UK Tightens Payment Company Regulations Starting May 2026

UK Financial Watchdog Tightens Rules for Payment & E-Money Firms to Protect customer Funds

London, UK – The Financial Conduct Authority (FCA) announced Thursday it will implement stricter regulations for electronic payment and electronic money institutions, effective May 2026, aimed at bolstering customer fund protection and enhancing sector stability.

the reforms, initially proposed in September 2023, mandate that firms segregate customer funds from their own accounts. This crucial step ensures that user money remains accessible even in the event of a company’s insolvency.

The FCA’s decision follows a dramatic five-fold increase in the use of online payments and e-money accounts between 2017 and 2022, often replacing traditional banking services. This surge in popularity has concurrently exposed millions of consumers to heightened risks, particularly concerning the safeguarding of their funds.

“People depend on payment companies to manage their finances. Though, too frequently enough, customers are left without their money when these firms fail,” stated Matthew Long, Director of Payments and Digital Assets at the FCA. “We will closely monitor firms’ progress in implementing these necessary improvements.”

Key Requirements of the New Rules:

Under the new regulatory framework, larger payment and electronic money institutions will be required to submit monthly reports detailing data protection measures and undergo annual self-reliant audits. Furthermore, daily reconciliation checks will be mandatory to guarantee the secure protection of customer funds. These rules apply to payment institutions, electronic money institutions (EMIs), and credit unions issuing electronic money.

FCA data reveals a concerning trend: between 2018 and mid-2023, bankrupt payment companies exhibited an average shortfall of 65% in protected customer funds.

The proclamation arrives shortly after Argentex, a London-based currency exchange broker and EMI since 2018, entered governance in July due to liquidity issues and market volatility.

Industry Response:

While the sector generally welcomes the increased regulatory oversight, calls for a proportionate approach have been made.

UK Finance, a leading financial industry body, expressed support for stronger protection standards but emphasized the need for balance. “Finding the right balance requires practical, proportionate, and internationally competitive rules,” a spokesperson said. “It’s vital to assess the impact of these changes before considering further tightening of regulations.”

The FCA has affirmed its commitment to monitoring implementation and evaluating the need for additional regulatory interventions in the future.

What specific steps should a PSP take to enhance its Customer due Diligence (CDD) processes to meet the stricter requirements coming into effect in May 2026?

Understanding the Regulatory shift

Starting May 2026, the United Kingdom is implementing significant changes to its regulations governing payment companies. These updates, driven by evolving financial crime risks adn the rapid growth of fintech, aim to bolster the integrity of the UK’s financial system. This article breaks down the key changes, their impact on payment service providers (PSPs), and how businesses can prepare.Key terms to understand include payment regulations UK, financial compliance, and PSP licensing.

Key Changes to UK Payment Regulations

The regulatory overhaul focuses on several core areas. These changes are largely influenced by recommendations from bodies like the Financial Conduct Authority (FCA) and aim to align the UK with international standards.

Stronger Customer Due Diligence (CDD): Enhanced CDD requirements will be enforced, demanding more rigorous identity verification and ongoing monitoring of customer transactions. This includes stricter scrutiny of politically exposed persons (peps) and beneficial ownership facts. Expect increased focus on KYC compliance (Know Your Customer).

Transaction Monitoring Enhancements: PSPs will need to implement more elegant transaction monitoring systems capable of detecting and reporting suspicious activity in real-time. This goes beyond basic fraud detection to include identifying patterns indicative of money laundering or terrorist financing. AML compliance (Anti-money Laundering) is paramount.

Increased reporting Obligations: The FCA is expanding the scope and frequency of regulatory reporting requirements. psps will be required to submit more detailed data on transactions, customer activity, and risk assessments. This includes reporting to the National Crime Agency (NCA) on suspected financial crime.

Cross-Border Payment Scrutiny: Regulations will be tightened on cross-border payments,particularly those involving high-risk jurisdictions. PSPs will need to demonstrate robust controls to prevent illicit funds from flowing through the UK financial system.

Digital Asset Payment Regulation: A significant portion of the new regulations addresses payments involving digital assets (cryptocurrencies). PSPs handling crypto transactions will face stricter licensing requirements and enhanced AML/CFT (Combating the Financing of Terrorism) obligations. This is a direct response to the growing crypto regulation UK landscape.

Impact on Payment Service Providers (PSPs)

These regulatory changes will have a considerable impact on PSPs operating in the UK.

Increased Compliance Costs: Implementing the necessary systems and processes to meet the new requirements will require significant investment in technology, personnel, and training.

Operational Challenges: Enhanced CDD and transaction monitoring will add complexity to daily operations, potentially leading to delays in processing payments.

Potential for Fines and sanctions: Non-compliance with the new regulations can result in hefty fines, sanctions, and even the revocation of a PSP’s license.

Competitive Landscape: The increased regulatory burden may create barriers to entry for smaller PSPs, potentially consolidating the market.

Impact on Fintech Innovation: While aiming to protect the financial system, the regulations could potentially stifle innovation in the fintech sector if not implemented thoughtfully.

Preparing for May 2026: A Checklist

Proactive preparation is crucial for PSPs to navigate these changes successfully. Here’s a checklist to get started:

1. Gap Analysis: Conduct a thorough assessment of your current compliance program to identify gaps in relation to the new regulations.
2. Technology Investment: Invest in advanced transaction monitoring systems, KYC/AML software, and reporting tools.Consider regtech solutions to automate compliance processes.
3. Staff Training: Provide comprehensive training to all relevant staff on the new regulations and their responsibilities.
4. Policy and Procedure Updates: Revise your existing policies and procedures to reflect the new requirements.
5. Risk Assessment: Conduct a comprehensive risk assessment to identify and mitigate potential vulnerabilities.
6. Regulatory Reporting Infrastructure: Develop a robust infrastructure for collecting, analyzing, and reporting data to the FCA and other relevant authorities.
7. Legal Counsel: Engage legal counsel specializing in financial regulation to ensure full compliance.

Specific considerations for Digital Asset Businesses

The regulations surrounding digital assets are particularly complex. PSPs dealing with cryptocurrencies should pay close attention to:

Registration as a Virtual asset Service Provider (VASP): Ensure you are registered with the FCA as a VASP.

Travel Rule Compliance: Implement systems to comply with the “Travel Rule,” which requires the exchange of originator and beneficiary information for crypto transactions.

Sanctions Screening: Conduct thorough sanctions screening of all crypto transactions.

Wallet Security: Implement robust security measures to protect digital wallets from hacking and