Law of unexpected consequences

12 January 2018

This article was featured in the February 2018 issue of the magazine.

Helen Hargreaves MSc FCIPPdip, CIPP associate director of policy and membership, alerts potential impact of new legislation

With eyes cast firmly on the forthcoming implementation of the General Data Protection Regulation on 25 May 2018, the Payment Services Regulations 2017 (‘the Regulations’) (http://bit.ly/2CwKgwB) have passed under the radar of most people.  The Regulations, which came into effect on 13 January 2018, could have a major impact. 

Potentially most affected are those payroll agents who make payments to HM Revenue & Customs (HMRC) on behalf of clients or those with international clients struggling to set up a pension scheme for their UK employees. However, as the legislation is so complex we encourage everyone to consider whether any of their business activities may now fall within its scope.

In 2009, the European Payment Services Directive (PSD) was introduced into the UK through the Payments Services Regulations 2009 (‘the 2009 Regulations’). The aim was to establish a Europe-wide legal framework for payment services by setting the information requirements and the respective rights and obligations of payment service providers (PSPs) and users.  It also introduced a new category of PSP, namely payment institutions, defined as providers of payment services unconnected to the taking of deposits or the issuing of electronic money by laying down authorisation requirements.

Although considered at the time to be forward-looking, many felt the PSD was ineffective when its provisions were applied to some of the more modern payment services that have been made available in the market since it came into effect – particularly in relation to online and mobile payments. When reviewing the PSD in 2012, the European Commission felt that it should be updated and consequently PSD2 was drafted to bring the original directive up to date with market developments and, where possible, to look to future-proof against any further developments in the payment industry.

PSD2 was approved by the European Parliament and Council in late 2015 and came into force in January 2016 requiring member states to implement the rules as national law by 13 January 2018. In the UK this has been achieved by the Regulations.  

 

...unexpected consequence for some payroll service providers...

 

There is an element of PSD2 which will, I am sure, be welcomed by most of us, and that is the outlawing of additional card charges on transactions. Dubbed ‘surcharging’, many businesses – including airlines and takeaway apps – charge customers to make payments by card; however, the Regulations mean this practice must now come to an end.   

Though introduced in part to help protect against fraud and possible abuses of payments, the Regulations have an unexpected consequence for some payroll service providers who may find they are inadvertently providing payment services within scope. Businesses that operate payment accounts or money remittance services may be required to be authorised or registered by the Financial Conduct Authority (FCA) to conduct payment services business.  

A ‘payment account’ is defined as “an account held in the name of one or more payment service users which is used for the execution of payment transactions”. Determining whether an account is a ‘payment account’ for the purposes of the Regulations is not a straightforward matter and several factors must be considered.  

Money remittance is defined as: "... a service for the transmission of money (or any representation of monetary value), without any payment accounts being created in the name of the payer or payee, where:

  •  funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee or to another payment service provider acting on behalf of the payee, or

  • funds are received on behalf of, and made available to, the payee".

The service of money remittance cannot therefore involve the creation of payment accounts. 

Money remittance is described as “a simple payment service that is usually based on cash provided by a payer to a [PSP], which remits the corresponding amount, for example, via communication network, to a payee or to another [PSP] acting on behalf of the payee”.  

Essentially, this suggests that if, as a PSP, you receive funds from your clients in respect of tax and National Insurance contributions which you pay into your bank account and then pay HMRC directly, you may be affected by these rules.  But there are several factors which may bring you in or take you out of scope.

Although HM Treasury and the FCA both say that the Regulations do not bring any additional requirements beyond those in the 2009 Regulations there are many payroll service providers unaware they must be registered or authorised by the FCA if they continue to make payments on behalf of their clients which fall within the scope of the Regulations.