As the government hunts for ways to make Britain more competitive, the country’s payments regulator has become caught in the crosshairs.

A string of controversial decisions has given some of the sector’s major firms reason to argue the government should bring the Payment Systems Regulator (PSR) under the control of the UK’s main financial watchdog. And the Treasury is paying attention.

The companies include well-known fintechs and other financial institutions which together serve tens of millions of customers.

It follows heavy criticism of the PSR’s engagement with firms and progress in bolstering the global standing of Britain’s payments industry – issues which have also triggered clashes with ministers in recent months.

The PSR was legislated into existence in 2013 and launched two years later, following a series of government-led reviews calling for more competition and innovation in payments.

Key areas of supervision include card fees, technical infrastructure and scams. It directly regulates eight payment systems and sets rules affecting around 1,500 banks, fintechs and other companies that provide payment services.

The PSR is a subsidiary of the Financial Conduct Authority (FCA) and shares some operations, but by statute is an independent economic regulator.

However, after years of frustration, executives told City AM they have lost faith in the PSR’s efficiency and called for it to be merged with the FCA.

‘Redundant and unnecessary’

While the PSR has touted the fact that it is the world’s only dedicated regulator for payment systems, its overlaps with the FCA and Bank of England have drawn scrutiny from the financial industry and politicians.

A government-backed, independent review led by former Nationwide boss Joe Garner last year found Britain is “unusual in having such a wide range of specialised regulators” and that this created complexities for firms.

For example, the FCA is responsible for ensuring access to cash, but the reimbursement of online scams sits with the PSR. Meanwhile, Pay.UK, which operates Britain’s interbank payment systems, is overseen by both the PSR and Bank of England.

“You need the Bank for operational resilience, and you need the FCA to make sure consumers aren’t ripped off,” the head of a major payments institution said. “The PSR is a completely redundant and unnecessary regulator.”

They called the state of UK financial regulation “deeply dysfunctional” thanks to its fragmented nature. A source who regularly engages with the PSR said it “hasn’t delivered anything better to the industry”.

There “is a general hope” within the sector for the FCA to absorb the PSR, but this will likely happen “naturally” without the need for targeted lobbying, they added.

“It would be more straightforward to have a single regulator, and it would likely improve PSR decision making,” another industry official said. “But we shouldn’t assume that folding the PSR into the FCA is a panacea as the FCA is not perfect.”