UK's Payment Regulations – What You Need to Know About PSPs, EMIs, DLT, Cryptoassets and Stablecoins
An overview of the payments ecosystem in the UK and an explanation of how DANIEL — and the different service provider types — fit into this framework.
As the world of payments continues to evolve and become more complex, understanding payment regulations in the UK — and how they apply to different institutions and rails — is essential for anyone looking to use or provide payment services. The Financial Conduct Authority (FCA) is responsible for regulating firms providing certain payment services in the UK. These regulated institutions include Payment Service Providers (PSPs), Electronic Money Institutions (EMIs) and traditional institutions such as banks and building societies.
The increased popularity of the use of cryptoassets, Distributed Ledger Technology (DLT), and stablecoins in the financial sector have brought some activities into the scope of the UK regulatory regime. This is, however, in its infancy and is currently heavily focused on cryptoasset activity.
These regulated activities and emerging technologies are already starting to interact, such as in DANIEL’s cross-border payment solution for Businesses, therefore clarity is required to understand how these interact from a regulatory perspective.
Payment Service Providers
The Payments Services Regulations 2017 (PSRs) established a new category of authorised financial institutions, known as Payment Service Providers (PSPs) in the UK.
PSPs must be authorised and regulated by the Financial Conduct Authority (FCA) to offer any of the regulated payment services listed in the PSRs, including depositing cash into payment accounts; withdrawing from payment accounts; executing payments via direct debits, credit transfers, payment cards or similar devices; issuing payment instruments; acquiring payment transactions; money remittance; providing account information services or initiating payments.
Cross-border payments are also covered within the scope of these regulations.
Electronic Money Institutions
Electronic Money Institutions (EMIs) are companies authorised and regulated by the FCA to issue e-money and are subject to the Electronic Money Regulations 2011 (EMRs) as well as the PSRs. Put simply, e-money is a digital monetary medium able to be exchanged that is held on an electronic device such as a card or in an online account.
EMIs are different to traditional institutions such as credit institutions, banks, building societies, credit unions or municipal banks that require additional registration and authorisation under the Financial Services and Markets Act 2000 (FSMA) and supervision by both the FCA and Prudential Regulation Authority (PRA).
An EMI is permitted to offer the same payment services as a PSP, however, a PSP cannot provide the same level of service as an EMI e.g. PSPs are not able to allow a customer to hold balances in their account not directly associated with a specific payment instruction.
EMIs are also required to hold all customer funds in special segregated safeguarded accounts, meaning those “electronic” fund balances are backed by real money which is not able to be used by the EMI for any other purpose (e.g. operationally).
Therefore, EMIs provide a secure way for customers to hold balances, as well as make cross-border, domestic and peer-to-peer payments.
Distributed Ledger Technology (DLT), Cryptoassets and Stablecoin
DLT is not currently regulated in the UK as it is seen as a new technology with a variety of use cases, nor are stablecoins, however, the government has announced that they will explore development and possible regulation soon.
The FCA does currently require firms who provide certain cryptoasset activity to register for supervision under the UK’s Anti-Money Laundering regime.
Money transmission is within the scope of the PSRs and EMRs in the UK. PSRs require the use of funds, therefore cryptoassets are out of scope as they are not considered funds. EMRs may apply if within the definition of e-money tokens.
For more information on the regulation of these technologies read our blog post “What to expect from upcoming cryptoasset regulations".
Regulation of Payment Rails
A payment rail is a platform or network allowing digital money transfers to be made between a payer and recipient utilising different countries, currencies and digital payment methods.
Globally, financial institutions are connected by different payment rails which allow them to send and receive the payments made by their customers.
In the UK, the most common payment rails include:
- Card payment rails – these allow a customer to make a payment using their debit or credit card information using an independent network operated by companies such as Visa, Mastercard and American Express
- SWIFT - Society for Worldwide Interbank Financial Telecommunication (SWIFT) is an international member-owned cooperative society that enables secure international payments between financial institutions.
- SEPA - The Single Euro Payments Area (SEPA) enables users in the European Economic Area (EEA) to make cross-border payments in any member state using bank account information
- FPS – Faster Payments System (FPS) facilitates real-time payments between users within the UK within the limits set by individual Financial Institutions
- DLT – Distributed Ledger Technology (DLT) is a relatively new alternative to traditional payment rails, utilising a decentralised database of records (e.g. transactions) managed by various participants to exchange digital currencies (e.g. stablecoins) on the network. As these records are immutable and cryptographically secured, this allows for a cheaper, faster, more secure and transparent way to make cross-border payments
Rails such as SWIFT are not payment or settlement systems, so they aren’t required to be regulated, rather, they are subject to central bank oversight as they are a critical service.
These platforms will individually set eligibility criteria for their users and require continued compliance with these in addition to local rules and regulations. Risk-based processes are also in place to monitor users on an ongoing basis and users can be disconnected if they breach requirements (e.g. sanctions legislation).
Overall, Payments Regulation in the UK is complex and constantly evolving. Financial Institutions such as Payment Service Providers and Electronic Money Institutions are subject to different rules and regulations that must be understood to ensure compliance with them.
Payment rails are currently not regulated, but an organisation must have the correct regulatory permissions to perform specific activities (such as payments) and comply with the requirements of the particular network. This means a regulated EMI is able to take advantage of alternate payment rails such as Distributed Ledger Technology without having to change or enhance their regulatory permissions, as long as the transaction type or activity itself is within the scope of their approval.