Payments market update

The Payment Systems Regulator (PSR)’s market review into the supply of card acquiring services, which commenced in July 2018, is expected to conclude in 2022 with the publication of the PSR’s proposed remedies. Those remedies are currently the subject of an interim consultation, published on 26 January, and revolve around the imposition of greater transparency requirements when it comes to pricing, encouraging digital comparison tools, greater engagement between payment service providers and their merchants, as well as making switching provider easier for merchants.

Read our article on the PSR’s final report published ahead of the remedies consultation.  We are keeping an eye on developments and will provide further updates once the PSR issues its provisional decision and draft remedies notice later this year.

The PSR published its regulatory framework proposal for the development of the New Payments Architecture (NPA) in December, following a consultation on reducing risk to competition and innovation. The NPA is a key project for the PSR and Pay.UK to deliver, and 2022 should see Pay.UK issue a request for proposal to potential NPA developers in the first half of the year, with the expectation that a vendor will be found and contracts signed in time for the build to commence towards the end of this year.

Read our article for more details on the background to the NPA and the stakeholders involved.

Following the FCA’s 2021 Woolard Review into the unsecured credit market, HM Treasury’s subsequent consultation on potential regulatory measures in respect of the rapidly-growing “Buy Now Pay Later” (BNPL) market closed on 6 January 2022.

The Woolard Review identified the current regulatory gaps in respect of BNPL as a concern and recommended it be brought inside the regulatory perimeter in order to avoid potential detriment to consumers and the wider credit market.

With the use of BNPL by consumers growing exponentially over the last 18 months, appropriate and proportionate regulation is overdue.  For further reading, we have summarised HM Treasury’s current thinking and our views.

Online retailers will need to ensure they are fully compliant with Strong Customer Authentication (SCA) by 14 March 2022. Otherwise, retailers may find that customer purchases are being declined.

The implementation of SCA has been delayed several times owing to the Covid pandemic, concerns regarding the industry’s readiness to implement SCA and the awareness levels of merchants and cardholders regarding SCA. However, the FCA has stated there will be no further extensions to this latest deadline.

SCA is intended to make electronic payment transactions more secure. Subject to limited exceptions, these changes mean that those accepting electronic transactions will have to verify a customer’s identity using SCA by applying security checks to the electronic transactions they process using two of the following three elements:

• something the customer possesses (e.g. a one-time pass code sent via SMS);
• something only the customer knows (e.g. a password or PIN);
• something the customer is (e.g. a fingerprint scan or voice recognition).

The Law Commission published its advice to the UK government on smart contracts in late 2021, building on previous work undertaken by the UK Jurisdiction Taskforce.

Smart contracts are essentially contracts where some or all of the obligations are recorded or performed by a computer program.  They are used prominently in numerous sectors, including insurance, decentralised finance, supply chain management, real estate and intellectual property.

The Law Commission was tasked with reviewing the current legal framework and recommending whether any additional legislation is required to facilitate and support the further development of smart contracts.  Its conclusion was that the UK’s current legal framework is adequate and able to facilitate and support the use of smart contracts. 

Going forwards, the Law Commission anticipates the market will develop practices and model contracts to allow for parties to increasingly use and implement smart contracts across a variety of settings.

Should parties wish to develop and rely upon smart contracts, the Law Commission set out a non-exhaustive list of issues that parties may wish to consider and provide for in their smart contract, including:

• clarifying the role of code in smart contracts and specifying if code is intended to define contractual obligations as well as to perform them;
• allocating risk in the event of coding errors, inaccurate data input or external events which may affect performance of the code;
• considering the relationship between any natural language and coded terms and where the same term is expressed in natural language and in code, making clear which term takes precedence in the event of any conflict; and
• ensuring that governing law and jurisdiction clauses are included in the smart contract, either in a separate natural language agreement or by way of comments in the code.

In the first half of 2021, UK Finance reported that £355 million was lost to authorised push payment (APP) fraud - compared to £208 million in the first half of 2020. APP fraud losses now exceed card fraud losses for the first time. This significant growth in sums lost to APP fraud comes despite the successful introduction of phase 1 of Confirmation of Payee.

Our article provides an overview of the developments in quarter 4 of 2021. Since then, the PSR published its consultation on APP scams which closed on 14 January 2022. The PSR has proposed the following: 

• Publication of fraud data by banks: banks and building societies in the 12 largest banking groups in Great Britain and the two largest banks in Northern Ireland (outside those banking groups) must publish data on their performance in relation to APP scams on reimbursement levels for victims, amongst other things.
• Improve scam prevention: the industry must improve intelligence sharing, to enhance detection and prevention of APP scams.
• Reimbursing victims: there should be mandatory reimbursement for victims of scams who have done nothing wrong.

The Treasury has announced that it will legislate to address any barriers to this regulatory action as soon as possible. The PSR is expected to engage with the industry further in the first half of 2022, with a view to publishing a policy statement outlining the measures they intend to take.

Following the Court of Appeal decision in Wood & Pengelly v Commercial First Business Ltd [2021] EWCA Civ 471, we have seen an increase in secret commission claims on the basis that firms have made commission payments to brokers or introducers of business. These claims are typically framed as claims in bribery, breach of fiduciary duty and also brought under sections 140A-C of the Consumer Credit Act 1974.

If you would like any more information, please contact us.

On 13 January 2022, the PSR published its new strategy setting out what it hopes to achieve over the next five years. It has identified the following four strategic priorities:

• Ensure users have continued access to the payment services they rely on, and support a choice of payment options.
• Ensure users are sufficiently protected when using the UK's payment systems.
• Promote competition between UK payment systems and the markets supported by them; protecting users where that competition is not sufficient.
• Act to ensure the interbank systems provide the infrastructure, rules and incentives that foster innovation and competition in payments.

Amongst other things, Chris Hemsley, the PSR’s Managing Director, said a “…key priority is to unlock the potential of account to account payments to provide credible alternatives to card payments – which are used for billions of pounds worth of retail payments.”

Our article on the PSR’s review of consumer protections in interbank payments in Q4 last year, please see here

During January 2022, the FCA and HM Treasury published draft rules that would classify cryptoassets as high risk investments under the UK financial promotion regime.  The proposed rules could have a significant impact on those firms operating within the UK that promote and deal in cryptoassets.

If you would like any more information, please contact us.

In the first of a series of articles, we introduce the Law Society’s recently updated Blockchain Guidance and the impact this new technology will have across different sectors.

In his foreword to the Guidance, Master of the Rolls Sir Geoffrey Vos predicts that in the future every lawyer will need to be familiar with the blockchain and its key applications in cryptoassets and smart contracts. We agree.