HM Treasury (“HMT) yesterday published a brief consultation (“Consultation”) on the implementation of the Interchange Fee Regulation (“IFR”) in the UK, which was adopted by the European Parliament and Council of the European Union on 29 April 2015. The interchange fee caps come into effect on 9 December 2015 and the majority of provisions relating to business rules on 9 June 2016.
HMT is seeking views on the following:
- how best to meet its obligation to put in place an adequate and efficient regulatory regime to supervise compliance with the IFR; and
- how it should exercise the discretion afforded to Member States in applying and setting caps to interchange fee rates.
The terms of the IFR require Member States to designate a competent authority that is empowered to supervise the IFR and grant the competent authority appropriate investigation and enforcement powers to do so.
As expected, it is the Government’s intention to designate the Payments Systems Regulator (“PSR”) as the ‘overarching’ regulator for this purpose. This is on the basis that the PSR is best placed to supervise compliance with the IFR and because it already has certain statutory powers to gather information. However, in order for the PSR to perform the role adequately, the Consultation proposes certain modifications and additions to the PSR’s existing powers. In particular, the Consultation states that it is intended that the PSR’s monitoring and enforcement powers andpenalty regime will be modelled on that which currently exists under the Financial Services Banking Reform Act 2013 (“FSBRA”). This will include minor changes to some of its powers such as its power to act on compliance failures and complaints and to conduct investigations and make requests for information.
In addition, while the PSR will act as the ‘overarching’ regulator, it is proposed that the FCA will also have a role in enforcement where the provisions of the IFR overlap with the FCA’s existing remit, specifically where it crosses over with the FCA’s role as supervisor under the UK Payment Services Regulations 2009. The Consultation refers to a list of the relevant ‘overlap’ articles of the IFR which include IFR provisions relating to co-badging, unblending, the Honour All Cards rules, steering rules and the information to be made available to merchants.
The Consultation further proposes that Trading Standards should be responsible for enforcing the obligation on merchants to display clearly to their customers which cards they accept. This seems sensible given that compliance with this provision is likely to be monitored through complaints to local Trading Standards offices.
Finally, the Consultation deals with appeals and provides for an appeal of IFR decisions to the Competition Appeals Tribunal. The Consultation also refers to an intention to provide powers to the PSR to establish an out of court procedure for business-to-business disputes. While the Consultation notes this may include powers to order redress where resolution cannot be achieved, no further detail is given on the nature of the out of court procedure.
Interchange fee caps
The IFR introduces interchange fee caps; a 0.2% cap for debit card transactions and a 0.3% cap for credit card transactions. The IFR, however, provides a degree of discretion regarding the caps to Member States:
- Credit cards: Member States can set lower fee caps for domestic credit card transactions than the caps set out in IFR.
- HM Treasury does not propose to implement a lower cap at this stage (although it may reconsider a lower cap following the completion of a programme of work launched in April 2015, which looks at the impact of IFR).
- Debit cards: Member States can set lower fee caps for domestic debit card transactions and there is flexibility to define lower percentage caps and impose maximum fee amounts.
- HM Treasury intends to allow payment service providers to apply a weighted average, meaning that interchange fees cannot exceed more than the equivalent of 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme. There is a 5 year time limit on applying a weighted average, and a further decision will be taken by 2020, which will be informed by the on-going work programme on the impact of IFR.
- Third party schemes: Member States can exempt three-party card systems which use issuers and/or acquirers from caps for a period of up to 3 years where the scheme’s market share remains below 3% in that Member State.
- The IFR does not exclude ‘three party schemes’ where the third party scheme uses third party payment service providers to issue and/or acquire its cards. Member States have a discretion to exempt third party schemes in these circumstances where the card scheme’s payment transactions made in a Member State do not exceed a 3% share across all card products, for a limited period of 3 years.
- The Government intends to avail of this exemption, noting that this will provide a transitional period in which three-party schemes may adjust their business models, e.g. giving the parties’ time to renegotiate the fees in the licence agreements which underpin this model.
- The Government believes that the PSR is well placed to monitor the market share of UK card schemes to assess whether any of these schemes exceed 3%, noting that it conducts regular horizon scanning exercises further to its duties under FSBRA.
Stakeholders now have until 28 August 2015 to respond to the Consultation and to give their view on the proposed new regulatory regime as well as on HMT’s proposals on these specific aspects of the IFR itself. Given the paucity of detail in the Consultation, it seems likely that questions will arise, and HMT will no doubt be required to publish further detail on its proposals.