Payments regulator in Treasury crosshairs as firms revolt

As the government hunts for ways to make Britain more competitive, the country’s payments regulator has become caught in the crosshairs.

A string of controversial decisions has given some of the sector’s major firms reason to argue the government should bring the Payment Systems Regulator (PSR) under the control of the UK’s main financial watchdog. And the Treasury is paying attention.

The companies include well-known fintechs and other financial institutions which together serve tens of millions of customers.

It follows heavy criticism of the PSR’s engagement with firms and progress in bolstering the global standing of Britain’s payments industry – issues which have also triggered clashes with ministers in recent months.

The PSR was legislated into existence in 2013 and launched two years later, following a series of government-led reviews calling for more competition and innovation in payments.

Key areas of supervision include card fees, technical infrastructure and scams. It directly regulates eight payment systems and sets rules affecting around 1,500 banks, fintechs and other companies that provide payment services.

The PSR is a subsidiary of the Financial Conduct Authority (FCA) and shares some operations, but by statute is an independent economic regulator.

However, after years of frustration, executives told City AM they have lost faith in the PSR’s efficiency and called for it to be merged with the FCA.

‘Redundant and unnecessary’

While the PSR has touted the fact that it is the world’s only dedicated regulator for payment systems, its overlaps with the FCA and Bank of England have drawn scrutiny from the financial industry and politicians.

A government-backed, independent review led by former Nationwide boss Joe Garner last year found Britain is “unusual in having such a wide range of specialised regulators” and that this created complexities for firms.

For example, the FCA is responsible for ensuring access to cash, but the reimbursement of online scams sits with the PSR. Meanwhile, Pay.UK, which operates Britain’s interbank payment systems, is overseen by both the PSR and Bank of England.

“You need the Bank for operational resilience, and you need the FCA to make sure consumers aren’t ripped off,” the head of a major payments institution said. “The PSR is a completely redundant and unnecessary regulator.”

They called the state of UK financial regulation “deeply dysfunctional” thanks to its fragmented nature. A source who regularly engages with the PSR said it “hasn’t delivered anything better to the industry”.

There “is a general hope” within the sector for the FCA to absorb the PSR, but this will likely happen “naturally” without the need for targeted lobbying, they added.

“It would be more straightforward to have a single regulator, and it would likely improve PSR decision making,” another industry official said. “But we shouldn’t assume that folding the PSR into the FCA is a panacea as the FCA is not perfect.”

The PSR’s independence has also created a “talent issue”, according to the source, who frequently deals with the three regulators.

They said: “Without being harsh, if you’re really good and want to work at a regulator, you go work at the Bank. If you’re pretty good, you go to the FCA.

“It’s quite tough to attract good talent to the PSR because they’re a small regulator, they’re nowhere near as prominent or public facing, anytime they’re in the press it’s usually for bad reasons with the industry slating them. You never get a sector slating the Bank of England.”

The PSR’s latest annual report shows it had 160 full-time employees in March, while regulating 43bn payments worth a combined £102 trillion last year.

Its headcount compares to around 4,700 at the FCA, with which it shares offices in Stratford, London. The FCA polices some 42,000 businesses.

One point of frustration shared by several sources was PSR staff’s perceived lack of experience working for payments businesses. “How can you tell me I have to do this and that if you do not understand the industry?” one said.

A fintech official said their company had not “really seen any of the people working on fraud policy having experience in first or second-line financial crime prevention”, which made it difficult to discuss the topic with the PSR.

A source close to the PSR said its staff had “a broad range of experience, skills and knowledge” that allowed it to deliver against its objectives.

In line with the Garner Review, the Bank of England, FCA and PSR have committed to revising their existing memorandum of understanding, which informs how they cooperate, by the second quarter of 2025.

Still, the PSR’s own rulebook and style of engagement have drawn further criticism.

In a letter seen by City AM, five members of the European Parliament wrote to the PSR earlier this month calling for it to review plans to reinstate caps on certain cross-border card fees after Brexit – warning they could hurt EU banks’ revenue.

Elsewhere, UK challenger banks have sounded the alarm over new rules that make them liable for refunding swathes of online scam victims.

Fraud revolt

The Labour government has publicly criticised financial regulators on several fronts as ministers crack the whip on a “secondary objective” introduced by the Conservatives last summer that requires them to facilitate the UK’s economic growth and competitiveness.

A person with knowledge of the matter said both ministers and backbench MPs have privately told firms they shared concerns over the PSR’s performance in recent months.

In November, Chancellor Rachel Reeves sent a first-of-its-kind payments “remit” letter to the FCA and PSR, officially telling the regulators how they should approach the growth mandate.

It called for “enhanced coordination” between the two agencies to reduce overlaps on areas like fraud, with this effort to be led by the FCA.

The move came after the PSR was hit by an avalanche of criticism and media coverage in the run-up to implementing a world-first scam reimbursement scheme in October.

It made payment firms liable for refunding victims of authorised push payment (APP) fraud up to a limit of £85,000 per claim and mostly within five working days, unless they can prove the customer acted with “gross negligence”.

“Fraud is a lot more central to the government’s mission,” said an official at one of Britain’s biggest fintechs, arguing that other contentious aspects of the PSR’s work had not attracted such scrutiny as they are more difficult to communicate to the general public.

“With the rules on fraud, they really topped it,” another source said. “It’s ridiculous what they’ve done. The trust is really diminished.”

Intense lobbying by fintechs and pressure from ministers, previously reported by City AM to include Reeves and City minister Tulip Siddiq, led to the PSR slashing the maximum refund limit from £415,000 in an 11th-hour U-turn.

But the industry remains concerned the rules put firms at risk of heavy losses and fail to hold technology companies liable for the surge of fraud stemming from social media platforms.

The PSR has promised an independent review of the scheme after 12 months, although the fintech official said they and others in the sector had asked for a much earlier assessment.

They said their firm, used by millions, remained worried by the PSR’s high bar for refusing compensation claims and the fact that not all companies under the regime have to use the same system for managing cases.

Regulators met with officials from banks, fintechs and trade bodies last week to discuss the scheme. An insider said firms warned they were being forced to refund cases where customers knowingly claimed compensation for legitimate transactions.

An executive from a large payment processor said the scheme “definitely has had an impact” and was slowing down activity through its platform, with banks taking longer to review high-value transactions like down payments on vehicles.

A source close to the PSR said it “engaged extensively with a range of stakeholders” ahead of implementing the rules, which they insisted “has gone smoothly”.

“Under previous leadership, they were not just insufficiently concerned with growth, but there were also competence problems at a day-to-day level,” former City minister Bim Afolami told City AM.

He is understood to have asked the PSR to consider a lower refund cap at the end of last year and publicly said the scheme had “significant problems” in May.

The following week, the PSR’s then managing director Chris Hemsley abruptly resigned. The regulator has said his departure was voluntary and unrelated to the controversy. He joined regulatory advisory firm Fingleton as a director in November.

On the prospect of merging the PSR, Afolami said the “problem is that the FCA already has a lot to do”. He called for the FCA to be split into two parts, managing wholesale and retail areas respectively.

The industry revolt saw representatives from less than a fifth of payments firms respond to a PSR questionnaire on their preparedness for the refund rules this summer.

“If you consult me for two years and then you do whatever you want and don’t care, then I won’t spend the time responding to you,” one of them said.

Government action

Last month, Labour unveiled a “National Payments Vision” originally pledged by the Conservatives. It backed Garner’s recommendations, noted slow progress in areas of payments regulation and assigned key responsibilities to the FCA instead of the PSR.

Among them, the government asked the FCA to be the UK’s regulator for open banking – which broadly refers to financial institutions sharing data to create new products. The technology can enable new routes for payments directly between bank accounts, bypassing card networks dominated by Visa and Mastercard.

While the government has requested the FCA work with the PSR on open banking, industry sources interpreted the move as a snub and pinned it on multiple complaints made by firms to the Treasury that the regulator has stifled competition in the space.

Labour hit out at the “slow” progress made by watchdogs on planning for a future regulatory regime, citing complaints from firms that engagement had been “challenging”.

“The whole thing has been very frustrating,” said one official from a large open banking firm, complaining about a lack of communication during and after industry consultations. They endorsed placing open banking entirely within the FCA’s remit.

The fintech official called the FCA’s new responsibility for managing overlaps between itself and the PSR “a severe weakening of the PSR and the beginning of the end of it”.

They argued the FCA’s more prominent role in cracking down on fraud “suggests where the long-term direction of travel is”.

Labour also made the case for “reform” at Pay.UK after finding that firms and the organisation itself were “frustrated” at its speed in delivering a “New Payments Architecture” – an industry proposal for a new system of interbank payments.

A PSR spokesperson said the regulator “strongly welcomes the National Payments Vision and engaged closely with government as it was developed”.

They added: “We are focused on delivering a future payments infrastructure that delivers competition and innovation, with world-leading protection on APP scams. We look forward to closely working with all partners, including the FCA, to deliver this crucial work.”

Leadership changes

The FCA is set to take a bigger role in the PSR’s activities going forward.

Rather than an internal candidate, David Geale, the FCA’s director of retail banking, was parachuted in to replace Hemsley – deepening ties between the two agencies. Geale had been on the PSR’s board since 2020.

Geale’s nine-month term as interim boss is due to end in March, after which the FCA will adjust the parameters of the role to align with the government’s vision.

A person with knowledge of the matter said the FCA will shortly begin recruitment for a new director of payments and digital assets who will also hold the position of permanent managing director of the PSR.

The FCA hopes “joining up the roles” will “foster greater alignment and strengthen relationships between the FCA and the PSR”, the person said.

An industry leader remarked: “For all intents and purposes, the PSR is now a division of the FCA – and jolly good thing too.”

An FCA spokesperson commented: “The PSR has a fundamental role in regulating payment systems. We look forward to continuing our close working relationship with them.”

Meanwhile, FCA chief executive Nikhil Rathi is reportedly expected to step down next October rather than seek a second five-year term, which could mean new leaders for both watchdogs next year.

The government has the power to reappoint or replace either of the regulators’ heads at the end of their terms and would have the final say on any fundamental changes to the FCA’s relationship with the PSR.

A Treasury spokesperson said: “We want to create a world-leading payments sector, driving growth through proportionate and effective regulation.”

“The PSR will continue to have an important role as the economic regulator of payments systems,” they added.