Industry stakeholders and regulators must collaborate to refine risk-based policies that enable innovation while safeguarding financial integrity.
13 March 2025
by Payments Intelligence
What is this article about?
How the FCA can define and balance “acceptable risk” in UK payments regulation to support innovation while ensuring financial stability and consumer protection.
Why is it important?
A well-calibrated regulatory framework can foster fintech growth, attract investment, and maintain the UK’s global competitiveness without exposing the market to excessive risk.
What’s next?
Industry stakeholders and regulators must collaborate to refine risk-based policies that enable innovation while safeguarding financial integrity.
UK payments firms are grappling with a critical question: What level of risk is acceptable in a market that demands both innovation and resilience? Amid rising fraud, emerging technologies like embedded finance, AI, and stablecoins, and intensifying global competition, the Financial Conduct Authority (FCA) faces mounting pressure to recalibrate its approach to regulation—or risk holding back the very sector it aims to protect.
The stakes are high. Investment in UK fintech has dropped sharply, from over £14 billion in 2022 to just £3.6 billion in 2024, as firms and investors increasingly favour jurisdictions with more agile, innovation-friendly regimes. Payments businesses navigating complex authorisation processes, unclear expectations, and outdated compliance burdens are calling for a shift towards a regulatory framework that reflects today’s market realities, not yesterday’s risks.
Striking the right balance means recognising that risk is inherent to innovation—but so is the danger of stagnation if regulation becomes a brake on progress. The challenge for UK policymakers is to set clear boundaries that protect consumers and markets without choking off growth. Defining “acceptable risk” in payments is no longer an abstract exercise—it’s a make-or-break issue for the UK’s global competitiveness in fintech and financial services.
The UK payments sector has expanded dramatically in recent years, driven by advances in technology, shifting consumer behaviour, and new forms of digital value exchange. From embedded finance and AI-driven risk tools to stablecoins and alternative payment rails, the pace of change is relentless—but regulation has struggled to keep up.
Many of the current rules were designed for an earlier generation of financial services and do not reflect the complexity or speed of today’s payments ecosystem. Firms are increasingly caught between regulatory requirements that don’t align with modern business models and emerging risks—including fraud, operational failures, and systemic threats—that require sharper regulatory focus.
Getting this balance right is now mission-critical for the UK’s competitive standing. If the regulatory environment becomes too restrictive, innovation will be driven offshore; if too lax, consumer harm and market instability could follow. The FCA’s challenge is to define what constitutes “acceptable risk” in a payments landscape that looks nothing like it did even five years ago—and to do so in a way that encourages growth while protecting consumers and the wider system.
A well-regulated payments landscape supporting innovation is important for the UK’s economic growth. Members of The Payments Association’s regulatory sub-working group have identified areas where greater regulatory flexibility could enhance market competitiveness while maintaining consumer protection and market integrity:
Investment is the lifeblood of a thriving payments ecosystem. For the UK to maintain its position as a fintech hub, working group members believe it’s important the FCA ensures that regulations do not deter capital inflows or slow down investment cycles.
In 2024, the UK led European fintech investment with $3.6 billion, significantly outpacing France ($1.1 billion) and Germany ($0.92 billion). However, the UK’s fintech investment has seen a sharp decline, dropping from $14.62 billion in 2022 to $3.6 billion in 2024. Some key areas for reform include:
Streamlining regulatory approval processes: Investors and payments firms alike have raised concerns about the slow pace of authorisations, particularly for new market entrants. The introduction of voluntary service level agreements (SLAs) for processing applications (e.g., six months for new firm authorisation, two months for individual approvals) could improve efficiency and investor confidence.
Adjusting control thresholds: Currently, UK regulations require pre-approval for acquisitions of control starting at 10%. Raising this threshold to 20-25% (in line with jurisdictions such as Singapore and Brazil) would facilitate larger, quicker investments in payments firms, fostering greater financial resilience without compromising regulatory oversight.
Aligning investment policies with global standards: The UK must ensure that its regulatory stance remains attractive compared to other jurisdictions. For example, Switzerland and the UAE have taken a more streamlined approach to fintech licensing, which has drawn significant investment. Learning from these models could help the UK remain a competitive destination for fintech funding.
SMEs are the backbone of the UK economy, yet many struggle with compliance burdens that were originally designed for larger financial institutions. A more proportionate regulatory approach could ensure that SMEs, particularly those operating in B2B payments, can thrive without unnecessary regulatory complexity:
The role of digital assets in payments is expanding rapidly, with stablecoins and cryptoassets playing an increasing part in emerging payment models. However, the UK risks lagging behind jurisdictions such as the EU and US, where more comprehensive frameworks are taking shape. While financial stability and consumer protection remain priorities, a flexible, risk-based approach may help the UK support innovation while managing risks.
Adopting a risk-based, market-access framework: A tiered model could assess stablecoins based on their use case (e.g., retail vs. wholesale) and systemic importance, offering more proportionate oversight than a one-size-fits-all approach.
Addressing key regulatory considerations –
A proportionate framework could help balance innovation and risk, supporting the UK’s competitiveness in the evolving payments landscape.
Fragmented regulation is seen by some industry participants as a source of uncertainty for payments firms, investors, and consumers. Improving efficiency and coordination between regulatory bodies has been identified by some as a way to address these concerns.
To maintain the UK’s position as a leading centre for payments and fintech, stakeholders have identified a need to re-examine how “acceptable risk” is defined within the regulatory framework. Across discussions, several key themes have emerged:
Industry collaboration—between regulators, policymakers, and market participants—has been seen as essential to achieving a balanced approach that maintains market integrity while enabling growth and investment.
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