Bank of England Opens Up Access to Payment Schemes for FinTech Firms

by Latham & Watkins LLP

The Bank of England (BoE) announced on 19 July 2017 that it is extending direct access to its real-time gross settlement (RTGS) service to non-bank payment service providers (i.e., e-money institutions and payment service providers that do not have regulatory permissions to carry out the “core” banking activity of taking deposits), subject to appropriate safeguards.

For the first time, non-banks will be able to apply for a settlement account with the BoE, providing direct access to the UK’s sterling payment systems that settle in sterling central bank money, including Faster Payments, Bacs, CHAPS, LINK, Visa, and, once live, the new digital cheque imaging system.

This change to the BoE’s settlement account policy is part of a broader strategy to widen access to the UK’s payment systems, to help smooth the path for new entrants such as FinTech payment firms to compete on a more level playing field with incumbent banks. This is an important development for non-banks as, at present, non-bank payment service providers can only “plug in” to these essential BoE payment systems indirectly via settlement agent banks, limiting access and therefore the ability of non-banks to compete with their bank counterparts.

Many new businesses see the lack of direct access for non-banks as a barrier to entry, particularly as this can mean that non-banks are bound by the systems, service levels and general willingness of their competitors.

This BoE announcement follows the launch of the BoE’s blueprint for a new RTGS service, published on 9 May 2017 (see our related Client Alert). Through the new RTGS service, the BoE aims to deliver a materially stronger, more secure and flexible sterling settlement system that simultaneously promotes innovation and competition, bringing it up to date to provide a service suitable for the current and future payments landscape.

Who is eligible?

Authorised e-money institutions and payment institutions are now eligible to apply for settlement accounts in the RTGS. Payments businesses that are only registered (small e-money institutions and small payment institutions) are not eligible to apply.

However, although the BoE and the FCA are ready to receive and process applications now, access is dependent upon the finalisation of the framework allowing access by non-banks. In particular, the legislative changes required before non-bank payment service providers can join the RTGS are not expected to come into force until January 2018. This timing, combined with the rigour of the application process, means that the BoE does not expect the first non-bank payment service providers will join the RTGS until the second half of 2018.

What is required?

The FCA and HMRC (supervisors of non-bank payment service providers) have developed a strengthened supervisory regime for those wishing to apply for an RTGS settlement account. However, applications will first need to be reviewed by the relevant payment schemes and the BoE.

Each payment scheme has its own eligibility criteria for direct settling participants. Consequently, interested parties are advised to contact the relevant payment system operator to discuss the access requirements in the first instance, before making an application.

The BoE has designed special RTGS account arrangements for non-bank payment service providers (reflecting the fact that such firms will not become participants of the Sterling Monetary Framework). Before non-bank payment service providers can open a settlement account, they will need to demonstrate compliance with a new risk management framework developed by various stakeholders over the past year, and will be expected to meet the same strong protections and connectivity requirements already in place for existing RTGS account holders.

If non-bank payment service providers pass this initial review, they will then be referred onwards for a supervisory assessment by the FCA (and HMRC, where appropriate) to determine compliance with existing regulatory requirements, including those relating to financial crime, safeguarding of customer funds, and governance arrangements. It is expected that this assessment will take around three months, and will include an information request and follow-up visit. Successful applicants then will be subject to on-going strengthened supervisory oversight by the FCA (and HMRC, where appropriate); this likely will include requiring the firm to commission independent audits covering key risk areas.

The regulators expect that the process will take around a year from a firm formally submitting its application until its “go-live” date, but this will depend on various factors such as the firm’s technical preparedness and the availability of on-boarding slots at the BoE.

The BoE, the FCA and the major payment systems operators have published a guide on access to UK payment systems for non-bank payment service providers. This guide provides background about RTGS access and the requirements, plus an overview of the process to become a direct settling participant.

Concluding thoughts

The BoE’s announcement marks a significant step forward for non-bank payment service providers, who have thus far been denied direct access to this crucial infrastructure. Although the possibility of direct access will not serve as a panacea for all new payment firms seeking to grow in the sector, it demonstrates an important willingness by the UK regulators to try to open up markets to non-traditional providers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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