Payment service exemptions: Could your business avoid costly licensing?

Many payment firms assume they need an FCA licence, but exemptions may allow them to operate with fewer regulatory burdens.

The UK payment services industry is incredibly diverse, comprising countless firms offering various payment services. For most businesses, applying for a license from the UK Financial Conduct Authority (FCA) is the first step when providing payment services.

While obtaining FCA authorisation may seem like the obvious choice, it comes with a host of regulatory obligations, significant costs, and administrative burdens. In some cases, firms that initially secured a “Small” license—such as a small payment institution (SPI) or small electronic money institution (SEMI)—later find themselves struggling when attempting to upgrade to full authorisation on the basis or their increased volumes. Lengthy delays or outright rejections by the FCA have, in some cases, severely hampered their ability to grow.

What many firms fail to realise is that not all payment services fall under the scope of the Payment Services or Electronic Money Regulations.

The case for exploring exemptions

Several exemptions allow firms to provide payment services without needing FCA approval or having to comply with an ever-expanding list of regulatory requirements.

These exemptions range from operating under a commercial agreement with a payer or payee (whereby you effectively conclude a transaction on behalf of one of the parties) to providing services to a minimal network of customers or operating in some form of settlement chain.

Most firms also believe that if you store funds for a customer or provide virtual/electronic wallets, then you must be issuing EMoney, but this is not always the case, and for some of these firms, an exemption can be found.

Key benefits of being exempt

For firms that qualify for exemptions, there are potential advantages to consider:

• No capital requirements: Resources can be directed toward growth rather than regulatory reserves.
• Access to more banking and liquidity providers: Regulatory status can limit the availability of financial partners and complicate onboarding.
• Lower compliance costs: Avoiding regulatory burdens reduces operational expenses.
• No safeguarding account expenses: Monthly fees for safeguarding accounts are now £15K per month in some cases.
• Reduced need for in-house compliance staff: Firms can use outsourced MLROs or compliance officers at a fraction of the cost of a full-time in-house resource.
• Unlimited transaction volumes: Unlike small license holders, exempt firms face no processing restrictions.

Who should explore exemptions?

Reviewing your business model for potential exemptions may be useful for firms operating in the payment services sector. Whether your firm is currently unregulated, unsure about licensing requirements, or already regulated but struggling with compliance costs, evaluating your position could lead to significant savings and improved operational efficiency.  For firms about to launch, business models and fund flows can be tweaked deliberately to ensure an exemption applies.

In some cases, third parties such as banks or financial auditors may recommend obtaining a license even when an exemption could apply, often as a precautionary measure.

The complexity of exemptions

Determining whether your business qualifies for an exemption is not always straightforward. The rules around exemptions can be complex and challenging to interpret, with terms such as “issuing e-money” defined in highly specific ways under the regulations. For this reason, businesses may find it beneficial to seek advice from a consultant with expertise in payment service regulations to better understand their options.

A professional consultant can help assess your business model, provide clarity on regulatory obligations, and determine whether an exemption may be applicable.

The challenge of getting complete advice

While exemptions can benefit payment firms, compliance consultancies may not always prioritise exploring them. While licensing projects and ongoing retainers can be a key focus for some compliance consultancies, firms should ensure they receive well-rounded advice that considers all regulatory options, including potential exemptions. Similarly, in-house compliance officers or MLROs are unlikely to explore exemptions that could render their roles obsolete.

Engaging a consultancy that provides transparent, well-rounded regulatory advice is essential to making informed decisions about licensing and exemptions.  A consultant with a strong focus on exemptions can help ensure your firm isn’t unnecessarily burdened by regulations that don’t apply to its business model.

Final thoughts

Identifying an applicable exemption requires careful analysis, and businesses should weigh both the benefits and challenges before proceeding. Identifying opportunities to reduce regulatory burdens may help firms optimise costs and improve operational efficiency.

If you believe your business may qualify for an exemption, it could be worthwhile to explore your options with a professional advisor.