The payment industry has experienced impressive growth in recent years, driven by technological advancements, shifting consumer preferences, and the rapid rise of e-commerce. The global payments market is expected to reach an astounding $8.94 trillion by 2027 (Grand View Research, 2020).

In the UK alone, the total value of payments processed in 2020 reached £94.7 trillion, with over 46 billion transactions (UK Finance, 2021). Moreover, the number of payment firms operating in the UK has increased by 53% between 2015 and 2021 (FCA, 2021). However, this expansion has also led to a complex landscape of regulatory and accounting requirements, creating a unique environment for start-ups, scale-up businesses, or large enterprises to evolve and grow within.

A Payment Service Provider (PSP) is a company that offers various payment-related services, such as facilitating electronic transactions, processing credit and debit card payments, and providing digital wallets for customers. PSPs play a crucial role in the UK’s payment ecosystem and are subject to a multitude of regulatory and accounting requirements. These requirements ensure the security, transparency, and reliability of payment services for both consumers and businesses.

Example Ecosystem: Card Payments

Regulatory Matters in the UK Payment Industry:

• Ensuring compliance with Financial Conduct Authority (“FCA”) requirements: The FCA requires PSP to be registered and authorised. This puts them under the compliance umbrella and results in several regulatory requirements. These requirements include monitoring transactions for fraud, conducting due diligence on customers and suspicious activity, and ensuring that customer funds are protected. In a recent letter addressed to CEOs, the FCA has expressed concerns regarding the financial promotions of Buy Now Pay Later (“BNPL”) agreements. The regulator has emphasized the need for firms to ensure that their promotions are fair, clear, and not misleading, as well as highlighting the risks associated with BNPL products (FCA, 2023). Example: In 2021, the FCA imposed a £4.7 million fine on Clearpay, a BNPL provider, for multiple regulatory breaches in the UK including non-compliance with financial promotion rules (FCA, 2021).
• Safeguarding client funds: PSPs in the UK are required to safeguard client funds in accordance with the FCA’s Client Assets Sourcebook (CASS) rules. This involves segregating client money from the firm’s own funds and holding it in designated client bank accounts. Another example is in 2017, when the FCA fined Linear Investments Limited £409,300 for failing to implement adequate risk management systems related to the safeguarding of client assets in the UK (FCA, 2017).
• Adhering to data protection and privacy regulations: The UK payment industry is subject to data protection and privacy regulations, including the UK General Data Protection Regulation (“GDPR”) and the Data Protection Act 2018. Businesses need to demonstrate their commitment to safeguarding customer information, which can help attract and retain clients. For instance, in 2018, the ICO imposed a £500,000 penalty on Equifax Ltd for their failure to safeguard the personal data of as many as 15 million UK residents during a 2017 cyber-attack (ICO, 2018).
• Reconciliation and record-keeping: CASS require UK-based PSPs to maintain accurate records of client money and perform regular reconciliations to ensure that client funds are properly safeguarded. Adequate record-keeping and reconciliation processes protect against client money shortfalls and regulatory breaches.

True and Fair Accounting

Finance is the backbone of any business. PSPs face several accounting challenges, including revenue recognition, tax, financial reporting, and audit requirements, as well as mergers and acquisitions. Addressing these challenges is essential for PSPs to ensure accurate financial reporting. Having accurate and updated numbers shows investor confidence.

• Revenue recognition: With the diversity of revenue streams in the payment industry, such as transaction fees, subscription fees, and interchange fees, PSPs face challenges in recognizing revenue in accordance with the International Financial Reporting Standards (IFRS) and the UK Generally Accepted Accounting Principles (UK GAAP). Proper revenue recognition is crucial to ensure accurate financial reporting and to meet the expectations of investors and other stakeholders.
• Mergers and acquisitions: As the payment industry continues to grow and consolidate, PSPs may engage in mergers and acquisitions (M&A) to expand their market share or diversify their product offerings. Proper accounting for M&A transactions, including the valuation of acquired assets and liabilities, is vital for providing an accurate financial picture of the combined entity.

What do firms need to do to address these requirements?

1. Onboard a compliance advisor: Engaging a knowledgeable compliance advisor can provide valuable support in ensuring compliance with FCA rules and other relevant regulations. A good advisor will help PSPs stay informed about regulatory updates and assist in implementing the necessary processes and controls to safeguard their businesses.
2. Working with Auditors: By partnering with seasoned auditors, PSPs can ensure that their systems and processes are regularly reviewed, thus enabling the timely detection and remediation of any issues related to client money safeguarding.
3. Conduct an annual safeguarding audit: PSPs are required to have an annual safeguarding audit, which assesses the effectiveness of their client money safeguarding processes and ensures compliance with CASS rules. The auditor’s reports act as assurance for healthy business practice and help identify areas for improvement.
4. Assist in implementing and monitoring internal controls: An auditor can provide guidance on establishing a robust internal control framework that helps identify, assess, and manage compliance risks. They can also support ongoing monitoring and evaluation of the effectiveness of these controls.
5. Provide advice on regulatory reporting: Auditors can help PSPs understand their reporting obligations and ensure that accurate and timely reports are submitted to relevant authorities, such as the FCA, HMRC, and Companies House.
6. Support during mergers and acquisitions (M&A): As the payment industry continues to grow and consolidate, auditors can assist PSPs in M&A transactions including the valuation of acquired assets and liabilities, and ensuring that the combined entity adheres to the regulatory and accounting requirements.
7. Offer guidance on tax compliance: Auditors can support PSPs in navigating the complex tax landscape, including corporation tax, value-added tax (VAT), and other indirect taxes. They can help ensure compliance with tax regulations, optimize the company’s tax position, and minimize potential liabilities.
8. Train staff on regulatory and accounting matters: Auditors can provide training sessions for employees, helping them stay informed about the latest regulatory requirements, CASS rules, and best practices for compliance. This can contribute to a strong compliance culture within the organisation.

How haysmacintyre can help

haysmacintyre has extensive experience working with payment service providers and understands the unique challenges they face. Our team of experts can provide accounting, auditing, assurance, tax advisory and bespoke regulatory and transaction services with global support to help PSPs navigate regulatory, CASS, and accounting matters. Should you have any questions please do not hesitate to contact Rishabh Bhagat at rbhagat@haysmacintyre.com