The UK’s High Court has asked the Court of Justice of the European Union (CJEU) for a preliminary ruling on the interpretation of the Interchange Fees Regulation (IFR), which caps credit and debit card interchange fees. The referral has been made part way through Judicial Review (JR) proceedings between American Express Co v The Lords Commissioners of HM Treasury, Diners Club International Limited, and MasterCard Europe SA.

The IFR, and the UK’s approach to compliance

The IFR provides that:

Recital 28: “Card-based payment transactions are … carried out [using] ‘three party payment card schemes’ (cardholder — acquiring and issuing scheme — merchant) [(3P Schemes)] and ‘four party payment card schemes’ (cardholder — issuing bank — acquiring bank — merchant) [(4P Schemes)]. Many [4P Schemes] use an explicit interchange fee, which is … multilateral. To acknowledge the existence of implicit interchange fees and contribute to the creation of a level playing field, [3P Schemes] using payment service providers [PSPs] as issuers … should be considered as [4P Schemes] and should follow the same rules… However, … it is appropriate to allow for a transitional period during which Member States may decide not to apply the rules concerning the interchange fee cap if such schemes have a very limited market share in the Member State concerned

Recital 29: “The issuing service is based on a contractual relationship between the issuer of the payment instrument and the payer … The issuer makes payment cards available to the payer, authorises transactions at terminals … and may guarantee payment to the acquirer for transactions that are in conformity with the rules of the relevant scheme. Therefore, the mere distribution of payment cards or technical services, such as the mere processing and storage of data, does not constitute issuing

Article 1(3)(c): The interchange fee caps in articles 3 and 4 of this Regulation don’t apply to “transactions with payment cards issued by [3P Schemes]

Article 1(5): That said, “When a [3P Scheme] licenses other PSPs for the issuance of card-based payment instruments … or issues card-based payment instruments with a co-branding partner or through an agent, it is considered to be a [4P Scheme], and the interchange fee caps will apply]. However, until 9 December 2018 in relation to domestic payment transactions, such a [3P Scheme] may be exempted … provided that the card-based payment transactions made in a Member State under such a [3P Scheme] do not exceed on a yearly basis 3 % of the value of all card-based payment transactions made in that Member State

Article 2(2): “‘issuer’ means a [PSP] contracting to provide a payer with a payment instrument to initiate and process the payer’s card-based payment transactions

Article 2(18): “[‘3P Scheme’] means a payment card scheme in which the scheme itself provides acquiring and issuing services and card-based payment transactions are made from the payment account of a payer to the payment account of a payee within the scheme. When a [3P Scheme] licenses other [PSPs] for the issuance of card-based payment instruments … or issues card-based payment instruments with a co-branding partner or through an agent, it is considered to be a [4P Scheme]

In its consultation on the UK’s approach to the IFR, HM Treasury said:

  • the 4P Scheme is the “predominant” model in the UK, and the acquirer is usually obliged to pay an interchange fee to the issuer every time a transaction occurs;
  • in 3P Schemes, the card scheme acts as issuer and acquirer and the banks aren’t involved, so there isn’t an interchange fee – fees are negotiated bilaterally between the card scheme and the merchants instead;
  • some 3P Schemes use PSPs to issue and/or acquire their cards, using licenses that rely on bilaterally negotiated fees;
  • the IFR will treat these 3P Schemes as if they were 4P Schemes, and these Scheme / PSP fees will be subject to the same fee caps;
  • 3P Schemes will need some time to renegotiate their license agreements to accommodate this;
  • so, the government will take advantage of the exemption in article 1(5) of the IFR, to give them time to adjust.

“Overall“, consultation respondents agreed with this approach, so that’s HM Treasury did (see the FSMA (Payment Card Interchange Fees) Regulations 2015).

The Judicial Review proceedings and the referral to the CJEU

At the time of writing, there’s no publicly available information, which explains (a) why American Express Co has asked the High Court to judicially review (JR) the HM Treasury decisions under or in connection with the IFR; (b) the cause of action on which the JR is based; (c) the remedies being sought; or (d) what impact the Court’s decisions might have on the parties to the JR proceedings, or anyone else. All we can say for sure is that the High Court has asked the CJEU whether:

  1. the IFR rule that, “a [3P Scheme] issuing card-based payment instruments with a co-branding partner or through an agent, [must] be treated as [if it was] a [4P Scheme]“, only applies if and to the extent that the co-branding partner or agent is acting as an “issuer“? and
  2. (If the answer is “no“, it applies more broadly that), whether articles 1(5) and 2(18) of the IFR are invalid because (a) the IFR doesn’t sufficiently “state the reasons on which [it is] based” (as required by article 296 of the Treaty on the Functioning of the European Union); (b) they reflect a “manifest error of assessment” (they seem to be based on a misunderstanding or false premise); and/or (c) they breach the principle of proportionality (they go much further than is required to achieve the EU’s policy objectives).

Next steps and comments

In all probability, the JR is on hold, pending the CJEU’s response to the High Court’s questions. American Express Co, HM Treasury, Diners Club International Limited, MasterCard Europe SA, and other interested parties now have an opportunity to give written statements to the CJEU, with their answers to these questions, and their reasons. The CJEU’s judge-rapporteur will summarise these statements, and they’ll be discussed at the Court’s general meeting, which will decide (a) how many judges will deal with this referral (it’s usually 5, but it can be 3 or 15); (b) whether a hearing is required; and (c) whether an opinion from the Advocate General is necessary. If there is a hearing, it will be held in public, and American Express, HM Treasury, Diners Club International Limited and MasterCard Europe SA will be invited to make submissions to, and answer questions from, the Court and the Advocate General. If the CJEU has asked the Advocate General for an Opinion, it will be given after the oral hearing; and the CJEU will make its decision after that. When the CJEU’s decision is available, the JR will resume, and the High Court will be able to make its decisions using the law as the CJEU has found it to be. This will plainly take many months, and it could take several years.

This generates some interesting Brexit timing questions: the UK has said that it will not give its article 50 notice to the European Union in 2016. If that’s right, the UK is unlikely to leave the EU before the end of 2018. Even when it does, we have no idea whether European Law will also cease to apply in and to the UK … which seems to suggest that there’s every chance that relevant Scheme / PSP fees will be capped from 10 December 2018, even if the cap might be lifted later on. The Brexit related questions therefore seem to be: exactly when and how does the IFR “3P Schemes = 4P Schemes” rule apply; and (effectively) will the CJEU strike these provisions down before 10 December 2018? We’ll see.