Author: James Borley, Director of Payment Services
HM Treasury’s Consultation Paper, Modernising Payment Services Regulation, is one of the most significant UK payments policy documents since the implementation of PSD2 through the Payment Services Regulations 2017 (PSRs). While some may have anticipated a wholesale redesign of the UK’s payments framework following Brexit, the consultation instead proposes a more measured approach: preserve what works, modernise what does not, and create sufficient flexibility to accommodate future developments in Open Banking, stablecoins, tokenisation and Artificial Intelligence.
The consultation suggests a Government seeking to balance innovation with regulatory certainty. It recognises that payments regulation designed around PSD2-era assumptions may not be well equipped for a world increasingly shaped by distributed ledger technology, tokenised assets, variable recurring payments, AI-enabled commerce and new forms of digital money (my often-used phrase “not in the contemplation of the legislators”).
The result is a consultation that is evolutionary rather than revolutionary. Yet some of its most interesting implications lie not necessarily in what is proposed, but in what is omitted.
A More FCA-Led Regulatory Framework
At the heart of the consultation is a proposal to reconsider the division of responsibility between legislation and regulation.
HM Treasury suggests that many of the detailed requirements currently contained within the PSRs and the Electronic Money Regulations 2011 (EMRs) could instead be delegated to the FCA, allowing the regulator to maintain requirements through the Handbook rather than relying on periodic legislative amendments. Core concepts, including the regulatory perimeter, key definitions and important consumer protections, would remain in legislation. More technical and operational provisions could migrate into FCA rules.
This follows the broader post-Brexit direction of travel across UK financial services: Parliament establishes the framework, regulators maintain the detailed rulebook.
There are obvious benefits. Payments markets evolve considerably faster than legislation. FCA rulemaking should enable more agile responses to technological developments, emerging risks and changing business models.
However, a framework that relies increasingly on regulator judgement and supervisory interpretation can create additional complexity, particularly for firms operating internationally.
The challenge for Treasury will be striking the right balance between agility and predictability.
Strong Customer Authentication: A Test Case
One practical example is the Government’s intention to remove the detailed legislative framework underpinning Strong Customer Authentication (SCA) and allow the FCA to implement a more outcomes-based regime.
This is a tacit acknowledgement that while SCA has contributed to fraud reduction, it has also introduced customer friction and operational burdens. A more flexible framework could allow the FCA to pursue the desired outcome, namely secure authentication, without being constrained by rules developed for a payments environment that is changing rapidly.
This proposal is indicative of the broader philosophy underpinning the consultation: fewer prescriptive legal requirements and greater regulatory flexibility.
Tokenised Payments go Mainstream
The consultation demonstrates a notable degree of enthusiasm for tokenised payments.
Treasury explicitly states its ambition to make the UK a global leader in tokenised deposits and stablecoin-enabled payment innovation. The potential benefits identified include reduced costs, greater efficiency, improved settlement and the development of programmable financial services.
The Government continues to apply the principle of “same risk, same regulatory outcome”. Tokenised deposits are intended to be regulated in a manner broadly consistent with traditional deposits where appropriate.
Similarly, certain UK-issued qualifying stablecoins would be treated as sufficiently “money-like” to operate within regulated payment chains, provided they satisfy the requirements of the UK’s new stablecoin framework.
Rather than viewing stablecoins solely through the lens of cryptoasset regulation, Treasury is actively considering their role within mainstream payment services.
Preparing for Agentic Commerce
One of the shortest sections of the consultation may ultimately prove one of the most important.
Treasury highlights the emergence of “agentic payments”, where AI agents could search for products, compare options, make purchasing decisions and execute payments on behalf of consumers or businesses.
This raises questions that existing frameworks were never designed to answer.
How should consent be evidenced when an AI agent initiates a transaction? How should liability be allocated? What constitutes authentication in an agentic environment?
The consultation offers no detailed solutions. However, the fact that these issues are already being considered suggests Treasury is attempting to future-proof the payments framework rather than merely updating it.
Open Banking Enters Its Second Phase
Perhaps surprisingly (to me at least), the longest and most detailed section of the consultation concerns Open Banking. Government continues to view account-to-account payments as a strategically important alternative to traditional card-based payment systems. Open Banking remains central to this ambition.
Treasury proposes a new statutory right of access to support Variable Recurring Payments (VRPs), enabling payment initiation service providers to establish mandates covering recurring payments with varying amounts and frequencies. If successful, VRPs could become one of Open Banking’s most transformative use cases, offering a credible alternative to card-on-file arrangements and direct debits.
Perhaps more importantly, the consultation finally addresses a longstanding question of who pays? Historically, access to Open Banking infrastructure has largely been provided free of charge. Treasury now proposes granting the FCA powers to facilitate commercial charging arrangements and establish pricing guardrails where appropriate. This reflects a growing recognition that Open Banking requires a sustainable commercial model if it is to scale successfully.
The consultation also confirms plans for the Future Entity to replace Open Banking Limited as the long-term standards-setting body, operating under FCA oversight with responsibility for standards, governance and operational coordination.
These proposals collectively represent the transition of Open Banking from a competition remedy to permanent financial market infrastructure.
The Forgotten 2023 Review
One curious feature of the consultation is the absence of any meaningful reference to HM Treasury’s 2023 Payment Services Regulations Review and Call for Evidence. That exercise was presented as the starting point for a broader reconsideration of the UK’s post-Brexit payments framework and sought views on many of the same issues now being revisited, including the future regulatory architecture, the distinction between payment institutions and e-money institutions, perimeter questions and the future role of the FCA.
Yet the current consultation is largely without reference to the conclusions of that exercise. Treasury has not explained how stakeholder responses informed its thinking, nor has it explicitly linked the current proposals to the earlier review.
This omission is notable because the 2023 exercise was itself framed as a post-Brexit opportunity to tailor payments regulation to UK priorities rather than inherited EU legislation. Industry participants may reasonably ask what became of those discussions and why some topics have advanced while others appear to have faded from view. Surely a change in Government cannot be the reason?
Streamlining Payment Services: Less Ambitious Than Expected
The consultation is also surprisingly cautious regarding simplification of the regulated activities framework itself.
The 2023 Call for Evidence specifically invited views on whether distinctions between payment institutions and Electronic Money Institutions (EMIs) remained necessary and whether aspects of the payments regime could be rationalised.
Many firms expected the current consultation to revisit the statutory list of regulated payment services and consider whether a framework designed around PSD2 remains appropriate.
Instead, Treasury appears largely content to retain the existing activity structure. The familiar categories remain, although (finally) we now see the amalgamation of placing/withdrawing of funds within a single ‘payment account’ service and, conversely, the separation of acquiring from issuing payment instruments.
While Treasury devotes considerable attention to tokenised deposits, stablecoins, Open Banking and AI-powered payments, it does not propose a fundamental redesign of the underlying payments taxonomy.
Indeed, the consultation appears focused on fitting new technologies into the existing framework rather than redesigning the framework itself. Stablecoins are brought within the payments perimeter. Open Banking definitions may be adjusted. New payment models are accommodated. But the basic list of regulated payment services remains largely familiar. The question of whether the EMRs will be absorbed into the PSRs (with ‘issuing electronic money’ becoming a payment service) is, however, not explicitly asked, let alone answered.
This may reflect a conscious desire to avoid disruption. Rewriting the list of regulated payment services would have significant implications for permissions, authorisations, contracts and supervisory processes. Nevertheless, it suggests Treasury is preparing for programmable money and agentic commerce while continuing to rely on a regulatory architecture originally designed for card payments, bank transfers and online account access.
Financial Crime and Individual Accountability
The consultation also reflects growing concern regarding financial crime risks.
Treasury notes that the expansion and increasing complexity of the payments sector has created new vulnerabilities and seeks views on whether enhanced accountability arrangements may be appropriate, including additional responsibilities for senior managers.
The FCA has consistently highlighted weaknesses in governance, safeguarding and financial crime controls across parts of the sector. It is therefore unsurprising that Treasury is probing industry views on accountability.
What is more interesting is what the consultation does not propose.
The Dog That Didn’t Bark: No Migration into FSMA
Perhaps the most intriguing omission (for me, at least) is the absence of any proposal to bring payments fully into the Financial Services and Markets Act (FSMA) framework.
Instead, the PSRs and EMRs are retained as distinct legislative regimes, albeit with greater FCA rulemaking powers.
There are understandable reasons for this.
Payment institutions differ fundamentally from banks. They generally do not accept deposits and rely upon safeguarding rather than depositor protection. A bespoke framework may therefore remain appropriate, although this is one of the weaker arguments for this, given the breadth of the Regulated Activities Order (both current and future).
More persuasively, a wholesale migration into FSMA would have imposed substantial cost and complexity on almost 1,200 authorised and registered firms.
Yet there is also a paradox. While Treasury is not formally bringing payment firms within FSMA, the proposed architecture increasingly resembles the FSMA model. Core provisions remain in legislation while detailed requirements migrate to the FCA. In effect, payments regulation may be becoming more FSMA-like without actually becoming part of FSMA.
The Consequential Omissions: SM&CR and FSCS
The decision not to migrate payment firms into the FSMA framework has important consequences.
Most notably, and despite years of dangling that particular carrot (or should it be sword?), the consultation contains no proposal to extend the Senior Managers and Certification Regime (SM&CR) to payment firms. While enhanced accountability is discussed, Treasury stops well short of proposing the full accountability framework. However, our advice to payments firms has always been that adoption of an SM&CR approach should nevertheless be seen as ‘best practice’.
Similarly, there is no discussion of Financial Services Compensation Scheme (FSCS) protection.
As payment firms increasingly offer products that resemble bank accounts, questions continue to arise regarding consumer understanding of the distinction between safeguarded funds and FSCS-protected deposits (and notwithstanding the FCA’s role a guardian of ‘Sensitive Business Names’).
The consultation leaves this distinction intact. Customer protection continues to rely on safeguarding arrangements and insolvency protections rather than compensation schemes.
Read-Across to PSD3
The consultation demonstrates clear awareness of developments in Europe, including PSD3 and the proposed Payment Services Regulation. Treasury expressly invites views on international developments and recognises the importance of maintaining the UK’s position within SEPA.
There are areas of obvious convergence:
- greater focus on fraud prevention;
- Open Banking reform;
- stronger oversight of payment firms;
- adaptation to new technologies; and
- enhanced consumer protection.
However, important differences are emerging.
The UK appears more willing to embrace regulator-led rulemaking, outcomes-based supervision and rapid adaptation. The EU continues to favour highly detailed legislative frameworks.
The UK also appears significantly more focused on integrating stablecoins and tokenised money into mainstream payment regulation.
That said, commercial reality will constrain divergence. Many firms operate across both jurisdictions, and excessive regulatory fragmentation would increase cost and complexity.
Conclusion
HM Treasury’s consultation is ultimately less about rewriting the payments rulebook than creating a framework capable of continuous adaptation.
The major themes are clear: greater FCA responsibility, support for Open Banking commercialisation, accommodation of tokenised payments, preparation for AI-enabled commerce and enhanced focus on financial crime risks.
Yet some of the most important messages lie between the lines.
The Government has chosen not to fold payments regulation into FSMA. It has chosen not to extend SM&CR. It has chosen not to revisit FSCS protection. And, despite earlier discussions dating back to the 2023 Call for Evidence, it has chosen not to undertake a wholesale restructuring of either the institutional framework or the underlying list of regulated payment services.
Instead, Treasury has opted for targeted reform built upon the existing architecture. Whether that approach proves sufficient as payments become increasingly tokenised, automated and AI-driven remains to be seen. For now, however, it seems the future of UK payments regulation will be shaped by evolution, not revolution.
How Can Complyport Help?
As the UK payment services regulatory framework evolves, firms should begin preparing for changes that may arise from increased FCA rulemaking, developments in Open Banking, stablecoins, AI-enabled payments and enhanced governance expectations. Whether you are an established payment institution, an EMI or an innovative fintech, early preparation can help minimise disruption and ensure ongoing compliance.
Complyport provides practical, expert support to firms navigating regulatory change, including:
- FCA Authorisations and Variations of Permission – Assisting firms seeking authorisation as Payment Institutions, EMIs or firms requiring changes to their existing permissions.
- Compliance Health Checks and Gap Analysis – Reviewing existing compliance frameworks against evolving FCA expectations, identifying regulatory gaps and recommending practical improvements.
- Safeguarding and Prudential Compliance – Advising payment and e-money firms on safeguarding arrangements, prudential requirements, client money controls and operational resilience.
- Financial Crime and AML Advisory – Enhancing Anti-Money Laundering, Counter-Terrorist Financing, sanctions and fraud prevention frameworks to meet increasing regulatory scrutiny.
- Open Banking and Payment Services Compliance – Providing regulatory advice on Open Banking, Payment Initiation Services, Account Information Services, Variable Recurring Payments and emerging payment models.
- Training and Regulatory Horizon Scanning – Delivering tailored training and keeping firms informed of forthcoming regulatory developments to help them prepare proactively for change.
If you would like to understand how HM Treasury’s proposed reforms could affect your business, contact Complyport today to arrange a meeting with one of our Subject Matter Experts.
