FCA Letter to the Chancellor on Competitiveness – What’s in it for Payments?

Keen followers of the political news will have seen that the Chancellor of the Exchequer recently held a meeting with the heads of UK regulatory bodies, urging them to remove barriers to economic growth and tasking them with creating a regulatory environment that boosts investment and innovation. It seems that the Chancellor was unimpressed with the response from the Competition and Markets Authority (CMA), resulting in Marcus Bokkerink, the Chairman of that body, leaving his job.

So, it might not be unreasonable to think that the Financial Conduct Authority (FCA) CEO, Nikhil Rathi, would have given his response to the Chancellor a lot of thought. First up, he says that in 2025 the FCA will, with the Payment Systems Regulator (PSR), introduce a new open banking payment method – variable recurring payments – increasing competition and choice. Readers with a good memory may recall that I wrote an article back in October 2021 on the CMA’s mandating of variable recurring payments (aka VRPs, because we do love an acronym in payments) for sweeping (CMA letter marks significant step forward for payments industry), so I might quibble with the use of the word “new” by Mr Rathi. However, depending on the limitations placed on its application by the FCA and PSR, this could prove real competition for Direct Debits and card payments, providing better control and transparency for consumers and improved payment processes for businesses. Potential use cases include automating savings and debt management, simplifying subscriptions and memberships and managing utility bills with flexibility. It is interesting to note that the PSR’s Strategy Update, also published this month, only mentions delivering on Phase 1 of VRPs for lower risk use cases (local government, utilities, regulated financial services), supporting industry-led delivery of a commercial model.

For existing firms, the letter says that the FCA will remove the need for a Consumer Duty Board Champion, now the Duty is in effect. While current Consumer Duty Board Champions (myself included) might be breathing a sigh of relief at this, I’m sure the FCA will be at pains to stress that there is still the need for appropriate governance, oversight and responsibility over Consumer Duty. So, while the formal title may go, the responsibility will remain.

Potential applicants for authorisation will be delighted to see the FCA state that they will extend pre-application support to all wholesale, payments and crypto firms. What the extent of this pre-application support will be is not set out, and I’m afraid anyone who thinks it will involve significant hand-holding is likely to be disappointed. That said, anything which helps firms to properly understand what the FCA expects in an application is to be welcomed.

In addition, the FCA says that it will “Indicate more frequently that we are ‘minded to approve’ promising start-ups to help them secure funding.” Again, this will be music to the ears of people involved in Fintech start-ups, all of whom presumably believe that their own project is “promising”. The key will be what the FCA sees as “promising”.

Linked to this, the letter notes that:

“Some innovative start-ups find it hard to meet all the threshold conditions immediately and therefore don't secure our approval to operate. We want to work with the Treasury to create a legislative framework that enables relevant firms to conduct limited regulated activities with streamlined conditions.”

Given that firms in the FCA’s Sandbox are often enabled to operate with limited permissions, it will be interesting to see which of the threshold conditions the FCA and HM Treasury believe there may be room for flexibility.

The letter indicates that, once authorised, the FCA will support more early and high growth firms, with 50% more dedicated supervisors. Again, “support” does not indicate hand-holding but more detailed supervision to ensure that the firms start off on the right, compliant, road.

In addition to the above, there are a couple of highly interesting things which Mr Rathi says they “could do”. The highest profile of these is the removal of the £100 limit for contactless transactions (much of the press comment has implied that this a fait accompli). As someone who worked on the ECB’s Forum on the Security of Retail Payments, which first came up with the requirement to place a limit on these transactions, this is something I feel real sense of ownership over. The limit was introduced as a fraud limitation measure along with the requirements to enter the PIN after five consecutive contactless transactions. It is notable that the letter does not mention removing the second of these precautions.

The letter explains that, drawing on US experience, removal of the limit would allow firms and customers greater flexibility, and levelling the playing field with digital wallets. Indeed, much of the social media comment on this proposal has indicated that the high level of use of Apple Pay and Google Pay (where there is no such limit) on their mobile phones amongst younger users means that they seldom carry physical payment cards anyway. However, there is a clear potential in this proposal for increased fraud by the theft of physical cards and it may be that card issuers will want to retain some kind of limit to combat this this potential.

On the AML front, the letter says that the FCA could, with Government support (so putting the ball back in the Chancellor’s court), reduce costs of anti-money laundering measures, relaxing know your customer requirements on small transactions. I can hear the cheers of many small money remitters and others as I type this, however, I would counsel caution. The fact that the FCA says it would require Government support for this action indicates that there is concern that it might open the door to more money laundering, so it seems that it may be nervous about going down that route.

So, if the FCA follows through with the actions outlined in Mr Rathi’s letter to Rachel Reeves, we could be in for a very interesting couple of years in payments, which will make a change!