With the UK government announcing plans to shutter the PSR in favour of regulatory streamlining, FStech editor Jonathan Easton examines what this news says about the government’s approach to financial growth in an increasingly multipolar economic landscape.

While it was not explicitly within the Labour party’s 2024 General Election-winning manifesto, there should be little surprise that the party has pulled the trigger on abolishing the Payments Systems Regulator (PSR) and folding its core functionality into the Financial Conduct Authority (FCA).

In a statement published on 12 March announcing the news, the government framed the decision as “the latest step in reducing the burdens on business” and the “latest steps to drive economic growth that puts more money in working people’s pockets”.

The quotes from Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves within the announcement suggest an outright hostility to regulatory oversight within the financial sector. The previous Conservative government “hid behind regulators”, according to Starmer, while Reeves—a former economist at the Bank of England—said that the “regulatory system has become burdensome to the point of choking off innovation, investment and growth.”

A history of regulation: Labour's recent relationship with the financial sector

Though the PSR was not set up under Labour (it was established by the Financial Services (Banking Reform) Act 2013 under the purview of Prime Minister David Cameron and Chancellor George Osborne), the outright abolition of a regulatory body reflects a broader shift away from Labour’s historic positioning as an advocate for greater oversight of financial institutions.

The party has oscillated between interventionist and more market-friendly approaches, particularly in its handling of the banking sector, monetary policy, and financial markets, but its more recent history following the downfall of Tony Blair’s ‘New Labour’ and the 2008 Global Financial Crisis has seen the party typically focus on re-regulation over a decade in which the party favoured economic populism in reaction to Tory austerity.

Following Blair’s resignation in 2007, his successor Gordon Brown (who, as Chancellor, oversaw the creation of the Financial Services Authority (FSA) in 1997) responded to the 2008 financial crisis by increasing state intervention, including bank nationalisations and support for quantitative easing by the Bank of England. However, his government’s broader regulatory tightening efforts and push to breakup the Tripartite System were largely left to his Conservative successors after Labour’s defeat in the 2010 General Election. The Tories would go on to restore powers to the Bank of England, and split the FSA into the Prudential Regulation Authority (under the Bank of England) and the FCA,

In opposition, Labour’s successive leadership of Ed Milliband and Jeremy Corbyn both took a more interventionist stance and advocated for stronger financial oversight. Milliband, current Energy Secretary, specifically referred to the City’s “casino capitalism” while the openly socialist Corbyn went further to propose breaking up big banks, establishing a National Investment Bank to fund public projects and calling for the creation of a so-called ‘Robin Hood’ financial transaction tax.

In his shift away from economic populism and wrangling of the party back to the centre of politics, Starmer had previously taken a more cautious tact with general support for robust regulation without radical change that might spook the financial sector’s still fragile confidence. The PM's appointment of City veteran Reeves as the country's first-ever female chancellor was also a signal that Labour intends to adopt a pro-business, economically pragmatic approach– one that, while distancing itself from past interventionist tendencies, leans toward market-friendly policies that prioritise growth over redistribution.

The Trump effect: UK and EU reactions

Starmer’s counterpart in 1,600 Pennsylvania Avenue however has quite a different approach to financial oversight. As part of actions taken by Elon Musk's non-governmental ‘Department of Government Efficiency’, US president Donald Trump has delivered a bevy of gifts to his friends on Wall Street with a mass deregulation drive. Treasury secretary Scott Bessent is championing a move away from "cumbersome box-checking", while the Consumer Financial Protection Bureau (CFPB) (created in the wake of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010) has all but been shuttered.

But while this is all good news for financial institutions on paper, Trump’s tariff war with Mexico, China and Canada, and cosying up to Russia, along with his repeated threats of turning the country's neighbours to the north into the 51st state (and a desire to annex Greenland), have sent the markets into free-fall and the dollar plummeting. At the time of writing, the Dow Jones is down 5.89 per cent since Trump's inauguration, and the S&P 500 is down by 7.89 per cent in the same period. The pound meanwhile is significantly stronger by comparison to 60-odd days ago, up from 1.23 to 1.30 since 20 January.

With America’s increasingly isolationist positioning on the economic and diplomatic stage, the UK and EU know they can no longer rely on US financial and defensive protection that has been all-but guaranteed since the Economic Recovery Act of 1948, better known as the Marshall Plan. In terms of defense, the EU has unlocked €800 billion for military spend within the bloc which will likely lead to an economic boom driven by arms manufacturing and has already been praised by the Bank for International Settlements (BIS).

The EU has made several declarations on financial regulations beyond the context of defense, including ongoing efforts to amend regulations like the Sustainable Finance Disclosure Regulation (SFDR) and securitisation rules, as well as initiatives to introduce more flexible financial products. While it is still unclear whether the EU will fully embrace deregulation to drive growth, it is exploring ways to foster competitiveness in key sectors such as clean technology and defense. It is likely that US trade and investment with the EU could cool in the coming months and years due to ongoing trade tensions and the EU’s response to US isolationist policies.

The UK is in a precarious position then. Wedded to the EU (though no longer part of it) due to mutual economic and security interests, but still looking to maintain decent diplomatic ties with Washington. These factors, combined with the economic impact of a decade-plus of Conservative rule, has put Labour in a position where it needs to restart the economy. Shuttering the PSR is, as Reeves puts it, an attempt to make “regulators work for the country, rather than block progress,” and shows a more forceful approach.

The government has already been accused of purging key figures from several regulatory bodies that were seen to be hindering growth. Marcus Bokkerink, chair of the Competition and Markets Authority (CMA) was removed from his post last month, due to a perceived interventionist stance, and was replaced by former Amazon exec Doug Gurr. Both Baroness Zahida Manzoor, chair of the Financial Ombudsman Service (FOS), and Abby Thomas, chief executive and chief Ombudsman, have similarly announced plans to step down in recent months.

The FCA’s position is not to see this as a deregulation drive, but rather as a reflection on the evolving needs of the market. FCA chief executive Nikhil Rathi explained: “With a changed payments landscape, now is the right time to put in place a more streamlined regulatory framework. Doing so is a natural next step following recent work to improve co-ordination and clarity on regulatory responsibilities.”

In an emailed statement, the PSR insisted that it had not been fully defanged and that it “continues to be the independent regulator of UK payment systems,” until officially shuttered. That said, the organisation described the decision as “a pragmatic next step in simplifying and clarifying payments regulation.”

Industry reactions: Relief, caution, and skepticism

Firms in the UK’s payments space have largely welcomed the news.

Miles Celic OBE, chief executive officer of TheCityUK, an industry-led body representing UK-based financial and related professional service, says that the decision is “good for the UK’s international competitiveness and wider economic growth,” adding that the organisation looks forward to supporting the FCA’s “commitment to the competitiveness of the UK’s regulatory environment and the government’s growth mission.”

Gilbert Verdian, chief executive officer and founder at blockchain firm Quant, praised the change for putting the focus “purely on a single regulator and a single point of contact” and claims that the creation of the PSR in 2013 has led to “confusion to which regulator to focus on by banks”. He adds: “The shuffling of schemes and responsibility between authorities has created a clouded view of compliance to regulations."

John Gidla, head of payments compliance at payments and gambling RegTech, Vixio, notes that while “having one less regulator to deal with could reduce complexity” the decision raises further questions “that will depend on how the FCA will take forward its approach to payments regulation, competition and market interventions.”

Regarding its specific functions, Paul Harris, financial regulation partner at law firm Osborne Clarke suggests that "certain parts of the industry were not entirely happy with the way in which the implementation of the authorised push payment (APP) fraud reimbursement scheme was implemented, with some questioning whether the FCA might have been the more appropriate body to oversee it."

The lawyer also raises how the transition will be handled. "What will be interesting is how the current suite of PSR Directions will be transposed into the FCA regulatory ecosystem," he says. "For example, will there be new Handbook text and guidance to be published? Will the FCA simply seek to lift and drop the current requirements or will this be seen as an opportunity to modify aspects of it? Clear communication and collaboration with the industry will be key in ensuring a smooth transition."

Jim Conning, banking and alliances director at banking integration solutions provider AccessPay meanwhile takes a more cautionary tone. “The specialised expertise within the PSR has been instrumental in driving targeted innovation in UK payment systems,” he explains. “Any dilution of this knowledge base could severely hamper our progress and potentially damage the UK's hard-earned reputation for payment excellence.”

“The government's focus on economic growth is understandable, but we must ensure this regulatory consolidation preserves what we have already built. If we lose this critical knowledge during the transition to the FCA, we risk wasting time and resources while eroding the consumer and organisational trust that's been painstakingly built.”

Some however are more openly cynical, with Jonathan Frost, director of global advisory for EMEA at biometrics security firm BioCatch describing the decision as “little more than a branding exercise”, noting that the PSR was already a subsidiary of the FCA and that the bodies share both office space and personnel. “Beyond dropping a logo, it’s unclear what, if anything, will materially change."

Consumer protection concerns: What’s at stake?

Despite some caution, industry players have largely welcomed the PSR's absorption into the FCA as a streamlining measure, but the consequences for everyday consumers remain notably absent from the government's messaging. The PSR was established with an explicit mandate to protect consumer interests in the payments ecosystem – ensuring fair fees, promoting competition that drives innovation, and safeguarding against fraud and system failures.

The consolidation raises legitimate questions about regulatory focus. The FCA's broader remit across the entire financial services landscape could potentially dilute the specialised attention that payment systems have received under the PSR. This comes at a particularly sensitive time, with APP fraud reaching record levels and vulnerable consumers increasingly targeted by sophisticated scams.

The government will provide further clarity in a speech later this week, before a consultation is launched to take place over the summer.

Looking ahead: Consultation, implementation, and economic impact

The Labour government's decision to abolish the PSR reflects a significant philosophical shift in the party's attitudes towards financial regulation – one that prioritises economic growth over traditional regulatory guardrails. This repositioning comes at a critical juncture in global affairs, with the UK attempting to chart its own course amidst American isolationism and EU militarisation.

Whilst industry leaders have largely welcomed the move as a simplification of the regulatory landscape, legitimate concerns remain about whether streamlining will preserve the specialised expertise needed to maintain the UK's reputation for payment excellence.

The government's broader pattern of regulatory restructuring—from the CMA to the FOS—suggests a coordinated strategy to reduce what it perceives as bureaucratic impediments to growth. Whether this strategy ultimately delivers the economic revival Starmer and Reeves envision remains to be seen.

As the consultation unfolds over the summer, the financial services industry will be watching closely to determine if this represents genuine regulatory reform or merely a symbolic gesture in Labour's quest to position itself as business-friendly while navigating an increasingly complex international economic landscape. The true measure of success will be whether the UK can maintain robust consumer protections whilst fostering the innovation and investment that have long been hallmarks of its financial sector.

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