On 25 March 2015, the Payment Systems Regulator (PSR), which becomes operational on 1 April 2015, published a Policy Statement which confirms how it will regulate the payment systems industry.
It has also published the terms of reference for two market reviews, announced an ‘ambitious’ Policy Work Programme for 2015/16, which includes a work programme on card payment systems, and released its Annual Plan and Budget for 2015/16.
A summary of key parts of the Policy Statement and related publications is set out in this briefing, together with a timeline of key dates for compliance.
- Regulatory approach
- Ownership, governance and control of payment systems
- Draft processes and guidance
- Card systems - programme of work
- Market reviews
- Next steps
- Key dates for compliance
In November 2014, we reported the launch of the PSR’s consultation, 'A new regulatory framework for payment systems in the UK'.
The PSR was established as an independent economic regulator with concurrent competition powers to regulate the payments industry. Its vision is ‘to have payment systems in the UK that are accessible, reliable, secure and value for money’. It has three objectives: to promote competition, innovation and the interests of ‘service-users’ (those who use, or are likely to use, services provided by payment systems).
As part of the 2015 Budget, the UK Treasury announced the eight payment systems that will come within the PSR’s remit1:
- Faster Payments
- Cheque & Credit Clearing
- Northern Ireland Clearing
Following its two month consultation period, the PSR received 88 responses, the majority of which were broadly supportive of the PSR’s proposed approach and proposals. However, there were ‘notable exceptions’ to this broad support, namely the card system operators, which argued that it was not proportionate to apply a number of the proposals to them. Having reviewed these responses and engaged with stakeholders, the PSR has now confirmed the approach it will take to regulation, positioned as a ‘fresh start’ for the sector.
The PSR’s aim is that this package of measures will ensure there is an improved strategy-setting process; to improve innovation and services, better governance and control of payment systems – where users’ voices are heard and outcomes are improved; and there are no unnecessary barriers or burdens for businesses wanting to get access to the payment systems.
The PSR expects a ‘good open and constructive relationship’ with industry. However, it makes it clear that if the measures it is taking do not adequately advance its objectives, it will consider using the ‘wide-ranging powers’ it has been given to remedy this.
The PSR will promote its objectives, prioritise the actions that affect the wider market and‘incentivise good outcomes rather than controlling them’.
The PSR will make independent decisions that are evidence-based and proportionate. Its decisions will be 'deliberate, transparent and predictable'. The PSR will keep this approach under review and continue to develop and adjust it as necessary over time.
Probably the most significant departure from the approach outlined in the consultation is that the PSR will not be taking its high-level, legally binding behavioural principles forward, as proposed.
Principle 1, proposed in November 2014, concerned relations with regulators. This principle is not being retained as set out in the consultation. The PSR will make a general direction, which will apply to all entities regulated by the PSR from 30 April 2015 regarding the way they deal with the regulator and what they must disclose to it. The principles concerning compliance and financial prudence, which were proposed in the November 2014 consultation will not be maintained. However, the PSR will monitor the extent to which the regulatory framework is achieving the behaviours expected by the PSR.
The new direction will be narrower than the proposed Principle 1 so that it no longer concerns relations with any regulators, only the PSR. The disclosures that the PSR expects to be made to it under this direction are those which 'could materially adversely impact advancement of the PSR’s statutory objectives and duties'. This represents a change from the previous text, which required firms to notify of 'anything relating to the participant of which the PSR would reasonably expect notice'. The PSR has also clarified in guidance that it does not want to know about the minutiae of firms’ businesses: it expects them to exercise'sound judgment' and tell the PSR why they are sending it particular information.
In relation to the decision to drop Principle 2, which concerned general compliance with regulatory obligations relating to payment systems or services provided by them, the PSR states that it does not believe that this principle needs to be introduced as a legally binding obligation at this time. Furthermore, it states in the Policy Statement that to introduce this principle may have 'unintended consequences' such as reducing the accountability of firms’ governing bodies to ensure compliance.
In relation to the decision to drop Principle 3, which concerned financial prudence, the PSR notes that the stability of the financial system is more of a direct focus for other regulators, and that this principle would not be a 'good fit' with its remit as an economic regulator. Furthermore, there are other requirements to which firms are subject, which make this principle unnecessary.
The PSR has concluded that no further principles need to be introduced at this time.
Ownership, governance and control of payment systems
The PSR’s proposals on ownership, governance and control of payment systems remain largely intact. However, it is notable that the directions in this area (as set out below) do not apply to the card system operators at this time. The PSR states that it will instead consider the issues in relation to Visa and MasterCard and the appropriateness of regulatory intervention in its new card systems work programme.
As proposed in its November 2014 consultation paper, the PSR will establish a Payments Strategy Forum to develop and agree strategic priorities for the long-term development of payment systems requiring industry collaboration. The PSR will ‘control’ the design and set-up of the forum and monitor outputs. If the PSR is dissatisfied with the progress made, it will ‘consider intervening’.
The PSR has, as proposed, issued a general direction to the interbank operators to ensure service users' interests are represented in the decision-making processes of the regulated payment systems' governing bodies. Interbank operators must comply with this direction by 30 September 2015 and they must report compliance annually. The first report is due on 31 October 2015.
The PSR has also made a general direction requiring the interbank operators, from 30 April 2015, to publish minutes of their governing body meetings (including how directors have voted) to make the decision-making process more transparent. In addition, a general direction on conflicts of interest requires operators to ensure that no director of the payment system is simultaneously a director of a central infrastructure provider to that payment system and the system itself. Operators must comply by 30 April 2015.
The PSR’s access proposals remain largely consistent with the November 2014 consultation proposals.
The PSR’s access proposals relate to direct and indirect access to payment systems.
Direct access is where there is a direct agreement between the payment service provider (PSP) and the operator of the payment system.
Indirect access is 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: Barclays, HSBC, Lloyds and RBS.
As proposed in November 2014, the PSR has issued a general direction (known as its ‘Access Rule’) that applies to Bacs, Cheque & Credit Clearing, CHAPS and Faster Payments requiring them to have ‘objective, risk-based and publically-disclosed access requirements, which permit fair and open access.’ The systems must comply by 30 June 2015. LINK, Visa and MasterCard are all subject to other access requirements under European legislation.2
To support this, the PSR has also made directions requiring all regulated payment system operators to provide the PSR with an annual report concerning compliance with the access rules applicable to them (the Reporting Rule). The first report is due by 31 July 2015. In addition, they are required to publish their access requirements from 30 June 2015.
The PSR considers that these arrangements will allow PSPs to evaluate the relative merits of different methods of accessing payment systems. The industry is voluntarily creating an ‘information hub’ which will contain information about accessing the payment systems, further improving transparency.
The PSR is requiring the four main sponsor banks to publish ‘clear and up-to-date’ access-related information to enable those wanting to use these services to compare them. The PSR has given greater clarity on the information that sponsor banks need to publish and has given them a three month extension in which to comply (compliance by 30 June 2015).
The PSR proposed a Sponsor Bank Code of Conduct in its November 2014 consultation to address concerns about the provision of indirect access. The PSR is taking this initiative forward – the final code must be approved by the PSR. It anticipates that it will be in place by 30 June 2015.
Draft processes and guidance
The PSR has published its final Powers & Procedures Guidance, Super-Complaints Guidance and Objectives Guidance. It has also published its Administrative Priority Framework, which sets out the broad parameters the PSR will consider when deciding whether to conduct an investigation or how to deal with an application or a complaint.
The Policy Statement also includes the final version of the PSR’s Penalty Guidance, which applies when it has found a regulatory ‘compliance failure’. The PSR has confirmed it is proceeding with the broad approach set out in its consultation. The level of penalty will be calculated according to the seriousness of the 'compliance failure' and increased or decreased in relation to aggravating and mitigating factors. The PSR confirms that penalties will be based on a percentage of the firms’ annual revenues from the relevant business activity in the UK, rather than other metrics proposed in the consultation.
In our article concerning the November 2014 consultation, we noted the proposal to impose an upper limit on fines of 10%. It is striking that the PSR has dropped this from its final guidance. The PSR claims that this will give it flexibility when setting regulatory fines and allow it to impose fines that have a necessary deterrent effect. It has disregarded arguments that unlimited fines could expose not-for-profit entities to too much risk. The PSR considers that such risk is outweighed by the fact that it will take into account the circumstances of the case and adopt a proportionate approach.
Card systems – programme of work
In addition to the Policy Statement, the PSR has also published a number of other documents, including a Policy Work Programme for 2015/16. This includes details of a programme of work on the cards payment systems. The PSR is expected to be the competent national authority under the European Interchange Fee Regulation (IFR) when it comes into force. The PSR has therefore committed, as part of this work programme, to considering how the IFR, and other regulations may apply, and wider issues raised about card systems ‘including transparency, governance, access and fees’.
As already noted, most of the PSR’s measures on ownership, governance and control do not apply to Visa and MasterCard. It appears that the PSR is reserving its position until it has considered the card systems more fully so that it can ensure that its measures do not have ‘unintended consequences’.
The PSR has, alongside its Policy Statement, launched two market reviews and published the terms of reference of these reviews.
The first is a review into ownership and competitiveness of infrastructure provision. This review is intended to establish ‘whether current ownership arrangements and relationships lead to a state of competition that delivers good outcomes for service users or whether changes may be warranted’. The review will cover Bacs, Faster Payments and LINK, and will look at infrastructure relating to clearing of payments.
The other review concerns indirect access to payment systems and will cover Bacs, Cheque & Credit Clearing, CHAPS, Faster Payments and LINK. The review will consider ‘the economic issues around Indirect Access to payment systems, the limited choice PSPs may have in securing Indirect Access and whether arrangements deliver a good outcome for service users’.
The PSR’s consultation on its competition concurrency guidance closed on 20 March 2015. Finalised guidance is expected in due course. The fullest extent of the PSR toolkit can only be appreciated once this is in place.
Key dates for compliance
1 April 2015
- PSR becomes operational
30 April 2015
- All regulated entities must comply with general direction regarding relations with and disclosure to the PSR.
- Interbank operators (excluding Northern Ireland Clearing) must comply with directions to:
- publish minutes of their governing body meetings
- ensure no director of the payment system is simultaneously a director of a central infrastructure provider to that payment system.
30 June 2015
- Bacs, Cheque & Credit Clearing, CHAPS and FPS must comply with ‘Access Rule’: to have ‘objective, risk-based and publically-disclosed access requirements, which permit fair and open access to the regulated payment system’.
- All payment systems operators required to publish their access requirements from this date.
- Sponsor banks (Barclays, HSBC, Lloyds and RBS) required to publish ‘clear and up-to-date’ access-related information for potential customers.
- Sponsor Bank Code of Conduct expected to be approved by the PSR and in place by this date.
31 July 2015
- All regulated payment system operators must comply with the ‘Reporting Rule’ by submitting their first report for the 12 month period ending 30 June 2015 by this date. The report must contain the detail prescribed by the PSR concerning compliance with the access requirements relevant to the operator’s system (either under the PSR’s Access Rule or European legislation3).
30 September 2015
- Interbank operators (excluding Northern Ireland Clearing) must comply with general direction to ensure representation of service-users’ interests in payment systems’ governing body decision-making processes.
31 October 2015
- Interbank operators (excluding Northern Ireland Clearing) must submit first annual report for 12 month period to 30 September 2015 on compliance with direction to ensure representation of service-user interests.