Payments and the UK government’s pro-growth agenda: FCA consults on a new risk-based exemption for contactless payments

What would change?

The FCA would replace the current exemption in Article 11 of the SCA-RTS, which imposes payment limits on contactless payments (including single, cumulative and consecutive payment limits) with a new risk-based exemption for contactless payments.

This new exemption would allow PSPs to process contactless payments without asking the payer to authenticate the payment where PSPs identify a transaction as “low risk” under existing transaction monitoring mechanisms that PSPs are required to have in place under Article 2 of the SCA-RTS.

As well as the risk-based factors outlined under Article 2, firms may consider additional factors which may help them identify whether a transaction poses a low risk.

Article 12 of the SCA-RTS, which exempts contactless payments at ticket gates and unattended parking terminals, will be retained.

What is the potential impact of the new risk-based SCA exemption for contactless payments?

The proposals, which follow a March 2025 engagement paper (see this Our Thinking article), are part of the FCA’s work aimed at supporting the government’s growth mission for the UK economy. They also reflect the government’s National Payments Vision commitment to simplify the approach to SCA, with more reliance on a risk-based approach supported by the Consumer Duty principle - as well as the general move towards an increasingly outcomes-focused approach to regulation.

The FCA’s choice of a risk-based exemption for contactless payments will probably come as no real surprise to those who read the engagement paper, the tone of which suggested that this was its preferred option.

In its summary of feedback on the paper, the FCA acknowledges that ‘most public and corporate respondents’ supported keeping the existing contactless limits, particularly the £100 single limit. Increased risk of fraud – and the potentially disproportionate impact on vulnerable customers – was the main reason for this view. In response, the FCA undertook analysis that indicates there is a low risk of increased fraud associated with its proposed changes. It points out that PSPs have strong incentives to maintain low levels of fraud, especially given their liability for reimbursement for unauthorised payments. On vulnerable customers, the FCA has included proposed guidance outlining its expectation that firms consider how their approach to contactless payments produces good outcomes for different groups of customers, particularly those with protected characteristics.

Points that PSPs would need to consider if they decide to take advantage of the new exemption include:

• What other risk-based factors, in addition to those outlined in Article 2(2) of the SCA-RTS, they should consider in identifying whether a transaction is low risk. The FCA’s amended Approach Document gives the examples of the payer’s normal spending or behavioural pattern, or the payer’s location.
• An overall fraud rate for in-person contactless payments and what a ‘significant increase’ in this rate would look like, which would indicate that payments are being processed outside the scope of the exemption. Industry intelligence-sharing initiatives are likely to be of some use here.
• How to ensure compliance with Consumer Duty obligations, including in relation to effective customer communications and monitoring outcomes to help in assessing the impact on different groups of customers, including those with protected characteristics.

It looks likely that most PSPs will continue to apply their existing limits in the short term, although the FCA’s industry engagement suggested that they would appreciate additional flexibility on the cumulative and consecutive limits. This position makes sense given the longer term effects of prices and inflation on current limits, and the potential for future improvements in fraud detection technology which might mean that PSPs could increase limits with more confidence.

As well as the potential for increased liability for unauthorised contactless payments, PSPs and merchants will be mindful of the implementation costs that would be involved in changing contactless limits, both technical (eg the need to reprogramme point of sale terminals to accept contactless payments over the current £100 limit) and in terms of communicating the change to consumers and businesses.

While introduction of the new exemption is being presented as pro-economic growth, innovation and competition:

• PSPs’ propensity to take advantage of the flexibility introduced by the change in the longer term is likely to be heavily influenced by their capacity to absorb the implementation costs and risk of increased liability for unauthorised payments, as well as whether they have the resources available to invest in the latest fraud detection technology. We could therefore be looking at an increased disparity between larger and smaller PSPs, leading to reduced innovation and competition.
• If, in future, PSPs all start applying different contactless payment limits, there might also be a risk of consumer detriment due to confusion over applicable limits - although it should be noted that many PSPs already allow their customers to apply their own contactless payments limits or to disapply contactless functionality. This could impact any potential gains in terms of promoting economic growth.
• The FCA itself points out that several industry respondents to its March 2025 engagement paper commented that it should be making wider reforms to the SCA-RTS to help accelerate the development of non-card-based in-person payments, such as account-to-account (or pay-by-bank) payment methods. Given the on-going expansion of open banking and pay-by-bank options – and the significant increase in the use of digital wallets (which the FCA acknowledges) - it is at least questionable whether the new exemption for contactless payments will have a noticeable impact on economic growth, or indeed competition or innovation in the payments sector.

How can Hogan Lovells’ combined legal and consulting teams help?

Hogan Lovells’ depth and breadth of knowledge of the legal, regulatory and policy drivers affecting financial services means we can help you get a grip on events, navigate uncertainty and capitalise on opportunities to shape your regulatory and policy environment.

We have significant experience in supporting firms on regulatory change projects - from undertaking initial gap analysis work, project managing and supporting the implementation of a rolling program of enhancements and operational changes.

The combination of our legal and consulting teams provides you with a full range of services, and clear guidance on how the solutions can be applied within the business. If you would like to discuss how we can help you, please reach out to any of the people listed in this article or your usual Hogan Lovells contact.

What’s next?

The consultation closes on 15 October 2025.

The proposals and summary of feedback to the engagement paper are contained in Chapter 9 of the FCA’s quarterly consultation paper no.49. Appendix 7 contains the proposed technical standards in a draft Technical Standards (Strong Customer Authentication and Common and Secure Methods of Communication) (Amendment) Instrument 2025, and Appendix 8 contains proposed changes to the FCA’s Payments and E-Money Approach Document.

Following the consultation, the FCA will then consider all feedback and publish a summary of it and details of any changes it will make to the SCA-RTS, including any changes to the consultation proposals.

Once the standards instrument has been made and the technical standards and guidance are published, any changes would come into force with immediate effect. However, the FCA wants to hear from PSPs if they believe they would face any issues with this approach.

Authored by Virginia Montgomery and Charles Elliott.