Response to FCA Quarterly Consultation CP25/24: Chapter 9

Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.

Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:

• to enhance understanding and awareness of consumer issues by strengthening the evidence base
• to serve the needs and aspirations of current and future consumers by inspiring and influencing the public, private and third sectors
• to enable the active participation of consumers in a fairer economy by improving access to information and support

Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.

The Consumer Principles are a set of principles developed by consumer organisations in the UK and overseas.

Consumer Scotland uses the Consumer Principles as a framework through which to analyse the evidence on markets and related issues from a consumer perspective.

The Consumer Principles are:

• Access: Can people get the goods or services they need or want?
• Choice: Is there any?
• Safety: Are the goods or services dangerous to health or welfare?
• Information: Is it available, accurate and useful?
• Fairness: Are some or all consumers unfairly discriminated against?
• Representation: Do consumers have a say in how goods or services are provided?
• Redress: If things go wrong, is there a system for making things right?
• Sustainability: Are consumers enabled to make sustainable choices?

We have identified information, safety and redress as being particularly relevant to the consultation proposal that we are responding to.

Overview

Consumer Scotland welcomes the opportunity to respond to the Financial Conduct Authority’s Quarterly Consultation: CP25/24. Our response relates to chapter 9 and the proposal to replace the current regulatory limits with a new exemption, which would allow payment service providers to deliver contactless payments where they identify the risk of a payment transaction to be low. Our response is framed around the key actions that will need to be taken to minimise potential detriment to consumers, including those in vulnerable circumstances, if regulatory contactless limits are removed.

Our response

Contactless payments are an important payment method for consumers, with UK Finance noting that 85% of consumers make a contactless payment at least once a month.[i] Consumer Scotland notes the importance of reviewing contactless payment limits as these payment methods become increasingly commonplace, to ensure that the limits are working well for consumers. We acknowledge the benefits to both businesses and individual consumers in being able to make contactless payments quickly, safely and securely, helping to facilitate faster and smoother transactions.

Despite these benefits, contactless limits can play an important role for some consumers as a beneficial friction point, particularly for those in vulnerable circumstances such as visually impaired consumers or consumers experiencing poor mental health, who may be more susceptible to over-indebtedness or scams.

The consultation paper highlighted some risks that respondents to the FCA’s earlier engagement paper identified could come from removing the limits such as:

• additional costs and burden for firms (eg reporting requirements)
• smaller firms and new entrants may not be able to apply the exemption due to a lack of resources
• inconsistent approaches to contactless limits between providers, causing inconvenience and reducing understanding for consumers and retailers.

Consumer Scotland understands that responses to the engagement paper did not show any appetite to change contactless limits in the short term, with 56% of industry respondents seeking no change to the contactless limits due to concerns of potential fraud increases, and only 20% of industry respondents in favour of amending the contactless limits. 78% of consumers that responded were in favour of maintaining the £100 single limit.

Following consideration of these responses, the FCA has indicated that its preferred approach is to put in place an exemption to allow payment service providers (PSP) to process contactless payments whenever they identify that a transaction poses a low level of risk. This is subject to PSPs having transaction monitoring mechanisms in place. PSPs can still set or maintain contactless payment limits as they see fit in line with their business and customer needs and in compliance with regulation.

Consumer Scotland shares the concerns noted above about the potential risks for consumers of changes to the contactless limit, including that such a change may cause consumer confusion and inconvenience, especially if different approaches are adopted by different PSPs.

Consumer Scotland recommends a number of mitigations should be put in place by the FCA to reduce the risks to consumers in final design and implementation of the changes. These recommendations are as follows:

• The FCA should work with firms to ensure that robust redress measures are in place to protect consumers who are a victim of fraudulent contactless payments.
• The FCA should ensure that providers take clear, proactive steps to make consumers, particularly those in vulnerable circumstances, aware of the options to remove or reduce contactless limits, and how to use these options.
• The FCA should provide firms with guidance demonstrating how they can show best practice in supporting consumers to understand the new limits and how they can restrict or remove the contactless limit as required
• The FCA’s approach to implementation should explicitly allow both PSPs and consumers to maintain their current practices if these continue meet their needs.

We expand on each of these recommendations below.

We welcome the proposal to update guidance to help firms use the new exemption, making changes to cover:

• How providers may identify levels of transactional risk
• How providers may manage risk, including setting contactless limits
• How providers may comply with Consumer Duty obligations, including considering the needs of consumers in vulnerable circumstances and through considering allowing consumers to set their own contactless limits
• How providers may work to reduce fraud rates

The consultation paper outlines the FCA’s view that firms have clear incentives to minimise contactless payment fraud. We welcome the FCA’s commitment to monitor and supervise firms to ensure that they are achieving good outcomes for consumers, such as low levels of fraud. We note the cost benefit analysis undertaken by the FCA which indicates a low risk of fraud associated with the proposed changes.  Consumers in vulnerable circumstances, such as those with less financial resilience may have a lower capacity to manage such risk, and in line with the consumer principle of redress, we recommend that the FCA should work with firms to ensure that robust redress measures are in place to protect consumers who are a victim of fraudulent contactless payments. Ensuring that robust redress measures are in place will also facilitate greater consumer confidence in making contactless payments.

The consultation paper notes that many payment service providers enable their customers to set lower contactless limits or remove the contactless function entirely at their discretion. In line with the consumer principle of information, the FCA should ensure that providers take clear, proactive steps to make consumers, particularly those in vulnerable circumstances, aware of these options and how to use them. This will enable individual consumers to make informed decisions about what is best for their own circumstances, including taking action to maintain the current practice if they wish to do so. We recommend that the FCA provides firms with guidance demonstrating how they can show best practice in supporting consumers to understand the new limits and how they can restrict or remove the contactless limit as required.

Finally, given the number of both PSPs and consumers who sought no change to the current contactless limit arrangements, we recommend that the FCA’s implementation approach to the proposed changes should explicitly allow both PSPs and consumers to maintain their current practices if these continue meet their needs.