HM Treasury has published an open consultation on the Regulation of the European Parliament and of the Council on Interchange Fees for Card-Based Payment Transactions (the Regulation) of 29 April 2015.
Although the Regulation came into force on 8 June 2015 and has direct effect in all the Member States of the European Union, the provisions of the Regulation do not take effect until:
- 9 December 2015, when the interchange fee caps come into effect; and
- 9 June 2016, when other provisions, such as business rules, come into effect.
The Treasury is seeking views on the government’s proposed plan of action to:
- “meet the UK’s obligation to put in place an adequate and efficient regulatory regime to supervise compliance with the [Regulation]”; and'
- exercise the national discretions the Regulation gives member states over:
- the application and setting of interchange fee caps; and
- the application of an exemption period of up to 3 years to third party card systems.
UK approach to implementing the regulatory regime
The Regulation requires member states to designate a competent authority to supervise compliance with the Regulation and grant it appropriate investigation and enforcement powers. The government proposes to designate the Payment Systems Regulator (PSR) as the “overarching regulator” and introduce a monitoring, enforcement and penalties regime that is “based closely on the enforcement regime that currently exists under the Financial Services (Banking Reform) Act 2013”, with a few modifications and additions to ensure the PSR has the power to:
- “make general directions”;
- “enable the PSR to take action to correct compliance failures”;
- “act on compliance failures and complaints”;
- “conduct investigations and make requests for information”;
- “raise fees and statutory immunity”;
- “apply penalties to enforce compliance with the [Regulation]”;
- “establish an out of court redress procedure …to adjudicate on business to business disputes beyond its enforcement role for breaches of the [Regulation], including powers to order redress to be paid”.
HM Treasury also “plans to assign a role to other regulatory bodies where [the Regulation] provisions fall under the scope of existing regulatory bodies, including:
- The Financial Conduct Authority (FCA), where there is overlap with the FCA’s role as supervisor under the UK Payment Services Regulations 2009; and
- Trading Standards bodies, to monitor observance of the Honour All Cards Rule, which obliges merchants to display which cards they accept to their customers.
The Regulation requires an appellate body to be designated to hear appeals against decisions taken by the PSR, and the government intends to designate that role to the Competition Appeals Tribunal.
UK approach to the national discretions
Although the Regulation has direct effect, member states are given the discretion to:
- Implement lower interchange fee caps for domestic credit card transactions than the cap of 0.3% set out in the Regulation;
- Implement lower caps on interchange fees for domestic debit card transactions than the cap of 0.2% set out in the Regulation. There is also flexibility, for a period of up to 5 years, to apply a weighted average interchange fee of no more than the equivalent of 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme; and
- Exempt three-party card systems that use issuers and/or acquirers and whose market share is less than 3%, from caps to interchange fees for a period of up to three years.
HM Treasury says the government:
- “does not intend to implement a lower cap for domestic credit card interchange fees than the default 0.3% cap”, because:
- “The current rate of credit card interchange fees in the UK is approximately 0.85% per transaction on average, therefore merchants will see significant savings”; and
- “a rate of 0.3% will align cross-border and domestic interchange fee rates, meaning greater coherence and consistency across the EU”
- intends to apply the cap of 0.2% to the weighted annual average transaction value of all domestic debit card transactions within the card scheme rather than set the cap at 0.2% per debit card transaction. The government has chosen not to align cross-border and domestic interchange fee rates at 0.2% of the value of the transaction because:
- “the rates set by the card scheme which processes the vast majority of debit card payments in the UK (97%) caps the maximum amount a merchant can pay in interchange fees for a given transaction” to 50p or £1, regardless of the value of the transaction; and so
- “a large number of merchants would end up paying more than they currently do today”.
- “intends to exercise the exemption available to third party card systems that use issuers and/or acquirers and whose market share is less than 3%, to give such third party schemes a transitional period to:
- “adjust their business models” and
- “renegotiate the fees that underpin the licensing agreements they hold with issuers and acquirers.”
HM Treasury says the government may reconsider its position on the above following the completion of the PSR’s 12 month programme of work launched in April 2015 to look at the impact of the Regulation and other trends and issues within the payments sector.
HM Treasury is calling on all those who will be affected by the Regulation, which “could be any individual, firm, or group that is a stakeholder in the UK payments market including: banks, card schemes, merchant acquirers, business groups, consumer groups, and other interested parties” to respond by 28 August 2015, on whether they agree with the government’s proposed approach to:
- the design of the regulatory regime for the supervision of the Regulation;
- interchange fee caps for credit card transactions;
- interchange fee caps for debit card transactions; and
- exercising the time-limited exemption for three-party card schemes, which use issuers and acquirers.