The Payment Systems Regulator (PSR) has opened its consultation A new regulatory framework for payment systems in the UK with responses due by Monday 12 January 2015.
The Consultation Paper sets out the PSR’s proposed approach to regulation, covering the high-level behavioural principles to which participants in regulated payment systems are expected to adhere, as well as a range of policy proposals. It has also published a suite of draft processes and guidance, including penalties guidance.
Key proposals include establishment of an industry strategy-setting forum, requirements as to the governance arrangements of payment systems and measures to promote fairer and more open access to payment systems.
In addition, the Regulator has announced that it will launch two market reviews under its regulatory powers in April 2015, one into indirect access and one into the ownership and competitiveness of infrastructure provision to UK payment systems.
Payment systems enable people to spend and transfer money. They are often referred to as the “plumbing” of the UK’s financial system. The new regulator, established in April this year, will regulate the systems designated by the Treasury and will become fully operational on 1 April 2015. The Treasury consulted on the systems it is proposing to designate and is expected to make its decision by April 2015.
The PSR has been given strong regulatory powers as well as concurrent competition powers. It has three statutory objectives, which are to promote competition, innovation and the interests of service-users.
What kind of regulator will the PSR be?
The PSR’s vision is to have world class payment systems. It wants industry participants (payment system operators, infrastructure providers to payment systems and payment service providers using them) to engage meaningfully with it to engender a “no surprises” culture – it expects participants to cooperate fully with it.
The PSR claims it will be “deliberate, transparent and predictable” in setting out the outcomes it wants to see and the deadlines for achieving them. It expects industry to develop solutions itself and to decide how to implement them but will step in if it does not see the progress it expects at the speed it expects.
The PSR is proposing to adopt three general, legally binding, principles or “behavioural standards” to which participants in designated payment systems must adhere.
The first principle relates to relations with regulators and requires a participant to deal with its regulators in an open and cooperative way. It also requires Payment service providers (“PSPs”) to disclose to the PSR “anything relating to the participant of which the PSR would reasonably expect notice”.
The second principle concerns compliance. It states that participants must observe “proper standards of conduct” and refrain from activity that it could reasonable expect would prevent or restrict other participants from complying with their regulatory obligations in relation to payment systems or services provided by payment systems.
The third principle is financial prudence and would apply to operators and infrastructure providers only. It requires them to ensure they have, or have access to, adequate financial resources to be able to carry out its functions and activities in relation to the relevant regulated payment system. This includes resources to cover business losses and debts as they fall due, and to be able to continue as a going concern and comply with its regulatory obligations.
Non-compliance with these principles would be regarded by the PSR as a regulatory “compliance failure” and could result in public censure and or a fine. Many participants will already be subject to similar principles, for example those of the Financial Conduct Authority. The PSR also sets out in the Consultation Paper further possible additional principles including integrity, skill, care and diligence, management and control, which are set out in one of the Supporting Papers to the Consultation Paper.
Payments Strategy Forum
The PSR proposes to create this new forum to drive collaboration and deliver innovation. The industry has been criticised in the past for being slow to innovate. The forum will be open to a wide range of industry stakeholders and service-users. Its aim will be to develop strategic priorities for UK payment systems in the long-term.
A working group will be set up to launch the forum as soon as possible and the PSR will provide a secretariat to the forum at the start, as well as appointing an independent chair and guiding principles under which it should operate. The PSR will participate in the forum to guide it and “advise as appropriate and act if necessary”. Card payment system operators, as well as interbank operators will be asked to take part.
Ownership, governance and control of payment systems
The PSR will require all operators to ensure the interests of service users (those who use or are likely to use regulated payment systems) are appropriately represented in decision-making processes of regulated payment systems at board level. This measure is intended to address concern about the governance of payment systems, including that the interests of indirect participants are not taken into account in interbank payment system decision-making, or in the case of the card systems, that merchants and acquirers’ interests are not adequately considered. Each year, the PSR will expect the operators to report on how they have complied with this requirement. The first report is due by 30 September 2015.
In addition, operators will be expected to publish board minutes and votes, including how independent directors have exercised their discretion in relation to public interest matters. The PSR intends this measure to bring greater transparency and clarity around decision-making within operators. Compliance will be expected from 1 April 2015.
The PSR raises concerns regarding conflicts of interest. It proposes to require interbank operators to ensure that they do not have the same people acting as directors on their boards as well as the boards of any central infrastructure provider to that payment system. It also expects the payment systems to carry out a review of their conflicts of interest policies and mechanisms.
The PSR expects these proposals to “change the dynamics of voting on operator boards and how control over payment systems is exercised”. Once implemented, if these initiatives do not produce the outcomes the PSR intends, it will take further action, including, if appropriate, use of its divestment powers.
The PSR identifies access to payment systems as being a key issue. PSPs can access payment systems directly (there is a direct agreement between the PSP and the Operator) or indirectly, 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. The Consultation Paper describes the difficulties PSPs face trying to get access to payment systems (whether directly or indirectly).
For direct access, the PSR proposes to implement an Access Rule requiring certain interbank operators to provide access on an objective, risk-based and open basis. Other payment systems that are likely to be regulated (LINK, MasterCard and Visa) are already subject to access requirements under European legislation. All of these systems will need to report annually to the PSR on compliance with the access rules that apply to them. The first report will be due on 30 June 2015.
In addition, the PSR is proposing to require Sponsor Banks to publish certain access-related information to improve transparency. This includes the payment systems to which Sponsor Banks offer indirect access, the key characteristics of that access and eligibility criteria. The information will have to be published on the Sponsor Banks’ websites and provided to the PSR and updated regularly. Compliance will be expected by 1 April 2015.
In addition, the PSR proposes that industry should agree a Code of Conduct governing arrangements for indirect access provided by Sponsor Banks, which will be approved by the PSR. This Code is intended to address concerns expressed by indirect participants relating to the security of their arrangements with Sponsor Banks, such as the lack of written contracts covering access in some circumstances and uncertainty as to the arrangements if the Sponsor Bank chose to discontinue supply. The PSR wants the Code to be in place by 30 June 2015 and for Sponsor Banks to comply by 30 September. If the Code is not developed on a voluntary basis, the PSR will take action to ensure it is put in place.
The PSR will conduct a review into indirect access. The aim of this review is to allow the PSR to gain a better understanding of the economics of indirect access and to consider ways of improving the balance for Sponsor Banks between the risks and rewards of offering indirect access. It will also consider the impact of its indirect access proposals.
The PSR’s review into ownership of and competition in the provision of infrastructure will evaluate what the expected outcomes might be for service-users from infrastructure-related developments. It will also examine potential infrastructure models and ownership structures that could be developed in the future. In addition, the PSR proposes to keep technology and infrastructure under review by carrying out a wider programme of infrastructure-related work next year.
Pre-launch scoping work on both reviews has already begun.
Draft processes and guidance
Also included in the PSR’s consultation are: information about how it will handle commercial disputes, draft Powers & Procedures guidance, Super-Complaints guidance and Objectives Guidance. Furthermore, it has published a draft 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.
It is also consulting on draft Penalties Guidance. It proposes to adopt a principles-based approach to setting fines for compliance failures. The fine will be set according to the seriousness of the compliance failure and increased or decreased depending on any relevant aggravating and mitigating circumstances.
The PSR notes that there are a number of industry characteristics that mean the approach to setting fines is not straightforward. It has not reached a view on whether it should base penalties on revenues or whether, in some circumstances, it should consider other metrics, such as the value of funds transferred through the relevant system to which the compliance failure relates. The PSR has chosen not to propose a minimum level of fine since it wants to have the flexibility to impose a low level fine, if appropriate. It has proposed, on the other hand, an upper limit of 10 per cent of the annual revenues derived or billings made by the participant from the business activity in the UK to which the compliance failure relates.
The full Consultation Paper and related documents are available on the PSR’s website. Given that the Paper introduces a number of new compliance obligations and requires other steps to be taken, such as the creation of a Code of Conduct, the proposals, if implemented, will place an additional regulatory burden on the payment systems themselves as well as their participants, some of which will need to be complied with by 1 April 2014. The sector will therefore need to review the Paper carefully and consider what, if any, steps may need to be taken during the coming months.