Author: James Borley, Director of Payment Services
A key element of any successful FCA application is ensuring that the permission profile accurately reflects the firm’s proposed activities. Getting the regulatory perimeter right is critical. As highlighted in our recent Complyport article on regulatory perimeter considerations, requesting the correct permission at the outset can prevent costly delays and supervisory challenge later.
However, this is often easier said than done. Over time, UK legislation and regulatory guidance have, in certain areas, diverged from the original policy intent. Nowhere is this more apparent than in the interpretation of the “payment account” payment service under the Payment Services Regulations 2017 (PSRs 2017).
In this article, we examine the source legislation and how it is currently interpreted in the UK.
The Legislative Framework
The first Payment Services Directive (PSD1) was a European Single Market Directive designed to increase competition and participation in the payments industry, which had historically been dominated by credit institutions (banks). PSD1 came into effect in 2009 and introduced a new category of regulated firm: the payment institution. These firms became subject to both prudential and conduct requirements.
In the UK, PSD1 was implemented through the Payment Services Regulations 2009 (PSRs 2009). This regime operated separately from the framework applicable to banks, which are authorised under the Financial Services and Markets Act 2000 (FSMA) to carry on regulated activities specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). For banks, the regulated activity of “accepting deposits” encompasses the provision of payment services.
Responsibility for supervising payment institutions was given to the Financial Services Authority (FSA), whose functions were subsequently transferred to the Financial Conduct Authority (FCA).
Following the introduction of PSD2, the UK implemented the revised regime through the Payment Services Regulations 2017 (PSRs 2017), which replaced the PSRs 2009. Schedule 1, Part 1 of the PSRs 2017 sets out the payment services that authorised and small payment institutions may provide.
In addition to the legislation, the FCA has published complementary guidance in:
- Chapter 15 of the Perimeter Guidance Manual (PERG 15); and
- The FCA’s Payment Services and Electronic Money – Our Approach document (the “Approach Document”).
Payment Accounts – A Clearly Understood Term?
Schedule 1, Part 1 of the PSRs 2017 lists the following payment services:
- Services enabling cash to be placed on a payment account and all of the operations required for operating a payment account; and
- Services enabling cash withdrawals from a payment account and all of the operations required for operating a payment account.
So far, so good. Next, we turn to the actual definition of ‘payment account’, which is defined in regulation 2 of the PSRs 2017 as “an account held in the name of one or more payment service users which is used for the execution of payment transactions”.
In PERG 15.2 Q.16, the FCA states:
“When determining whether or not an account is a “payment account” for the purposes of the regulations, in our view it is also appropriate to focus on its underlying purpose. To establish this it is necessary to consider a number of factors including:
- the purpose for which the account is designed and held out;
- the functionality of the account (the greater the scope for carrying out payment transactions on the account, the more likely it is to be a payment account);
- restrictive features relating to the account (for example, an account that has notice periods for withdrawals, or reduced interest rates if withdrawals are made, may be less likely to be a payment account);
- a limited ability to place and withdraw funds unless there is additional intervention or agreement from the payment service provider (this will tend to point more towards the account not being a payment account); and
- the extent to which customers use an account’s payment service functionality in practice.”
For How Long Can Funds Be Held on a Payment Account?
So, the FCA is clear that funds placed on a payment account, whether received directly from the payment services user of from a third party, are expected to be used to make a payment. However, the FCA currently takes the narrow view that payment accounts operated by payment institutions can only hold funds if they are allocated to a specific future-dated payment. Importantly, however, there is no published specification as to how long funds may be held on a payment account before they must be sent to a payee or returned to the payer.
In support of this restriction, the FCA points to regulation 33 in the PSRs 2017, which says:
“Any payment account held by an authorised payment institution or a small payment institution must be used only in relation to payment transactions” [my emphasis]. A payment transaction may constitute either a credit to or withdrawal from that account.
The FCA’s interpretation of this provision is set out in PERG 15.2 Q5. The FCA states: “Our view is that this means that a payment institution cannot hold funds for a payment service user unless accompanied by a payment order for onward transfer (whether to be executed immediately or on a future date). Funds cannot be held indefinitely. They should not be held for longer than is necessary for operational and technical reasons.”
It is important to emphasise that this reflects the FCA’s supervisory view rather than an explicit statutory time limit in the legislation itself. The PSRs 2017 do not prescribe a defined maximum holding period.
In supervisory discussions, firms have reported differing interpretations as to what constitutes an acceptable timeframe for “operational and technical reasons”, with informal indications ranging from a matter of days to several weeks. However, no formal published timeframe exists.
By contrast, in response to a European Banking Authority (EBA) Single Rulebook Q&A concerning the corresponding PSD2 provision underpinning Regulation 33, the EBA stated:
“A payment institution may hold clients’ funds on payment accounts for the purpose of providing payment services, including the execution of not yet specified future payment transactions, in accordance with the framework contract for setting up the referred payment account.”
The EBA answer was published on 12 March 2021, after Brexit, but this does mean that the FCA’s position is much more restrictive on the activities of payment institutions than elsewhere in the European Union (EU), despite its implementation while the UK was still an EU member. This was also reinforced by my own survey of former colleagues at various EU competent authorities: when asked “for how long you would allow a payment institution to hold funds on a payment account?”. The answer was the same: indefinitely.
Hope for the Future?
In 2023, HM Treasury launched a Call for Input on the future of the UK payments regulatory framework, including the PSRs 2017. Among the issues raised by industry participants was whether greater clarity is needed regarding the concept of a payment account and the permissible holding of funds.
Although progress on reform has been measured, future legislative amendments and the National Payments Vision may revisit:
- The interaction between the PSRs 2017 and the Electronic Money Regulations 2011;
- Combining the two parts of the ‘payment account’ service;
- Whether the existing legislation should be consolidated into FSMA; and
- Whether clearer statutory parameters should be introduced regarding holding periods.
Until such reforms materialise, firms must operate in accordance with the FCA’s published guidance and supervisory expectations.
How Complyport Can Help
Managing the regulatory perimeter between payment institutions, electronic money institutions and credit institutions requires careful analysis of legislation, FCA guidance and supervisory practice.
Complyport supports firms with:
- FCA authorisation applications for payment institutions and electronic money institutions;
- Regulatory perimeter analysis and permission scoping;
- Drafting of customer terms and safeguarding frameworks;
- Compliance health checks and gap analyses; and
- Ongoing regulatory advisory support.
If you are considering applying for authorisation, varying your permissions or reassessing your business model in light of the FCA’s interpretation of payment accounts, our Subject Matter Experts can assist.
Contact Complyport today to arrange a meeting and discuss how we can support your regulatory journey.
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