds of risks could then be recommended for “recognition” by HM Treasury which would bring it under the Bank’s supervision.

Now HM Treasury has issued its response to its consultation. The government confirms that it plans to reform the Bank’s perimeter in line with its proposals. These changes could impact unregulated tech businesses which have become integral to many payment transactions.

Under the government’s plans, the expanded scope for a systemic payments perimeter would apply to:

• systemic payment systems where these are judged to be likely to threaten the stability of, or confidence in, the UK financial system or have serious economic consequences for the UK (these systems are already in scope of the Bank’s supervision)
• associated service providers to the above (also already in scope)
• providers in their own right, where these are judged to be likely to threaten the stability of, or confidence in, the UK financial system or have serious economic consequences for the UK (new)
• associated service providers to the above (new)

These changes to the Bank’s perimeter require legislative change. HM Treasury will issue a further public statement setting out its approach as it determines a suitable vehicle for making these reforms. The Bank will also explain its plans for its expanded role once the relevant legislation has been published.

Supervising systemic stablecoins

The regulation of systemic payments firms is not the only extension of the Bank’s regulatory remit on the cards. The Financial Services and Markets Act 2023 creates a supervisory regime for certain stablecoins used as a means of payment, defined in the legislation as digital settlement assets or DSAs.

Under FSMA 2023, HM Treasury may “recognise” a payment system using DSAs or its service providers if it threatens the stability of or confidence in the UK financial system or could have serious consequences for business or other interests throughout the UK. Payment systems and service providers that are recognised would then be subject to Bank of England oversight.

HM Treasury has not yet said when the relevant part of the legislation extending the Bank’s remit to DSA payment systems will come into effect. However, related powers for HM Treasury to make regulations concerning recognised payment systems and DSA service providers come into force on 29 August 2023.

EU developments

It is nearly two years since the European Central Bank finalised its oversight framework for electronic payment instruments, schemes and arrangements. This framework, known as PISA, allows the ECB / Eurosystem to oversee businesses which support the use of payment cards, credit transfers, direct debits, e-money transfers and digital payment tokens, including digital wallets. It also covers cryptoasset-related services, such as the option to send, receive or pay with cryptoassets using an electronic wallet.

The ECB is currently rolling out the PISA framework. We are working with clients which have been informed that they will be brought within its scope. For some businesses this may be the first time that they are subject to European financial services regulation. We understand that the ECB is continuing to assess whether other schemes and arrangements should be supervised.

Meanwhile, the ECB continues to support the development of the European Payments Initiative by a network of European banks and financial services companies. The EPI aims to build a home-grown instant payments solution that can be used anywhere in Europe, which would compete with global card schemes. The initiative has been regarded by some authorities as supportive of the EU’s “strategic autonomy” agenda which aims to reduce reliance on foreign actors.

These developments are supplemented by upcoming reforms to the EU’s regulatory framework. These include plans for an instant payments regulation and the reworking of payment services regulation, known as PSD3.

The EU has also finalised its approach to regulating stablecoins. Asset-referenced tokens and e-money tokens are in the scope of MiCAR which starts to apply from 30 June 2024. More stringent requirements and supervision apply to issuances that are deemed to be “significant”. MiCAR also includes measures designed to limit the use of asset-referenced tokens and foreign currency denominated e-money tokens as a means of exchange in a single currency area.

• Read our cross-border guide for more on MiCAR.

The bottom line

• Collectively these initiatives illustrate how systemic regulators are responding to, and attempting to get in front of, a rapidly evolving market. Policymakers are working to fill in perceived gaps in the systemic oversight of modern payments chains.
• This matters because more businesses that are involved in those chains – even those that do not handle funds directly – will find themselves subject to regulatory scrutiny.
• Regulators are also making sure they have sufficient powers today to keep tabs on any stablecoins which could become systemically important in the future.