Proposals for regulation of the payment systems industryPrint publication
On 13 November 2014, the Payment Systems Regulator (the PSR) published a consultation paper, “A new regulatory framework for payment systems in the UK” with responses due by Monday 12 January 2015. The PSR will consider the responses received, and intends to publish its final policies, processes and priorities in a policy statement by the end of March 2015.
The consultation paper sets out how the PSR proposes to regulate the payments industry when it becomes fully operational on 1 April 2015. It also explains how it intends to implement and enforce the regime. Key proposals include the establishment of an industry-wide forum, requirements as to the governance arrangements of payments systems and measures to promote fairer and more open access to payments systems.
In addition, the PSR has announced that it will launch two market reviews by April 2015:
- a market review assessing the ownership and competitiveness of the current payment systems infrastructure and considering other possible infrastructure models and ownership structures.
- a market review looking at how indirect access to payments infrastructure is currently provided.
What is a payment system?
The job of the PSR will be to regulate payment systems designated by the Treasury. A payment system is defined in the relevant legislation (the Financial Services (Banking Reform) Act 2013) as “a system which is operated… for the purpose of enabling persons to make transfers of funds, and includes a system which is designated to facilitate the transfer of funds using another payment system”. Or, in the more colourful language of its website: “Payment systems form a vital part of the UK’s financial system. They underpin the services that enable funds to be transferred between people and institutions – from large transfers between firms to a contactless payment for your morning coffee”.
The Treasury consulted on the systems it is proposing to designate and is expected to make its final decision by April 2015. The Treasury has provisionally stated that it intends to include the following systems:
- Faster Payments
- The Cheque and Credit System
- Northern Ireland Clearing System
The role of the Payment Systems Regulator
The PSR has been given strong regulatory powers as well as concurrent competition powers. It has three statutory objectives, namely the promotion of competition, innovation and the interests of service users.
The PSR has a wide panoply of powers at its disposal, including:
- carrying out reviews of relevant markets
- launching investigations either of its own initiative or in response to complaints
- information gathering powers
- imposing general or specific directions
- dispute resolution powers
- imposing sanctions for non-compliance. These powers including fining and the power to order divestment as well as public censure.
The consultation document contains proposals regarding fining. Fines will reflect the gravity of the compliance failure and the existence of aggravating or mitigating features. There is no minimum level of fine proposed but there is a suggested cap of 10 per cent of the annual revenue derived or billings made by the relevant undertaking from the business activity in the UK to which the compliance failure relates.
The PSR has said that it will not hesitate to use the tools at its disposal if it considers that operators are failing to deliver the outcomes it expects of them.
A principles-based approach
The PSR is proposing to adopt three general, legally binding, principles or “behavioural standards” to which participants in designated payments systems must adhere:
- the first principle relates to “relations with regulators” and requires a participant to deal with the regulator in an open and cooperative way. Participants will be expected to disclose “anything relating to the participant of which the PSR would reasonably expect notice”. (See further the comments on Transparency, below)
- the second principle concerns “compliance”. It states that participants must observe “proper standards of conduct” and refrain from activity which that participant should reasonably have expected to restrict or prevent another participant from complying with its regulatory obligations in relation to payment systems or services provided by payment systems
- the third principle is “financial prudence” and would apply to operators and infrastructure providers. It requires them to ensure they have, or have access to, adequate financial resources to be able to carry out their functions and activities in relation to the relevant regulated payment system, including the resources to cover business losses and debts as they fall due and to be able to continue as a going concern and to comply with regulatory obligations. Non-compliance with these principles would be regarded by the PSR as regulatory “compliance failure” and could result in public censure and or a fine.
A core element of the proposals concerns access to payment systems. Payment systems providers (PSPs) can access payment systems directly (there is a direct agreement between the PSP and the operator) or indirectly, where a PSP accesses the system through a PSP with direct access. In this situation the PSP with direct access is known as the Sponsor Bank. Only four of the major banks currently offer sponsor services. The consultation paper describes the difficulties that PSPs can face in accessing payment systems and this will strike a chord with many PSPs.
For direct access, the PSR proposes to implement an Access Rule requiring certain interbank operators to provide access on an objective, risk-based and open basis. Other payment systems that are likely to be regulated (LINK, MasterCard and Visa) are already subject to access requirements under Article 28 of the Payments Services Directive (2007/64/EC). All of these systems will need to report annually to the PSR on compliance with the access rules that apply to them. The first report will be due not later than 30 June 2015.
In addition, the PSR is proposing to require Sponsor Banks to publish certain access-related information to improve transparency, including the payment systems to which Sponsor Banks offer indirect access, the key characteristics of that access and eligibility criteria. The information will have to be published on the Sponsor Banks’ websites and provided to the PSR and updated regularly. Compliance will be expected by 1 April 2015.
The PSR also proposes that industry will develop a PSR-approved Code of Conduct governing arrangements for indirect access provided by Sponsor Banks. This Code of Conduct is intended to address concerns expressed by indirect participants relating to security of their arrangements with Sponsor Banks, such as the lack of written contracts covering access in some circumstances and uncertainty as to the arrangements if the Sponsor Bank chose to discontinue supply. The PSR wants the Code of Conduct to be in place by 30 June 2015 and for Sponsor Banks to comply by 30 September 2014. If the Code of Conduct is not developed on a voluntary basis, the PSR will take action to ensure it is put in place.
Transparency is another keyword in the consultation document. The PSR has said it expects a “no surprises” culture from operators and for operators to keep it informed of anticipated developments before they are implemented. Operators will be expected to respond fully, accurately and promptly to any information requests from the PSR.
Ownership, control and governance
The PSR intends to open up governance and control of the payments systems by involving additional players in more transparent decision-making.
The PSR will require all operators to ensure the interests of service users (those who use or are likely to use regulated payments systems) are appropriately represented in the decision-making process concerning regulated payment systems at board level. This measure is intended to address concerns about the governance of payment systems, including that the interests of indirect participants are not taken into account in interbank payment system decision-making, or in the card systems, that merchants and acquirers” interests are not adequately considered. Each year, operators will have to report on how they have complied with this requirement, with the first report due not later than 30 September 2015.
Operators will be expected to publish board minutes and votes, including how independent directors have exercised their discretion in relation to public matters. The PSR intends this measure to bring greater transparency and clarity in relation to decision-making within operators. Compliance will be expected from 1 April 2015.
The PSR expects these proposals to “change the dynamics of voting on operator boards and how control over payment systems is exercised”. Once implemented, if these initiatives do not produce the outcomes the PSR intends, it will take further action, including, if appropriate, use of its divestment powers.
The PSR also raises concerns in relation to conflicts of interest. It proposes that individuals are not simultaneously a director of an interbank operator and a central infrastructure provider at the same payment system.
Payments Strategy Forum
The PSR is proposing the creation of a new forum, involving card payment systems operators as well as interbank operators, to drive collaboration and further innovation, referring in the consultation paper to the slow pace of innovation in the industry. The aim of the forum will be to develop strategic priorities for UK payment systems in the long-term.
A working group will be set up to launch the forum and the PSR will provide a secretariat to the forum at the start, as well as appointing an independent chair and guiding principles under which it should operate. The PSR will participate in the forum to “advise as appropriate and act if necessary”.
Market reviews by the PSR
Before 1 April next year, the PSR will initiate a market review “into the ownership of, and competition in, the provision of infrastructure” in the payments systems market, with a view to ensuring that such infrastructure is “able to support new developments and innovations at all levels, including both the system and service levels”. It will also examine potential infrastructure models and ownership structures that could be developed in the future. In addition, the PSR proposes to keep technology and infrastructure under review by carrying out a wider programme of infrastructure-related work next year.
There will be a second market review running concurrently, this one with a focus on indirect access to payment systems. The aim of this review is to allow the PSR to gain a better understanding of the economics of indirect access and to consider ways of improving the balance between the risks and rewards of offering indirect access. It will also consider the impact of its indirect access proposals to see whether further steps should be taken to promote access to payment systems.
What happens next?
The full consultation and related documents are available on the PSR’s website. The consultation runs until 12 January 2015. The PSR will consider the responses received and it intends to publish its final policies, processes and priorities in a policy statement by the end of March 2015, in readiness for it becoming fully operational on 1 April 2015.
The payment systems sector has been in the regulatory spotlight for some years already. The issue of interchange fees – the fees paid for the acceptance of card-based transactions – has been subject to competition law investigation at both the national and EU level. In the UK, the Competition & Markets Authority has decided at this stage that it will not progress its investigation into MasterCard’s and Visa’s UK interchange fee arrangements in light of the European Commission’s proposed interchange fees regulation, which is expected to cap MasterCard’s and Visa’s fees and ensure they are “fair and transparent”. The Financial Conduct Authority is also consulting on the scope of its proposed market study into credit cards.
It is clear that the payments sector as a whole will undergo considerable regulatory change in 2015 and the ensuing years. Providers and users should consider what, if any, steps may need to be taken during the coming months and what opportunities these regulatory developments may offer.
How we can help
The PSR’s consultation and market reviews mentioned above offer an opportunity for both operators and payment service providers to present their side of the story to the regulator, with the aim of influencing the regulatory requirements imposed on the sector. Our Financial Regulatory and Competition teams have extensive experience of advising across the financial services sector and of acting before regulators (including the FCA and CMA). If you should like assistance to make representations and/or to prepare for the considerable regulatory change that the payments sector faces, please contact Trudy in the first instance.