Payment Services Regulations: Implications for third-party paymentsby
The CIPP’s Terri Bethel considers the repercussions the European Directive on payment services may have for payroll bureaux and accountants making payments on behalf of clients.
The Payment Services Regulations (2017) came into effect on 13 January 2018 and, while much has been said about the banning of credit card fees on transactions, there seems to be less awareness of the possible implications for payroll bureaux and agents making payments on behalf of clients.
The regulations require organisations that provide payment services to register with the Financial Conduct Authority (FCA), with various exceptions. Payments by unauthorised organisations are now illegal. What might this mean for bureaux and agents that make payroll payments to HMRC, pension payments to providers and so on, on behalf of their clients?
The European Directive on payment services in the internal market (2007/64/EC), known as PSD1, intended to establish a Europe-wide legal framework for payment services by setting out the rights and obligations of payment service users and providers and the corresponding information requirements. It defined ‘payment institutions’ as payment service providers unconnected to the taking of deposits or the issuing of electronic money by laying down authorisation requirements. It was implemented in the UK through the Payment Services Regulations (2009).
A second Directive was approved in 2015 (2015/2366/EU), known as PSD2, that updated and replaced the original one. PSD2 takes account of modern payment methods, such as online and mobile payments, and increases consumers’ protection against fraud and other abuses. It introduces the concept of “account information service providers” that provide online services of consolidated account information; such providers need to be registered with the FCA. The Directive has been implemented in the UK by the Payment Services Regulations (2017).
What is a payment service provider?
Whether payroll bureaux, agents and others providing payment services on behalf of clients fall within the scope of the regulations will depend on both the definition of a payments service provider (PSP) and the definition of payment services (see below).
A PSP is an organisation or individual who carries out payment services. There are various categories: Authorised Payment Institutions, Small Payment Institutions (SPIs), credit institutions, and so on. PSPs may be required to be authorised by the FCA before they can provide payment services.
As in the original regulations, SPIs can avoid some of the requirements of authorisation with the FCA by registering instead. There are various criteria for classification as an SPI, including monthly total transactions worth below €3m, not operating in other EU member states (‘passporting’) and being able to prove that people managing the business have not been convicted of any financial crimes.
What payment services are affected?
Payment services are any of the specified activities “when carried out as a regular occupation or business activity”, with certain exceptions.
The specified activities include (but are not limited to):
- services enabling cash to be placed on or withdrawn from a payment account (and operating a payment account)
- executing payment transactions (using direct debits, devices such as payment cards and mobile phones, and credit transfers such as standing orders) including funds transfers on a payment account with the user’s PSP or with another PSP, or where funds are covered by a credit line
- money remittances, which are defined as services for the transmission of money or monetary value without the creation of payment accounts.
There are many exceptions including, for example:
- transactions in cash with no intermediary
- transactions based on paper documents such as cheques, bankers’ drafts, paper vouchers and paper postal orders
- services provided by technical service providers who facilitate the provision of payment services without possessing the funds at any time.
Payroll and pension payments, by their very nature, represent a recurring payments requirement and therefore count as a payments service. They differ from a one-off payment that an accountant might make through their client money account, for example, a repayment of overpaid tax for a client.
Agents who collect payments from their clients and then pay HMRC, for example, through the agent’s bank account could be acting illegally if they are not authorised as a PSP or registered as an SPI with the FCA. This may affect the care sector in particular: cases have even been identified where local authorities are providing funds to agents to make payments to an individual who is in receipt of benefits so that their carers can be paid directly.
Businesses that suspect they may be affected by these regulations are advised to review the FCA Handbook and to seek specialist advice. If necessary, they must then register with or seek authorisation from the FCA. Note that failure to do so could lead to criminal sanctions and fines.
If affected payment services make up a small element of the business, such that the cost of registration or authorisation cannot be justified, the bureau or agent will have to adapt the services provided to ensure that they are no longer within the scope of the regulations. For example, where a bureau may have paid remittances to HMRC on behalf of its clients, its service may stop at the final calculation, requiring the clients to make the payment transaction themselves.
HM Treasury and the FCA both say that the revised regulations do not introduce any additional requirements than before. However, there may be many payroll and pensions service providers that are unaware of the need to be registered or authorised by the FCA if they fall within the scope of the regulations.
While the UK remains a member of the EU, the Government is obliged to implement European Directives. The exit negotiations will determine the extent to which arrangements will apply after the UK leaves the European Union. However, given the size of the financial services industry in the UK and its interconnectedness with the EU, it is perhaps unlikely that these regulations will be altered substantially in the future.