The Abolition of the Payment Systems Regulator, proposed changes to mortgage rules, and other updates for retail banks and payments firms

Financial Institutions 360: Payments and retail banking update

Read other sections of this edition of the Financial Institutions 360:

• Regulatory update
• Asset management update

Abolition of the Payment Systems Regulator

The Government announced on 12 March 2025 that it was planning to abolish the Payment Systems Regulatory (PSR) and absorb its functions into the FCA. A consultation on the new legislative framework will be published later this year.

In evidence given to the Treasury Committee on the same day, the chair of the PSR and the interim MD of the PSR gave evidence about how they expected the transfer of its functions. They expected that there would be an interim period which could last until late 2026, and that some functions may be transferred to the Bank of England.

Payments portfolio letter

On 3 February 2025, the FCA published a portfolio letter for payments firms, in which it sets out three key outcomes for firms, which it considers are essential to good customer outcomes:

1. Outcome 1: Effective competition and innovation to meet customers’ needs, characteristics and objectives. The FCA refers to its work on the Consumer Duty and the Innovation Hub, noting a sector-specific priority being the clarity of foreign exchange pricing in payment services.
2. Outcome 2: Firms do not compromise financial system integrity: Two priorities in this area are financial crime and operational resilience.
3. Outcome 3: Firms keep customers’ money safe: The FCA refers to the recent consultation on its proposed changes to safeguarding rules.

More generally, the FCA reminds payments firms of the importance of governance, oversight and leadership.

Other policy priorities for the FCA are Open Banking, including the development of the long-term regulatory framework, and Strong Customer Authentication.

Card scheme and processing fees

On 6 March 2025, the PSR published the final report of its market review into card scheme and processing fees. Among other things, it found that Mastercard and Visa are subject to ineffective competitive restraints in the supply of scheme and processing services to UK acquirers and merchants.

The firms have increased their core scheme and processing fees to acquirers by at least 25% since 2017, which has led to increased costs to businesses of at least £170m a year. The PSR also found that Mastercard and Visa have failed to provide sufficiently clear and detailed information on fees, which has created poor outcomes for acquirers and merchants.

Mortgages

On 7 March 2025 the FCA published a statement and a letter to the Treasury regarding next steps for mortgages, billed as part of the FCA’s work to simplify responsible lending and support home ownership. The FCA followed this up with further detail in its Feedback Statement FS 25/2 on the Consumer Duty and simplifying the rulebook. The FCA plans to:

• Launch a call for evidence on current and alternative approaches to stress testing.
• In May, consult on early ideas to simplify its rules, making it easier for consumers to remortgage with a new lender, discuss options outside of the regulated advice process, and reduce their mortgage term.
• In June, publish a discussion paper on the future of the mortgage market, covering topics including risk appetite and responsible risk-taking, alternative affordability testing and product innovation, lending into later life, and consumer information needs.
• Retire guidance where it overlaps with the requirements of the Consumer Duty.

On 30 January 2025, the FCA published a portfolio letter for mortgage intermediaries. The FCA highlights that its key focus area will be embedding the Consumer Duty. The other areas of supervisory focus are as follows:

• Quality of advice and unsuitable products – the FCA notes that the Consumer Duty requires firms not just to assess whether the customer meets the lending criteria but also to ensure that the advice process is designed to meet the needs, characteristics and financial objectives of the target group of customers. The FCA will be reviewing whether firms are carrying out sufficient assessment of customer circumstances, whether the advice given is suitable, customer understanding and the adequacy of firms’ systems and control and quality assurance procedure.
• High pressure selling and ancillary products – the FCA has found that some firms have a culture driven by sales targets, which can lead to consumer harm and breaches of the Consumer Duty.
• Excessive fees and fair value – the FCA refers to its recent work on good and poor practice in fair value assessments, and says it will continue to monitor fair value as part of their ongoing supervisory work.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2025