On 13 November 2014, the new Payment Systems Regulator (PSR) set out how it proposes to regulate the payments industry when it becomes fully operational on 1 April 2015.
The core proposals include:
- creation of a Payments Strategy Forum
- ownership, control and governance to be opened up
- fairer and more open direct access to payment system operators
- greater transparency for those seeking indirect access to interbank systems
- high-level behavioural expectations through three ‘Principles’
The PSR will have enforcement and investigatory powers (e.g. penalties and censures) powers to handle commercial disputes regarding access to payment systems or fees and charges relating to services provided by them. It also has the power to force a firm to sell its interests in an operator. The proposals underline the PSR’s three objectives:
- to promote competition
- to promote innovation, and
- to ensure that payment systems are developed and operated in the interests of service-users.
Relevant firms should review their business models against the proposals. Implementing regulatory change can be a challenge for any business, but it tends to be easier if you engage earlier on in the process. The sector should continue to work with trade associations and stakeholders (such as HM Treasury and the PSR) to give constructive, co-ordinated feedback, and to sustain this after adoption, as the PSR develops. The consultation runs until 12 January 2015 and two market reviews will be launched by April 2015: to assess ownership and competitiveness of the infrastructure and indirect access.
In October 2014 HM Treasury published a consultation paper on its proposed designation of certain payment systems for economic regulation by the Payment Systems Regulator (the "PSR") under the Financial Services (Banking Reform) Act 2013 (the "2013 Act"). The paper provides guidance on the designation criteria and explains the Treasury's rationale for its decision to designate, or not to designate, the relevant systems.
The payment systems designated for PSR oversight should be differentiated from the Systemically Important Payment Systems ("SIPS") that the ECB designated in August 2014 (TARGET2, EURO1, STEP2-T and CORE(FR)), which are high-value and retail payment systems in the euro area operated by both central banks and private entities.
What is a payment system?
The 2013 Act defines a payment system as "a system which is operated … for the purpose of enabling persons to make transfers of funds, and includes a system which is designated to facilitate the transfer of funds using another payment system". This definition ensures that online and third-party systems which overlay or utilise elements of core payment systems can be treated as payment systems in their own right and, therefore, be subject to regulation by the PSR.
What are the designation criteria?
The 2013 Act provides that the Treasury may make a designation order if it is "satisfied that any deficiencies in the design of the system, or any disruption of its operation, would be likely to haveserious consequences for those who use, or are likely to use, the services provided by the system".
The consultation paper stresses that the mere fact of being designated does not mean that specific failures in a system have been identified.
In its proposed designation order, the Treasury has had regard to four criteria. Rather than a series of binary tests, these criteria facilitate a multi-dimensional assessment, and no one criterion in and of itself will bring the payment system into scope. The four criteria that the Treasury must consider are:
- the number and value of the transactions that the system presently processes or is likely to process in the future;
- the nature of the transactions that the system presently processes or is likely to process in the future;
- whether those transactions or their equivalent could be handled by other payment systems; and
- the relationship between the system and other payment systems.
While neither the 2013 Act nor the consultation paper gives any particular weighting to these criteria, a close reading of the paper suggests that particularly important criteria are (1) the number and value of transactions and (3) transaction-handling by equivalent payment systems. Indeed, in respect of PayPal and American Express, the consultation paper states that both "the number and value of transactions processed [by these systems are not] significant enough to support the inclusion of this payment system in the scope of regulation by the PSR."
More generally, the paper states that the "existence of close substitutes can be a useful indicator of choice and competition". A system's substitutability may therefore suggest a lack of importance, or equally indicate that the competitor should also be designated (and therefore subject to regulation by the PSR).
What payment systems is the Treasury proposing to designate?
The Treasury proposes to designate the following systems:
- Faster Payments
- The Cheque and Credit System
- Northern Ireland Clearing System
For the moment, the Treasury does not propose to designate American Express, Diners Club or PayPal, although it welcomes comments on this issue and proposes to reassess the designation at its next annual horizon-scanning meeting (the date of which has yet to be announced).
The changing face of payment systems?
While the Treasury doesn't propose to designate any outlier payment systems, the influence on its considerations of the online and mobile payments space is undeniable. The Treasury notes that the Faster Payments system provides the underlying frameworks for new overlay e-commerce and m-commerce payment systems such as Pay-m, and the use of Visa's payment system is "likely to be supported by the growth of the internet economy", with innovation in merchant acquiring solutions contributing to higher levels of payments using Visa. In addition to traditional payment alternatives such as cheques and cash, it is noted that substitutes for Visa include Ukash, which allows users to exchange cash for a voucher redeemable at a participating website, as well as PayPal online. The Treasury also points to a number of other payment systems which are not yet ready for regulation because they are too small or not based in the UK – all of which are Internet-based: Paym, Zapp, M-Pesa and Google Wallet.
As the online payments market continues to go from strength to strength, we can expect to see the Treasury designate an increasing number of e-payment and m-payment structures as payments systems, with regulation and brand recognition providing the barriers to entry that limit substitutability.