The Financial Services and Markets Bill, APP Fraud and Crypto Assets

Nicola Sharp of Rahman Ravelli details the main parts of the Bill that is set to change the UK’s regulation of financial services.

The Financial Services and Markets Bill, which is currently in the report stage in the House of Lords, will usher in a series of notable changes to the regulation of the UK’s financial services sector if it becomes law. Authorised push payment (APP) fraud and crypto assets are two areas that are a particular focus for the Bill.

APP Fraud

Payment service providers (PSPs) are currently not liable for fraudulent payment transactions if they have carried out the transaction in accordance with the unique identifier (sort code and account number) that a customer gave them. This is due to regulation 90(1) of the Payment Service Regulations 2017 (PSRs 2017).

This, however, can lead to the situation where someone who is conned into sending money to the account of a fraudster has no way of seeking its return because it was they who provided the PSP with the bank account details and gave authorisation to make the payment.

Concerns have been voiced about this situation for a number of years, with many in the financial services industry saying there needs to be more protection for customers who fall victim to such fraud. This is now being tackled by section 68 (Liability of payment service providers for fraudulent transactions) of the Bill.

This proposes to amend regulation 90 so that the Payment Systems Regulator (PSR) – which oversees the payments industry – can act to make a PSP reimburse a victim of APP fraud where “(a) the case relates to a payment order executed over the Faster Payments Scheme, and (b) the payment order was executed subsequent to fraud or dishonesty”.

The Bill also requires the PSR to:

• Draft and consult on proposals for the reimbursing of fraudulent Faster Payments within two months of the Bill coming into force; and
• Impose those requirements for reimbursement within six months of the Bill coming into force.

These obligations led to the PSR producing a number of consultation papers focusing on this and related issues.

These included the September 2022 paper “CP22/4: Authorised push payment (APP) scams: Requiring reimbursement’’. This paper put forward the proposal that the sending PSP should be responsible for the reimbursement or money to all victims, except in some limited cases, but added that the cost can be allocated equally between the sending and receiving PSPs.

At this stage, this proposal will need to be reassessed as the House of Commons Treasury Committee opposed PSR’s plan to delegate the mandatory reimbursement to Pay.UK; which runs the UK’s retail payments operations. Three months later, the PSR paper CP22/5 contained measures to ensure increased transparency and more sharing of scam data between banks and building societies.

While much will obviously depend on the Bill becoming law, such papers do at least illustrate that the payments industry is responsive to the need to give APP fraud victims greater protection. If and when the Bill does become law, PSPs will have to assess how best to amend their procedures and allocate resources in order to both reduce the risk of APP fraud and ensure victims are reimbursed.

Crypto Assets

The Bill is notable in terms of crypto assets because it proposes extending the application of the current scope of Part 5 of the Banking Act 2009 to include payment systems using digital settlement assets.

This will bring activities facilitating the use of certain stablecoins within the scope of the Financial Conduct Authority (FCA), meaning that the current regulatory regime for more traditional, conventional financial instruments will apply. The Treasury will have the power to regulate certain stablecoins and to amend or end the use of current FCA or Prudential Regulation Authority (PRA) rules regarding financial stability to ensure stablecoin firms are not having to meet obligations that are at odds with each other.

The Bill could be seen as the UK’s equivalent to the European Union’s Markets in Crypto Assets regulation (MiCA), which looks set to come into force now that the European Parliament has endorsed it. The UK’s Bill is set to give clarity on the legal status of crypto assets, which is currently lacking. Such clarity will enable businesses in the crypto sector to function with greater certainty, particularly those who provide payment services that involve crypto assets or other digital settlement assets.

Conclusion

While it will certainly affect APP fraud and crypto (for the reasons mentioned), the Bill also covers other notable areas. The Bill’s proposal to create a new regime for critical third parties is a response to recommendations by both the Treasury Select Committee and the Bank of England’s Financial Policy Committee. Managing retained EU law, reform of the financial promotion framework and establishing a framework for the protection of easy access to cash are all covered by the Bill.

If, as expected, the Bill does become law this year, there is little doubt that it will have a significant effect on various aspects of the UK’s financial sector.