On 15 December 2015, the Payment Systems Regulator (PSR) published a report on access to, and governance of, payment systems (the Report), documenting the progress that operators of certain payment systems (Operators) have made towards achieving more open and flexible direct access and more transparent governance arrangements.
The Report concludes that the payments sector is showing signs of becoming more competitive as a result of the directions the PSR has implemented. However, it also emphasises that there are key areas of focus remaining where improvements and greater stakeholder engagement is required.
Background: PSR's Policy Statement of March 2015
Improving access to payment systems and making the governance of Operators more inclusive and transparent are key priorities for the PSR. To this end, the PSR exercised its power under section 54 of the Financial Services (Banking Reform) Act 2013 to issue six directions covering access and governance of regulated payment systems, as announced in its Policy Statement of March 2015 (Policy Statement). These directions are summarised below:
- With effect from 30 June 2015, a requirement that BACs, C&CCC, CHAPS and Faster Payments (FPS) publish “fair, open and risk-based criteria for direct access to payment systems”. In addition, a requirement that these Operators, together with LINK, MasterCard and Visa, report to the PSR each year on the progress they have made to ensure fair and open access to their systems. The first access compliance reports were required to be submitted to the PSR by 31 July 2015.
- Also with effect from 30 June 2015, a requirement that Barclays, HSBC, Lloyds and RBS publish clear and up-to-date information on its sponsor bank services in respect of access to, and use of, any non-card regulated payment systems by indirect Payment Service Providers (PSPs).
- With effect from 30 September 2015, a requirement that BACs, C&CCC, CHAPS, FPS and LINK ensure that their internal decision-making procedures and processes “appropriately represent” the interests of service users. Similar to the reports required as to access compliance, Operators became required to submit annual reports as to how they have complied with these governance directions. The first compliance reports were required to be submitted by 30 October 2015.
- A requirement that BACs, C&CCC, CHAPS, FPS and LINK take reasonable steps to ensure no conflicts of interest exist by which directors of these Operators also sit as a director on the board of a related infrastructure provider. In addition, these Operators have also been required to publish board minutes and board voting outcomes as soon as possible since 30 April 2015 so as to increase transparency with the PSR.
The compliance reports submitted pursuant to these directions have helped to inform the PSR’s view of progress that has been made since the directions took effect, particularly with regards to achieving more open and flexible direct access to payment systems, and improving the inclusivity and transparency of Operators’ governance arrangements.
Progress made so far
The PSR is encouraged by the progress Operators have made to ensure fair and open access to payment systems. In particular, the PSR notes:
- Progress has been made to ensure direct access is more flexible
- More comprehensive information is being made available to potential direct participants
- All Operators have noted in their compliance reports that their access requirements have been publicly disclosed, improving transparency and the availability of information.
The PSR has said that this has had a positive impact on the payments sector with, for example, an increase in the number of Payment Service Providers (PSPs) declaring an interest in becoming direct participants in payment systems.
The Report summarises at a high level the work each Operator has undertaken so far to address concerns around access and to identify future steps they propose to take to address these issues.
Areas of focus
Given that the PSR’s access directions have only been in force since 30 June 2015, many of the issues identified by way of consultation still require focus and progress. The Report highlights specific areas that require continued focus although the Operators to which each one applies varies. The areas of focus are:
- A need for Operators to make as much information available to potential members as possible without requiring a non-disclosure agreement to be entered into, so as to improve transparency and enhance public disclosure of access requirements.
- To be a direct participant of BACs, C&C, CHAPS and FPS, the Operators of these systems require firms to have a settlement account at the Bank of England. The Report therefore requires these Operators to engage with the Bank of England, as necessary, and to consider alternative solutions or settlement models to Bank of England settlement.
- Continual consideration by Operators of the appropriateness of requirements relating to the regulatory status of PSPs that want direct access. Operators should also consider changes to support more proportionate and open access for small banks and non-bank PSPs.
- Continual evaluation by Operators of the proportionality of their access requirements, especially technical requirements.
- Reporting on the potential impact of the Interchange Fee Regulation (IFR) on access arrangements and requirements within card payment systems. The PSR expects this to be reported on by Operators in their 2016 compliance reports.
- Finally, an issue that was not raised in the Policy Statement: ensuring that Operators have clear and well-defined onboarding processes and that they identify areas that could be streamlined or improved. In particular, there should be a focus on ensuring Operators effectively manage their pipe-line of new joiners.
There are also issues for specific Operators to consider in relation to financial risk management and for BACs, the potential liability faced by collecting organisations in relation to the direct debit scheme.
Progress made so far
The Report notes that the PSR is particularly encouraged by the steps Operators have taken to comply with General Direction 5 by ensuring there are no conflicts of interest arising from directors of infrastructure providers sitting as board members of Operators. The PSR also notes that Operators have begun publishing board minutes, thus improving transparency and ensuring compliance with General Direction 6.
Further, all Operators have reported on the measures that they have implemented, or that they propose to implement, to improve the representation of service users’ interests across their corporate decision-making. This shows that Operators are engaging with the PSR’s requirements.
The Report summarises the work each relevant Operator has undertaken to comply with PSR’s governance directions.
Areas of focus
To maintain compliance with its governance directions, the PSR considers that Operators should continue to ensure that they publish board minutes as quickly as possible, and with minimal redactions. The PSR also underlines the importance of Operators continuing to comply with General Direction 5. In this regard, the PSR notes that its market review into ownership of infrastructure provision will inform its approach to governance and ownership of payments systems.
In regards to service users, the Report highlights three key areas of focus where additional progress is expected. These are:
- For certain payment systems, identifying service users whose views need to be understood and considered as part of the decision making process. The PSR considers that not all Operators have been engaging with a broad enough base of service users, and that the PSR will identify service users whose views Operators should consider
- Ensuring that Operators give sufficient consideration and representation to the views of service users during board discussions and similar internal meetings
- Ensuring that Operators engage with service users whilst undertaking internal reviews of their own governance arrangements.
The PSR has written to individual Operators to explain the areas that require attention. It is proposing to engage in direct discussions with Operators to monitor progress and keep abreast of the key developments with each payments system. The PSR has invited comments on the Report.
What this means for you
The PSR has decided to make its report an annual exercise and has made clear its future requirements in relation to the Operators’ compliance reports. Generally, the PSR appears to be pleased with the progress that has been made. It notes where it thinks greater progress is needed and to date makes particular examples of Operators that have done well.
It is clear, however, that the PSR believes there is a lot more to do. It prefers that Operators get on and make changes voluntarily but makes a point of noting throughout the Report that if progress is inadequate it will take action. In the Report, the PSR highlights that its directions are principles-based and that compliance is not a box-ticking exercise, noting “there is a broader obligation on the operators to do all they can to meet the spirit of our directions” and that the payments industry must“rise to the challenge”.