Payment systems regulation
On 1 April 2015, the UK became the first country in the world to have separate regulation of payment systems.
On that date, the Payment Systems Regulator (the “PSR”) assumed powers to regulate “designated” payment systems. The following systems have been designated so far:
- The old paper-based systems of cheques and bank giro credits, operated by the Cheque & Credit Clearing Company
- NICC, the equivalent cheque clearing system in Northern Ireland, operated by Belfast Bankers' Clearing Company
- CHAPS: The UK’s guaranteed same-day interbank transfer system, under which individual payments are settled between payer and payee banks in “real time”.
- Bacs (including Direct Debit): An interbank transfer system which is cheaper but slower than CHAPS, as payments between banks are aggregated, netted off and settled on a three-day cycle.
- Faster Payments, launched in 2008 as a faster alternative to Bacs: It too operates on a “deferred net settlement” basis, but it runs three settlement cycles per day.
- LINK, which was developed in the 1980s to create interoperability between the ATMs of different UK banks
- Visa Europe
The PSR is an independent subsidiary of the Financial Conduct Authority.
The PSR was established by the Financial Services (Banking Reform) Act 2013 (“FSBRA”).
Payment systems are defined widely in s41 of FSBRA, as
- a system operated in the course of business for the purpose of enabling people to transfer funds, and
- a system designed to facilitate the transfers of another payment system.
Given the large and growing number of systems potentially falling within this definition – including facilitative services like chip-and-pin and contactless – designation is required to limit and provide certainty over which systems are subject to regulation.
Issues for the PSR
Payment systems are typically established by cooperation between major banks, and operated by special-purpose companies (“Payment System Operators”) in which those banks tend to be stakeholders.
Many other (usually smaller) banks do not have direct access to the payment systems. If they wish to offer the systems to their customers, they must do so indirectly via contractual arrangement with a “sponsor” bank that has direct access (“Direct Service Providers”).
Direct service provision is not necessarily restricted to the stakeholder banks that founded the system; but there is a practical obstacle to becoming a Direct Service Provider as it requires a settlement account with the system’s Settlement Agent, typically the Bank of England. Settlement of transactions is achieved via the transfer of balances between the Direct Service Providers’ accounts with the Agent.
(1) There are therefore competition concerns, in that it may be commercially essential for an Indirect Service Provider to offer a popular payment system to its customers but it cannot do so other than through agreement with a sponsor bank that is likely to be a competitor.
(2) The rules governing access to the systems and stipulating how they function are generally set by those directly involved in them – i.e. the stakeholder banks through the Payment Systems Operator, and perhaps the technical Infrastructure Provider. The rules may therefore attach insufficient weight to the interests of Indirect Service Providers and the public at large (“service-users”).
(3) Payment systems are often poor environments for innovation. Those directly involved may be too numerous for agile decision-making, those indirectly involved have limited influence and many of the designated systems have unique features giving them a semi-captive market, reducing the need to innovate.
These concerns are reflected in the PSR’s three statutory objectives; to promote competition, to promote innovation, and to ensure that payment systems are developed and operated in the interests of service-users (s50, s51 and s52 of FSBRA).
The PSR’s Powers and Duties
Powers over Participants:
In pursuit of these objectives, FSBRA gives the PSR five powers (detailed below) over the following “Participants” in designated systems:
- s42(3): the Payment System Operator; for example
- Cheque & Credit Clearing Company Limited
- CHAPS Clearing Company Limited
- Bacs Payment Schemes Limited
- s42(4): the Infrastructure Providers;
- the most notable of which is VocaLink, which provides the infrastructure for Bacs (including Direct Debit), Faster Payments and LINK.
- Those who provide core infrastructure are termed “Central” providers, to distinguish them where a system also has peripheral providers.
- s42(5): the Direct and Indirect Service Providers.
The powers are:
- s54: to give directions to Participants:
(a) requiring or prohibiting them from taking action; or
(b) setting standards to be met in relation to their system.
- s55: to require an Operator to establish, change (or not change) the system rules.
- s56: to order:
(a) an Operator to grant access to a party that wishes to become a Service Provider; or
(b) a Direct Service Provider to enter into an agreement with a party that wishes to become an Indirect Service Provider
- s57: to order variation an agreement:
(a) between an Operator and a Service Provider;
(b) between an Indirect Service Provider and its sponsor; or
(c) concerning the fees and charges a system; on the application of a party to that agreement.
- s58: to require a stakeholder in an Operator to dispose of all or part of its interest if necessary to avoid a likely restriction or distortion of competition in the market for either payment systems or the services provided by such systems.
The PSR also has:
- Information-gathering powers under s81 of FSBRA, by which it can conduct Market Reviews.
- A Competition law function concurrent with that of the CMAand FCA, including:
(1) Powers under the Enterprise Act 2002 to
- conduct Market Studies where markets do not appear to function well for consumers; and
- refer such markets to the CMA for a more detailed Market Investigation.
(2) Enforcement powers under the Competition Act 1998 to
- conduct investigations into individual firms’ possible non-compliance with competition law.
Two Market Reviews are currently ongoing:
(1) One is into the supply of indirect access to payment systems. The review is investigating why so few Direct Service Providers choose to sponsor indirect access. It will look into the risks and economics of offering sponsorship and consider what can be done to improve indirect access, perhaps resulting in an increase in the number of sponsors and thus competition between them.
(2) The other is into the ownership and competitiveness of infrastructure provision. The key question to be explored is whether competition is effective in the provision of infrastructure, and if not, why not. The review is focused on Bacs, Faster Payments and LINK, all of which have their infrastructure provided by a single company, VocaLink Limited which, in turn, is owned by the major banks.
s68-70 of FSBRA prescribe a process whereby representative bodies designated by HM Treasury may complain to the PSR that features of a market for services provided by payment systems are, or appears to be, significantly damaging the interests of service-users. The PSR must publish a response within 90 days of the complaint stating how it proposes to deal with it.
The PSR released a Policy Statement on 25 March 2015, stating its early intentions, pursuant to which it has done the following.
Representation of service-users’ interests:
The PSR has used its s54 power to make General Directions to all Operators except NICC, MasterCard and Visa, requiring them:
- under General Direction 4; to ensure representation of service-users’ interests at board level;
- under General Direction 6; to publish the minutes of their governing bodies; and
- under General Direction 5; to ensure that none of their directors are also a director of their own Central Infrastructure Provider to avoid conflicts of interest that may prevent competing providers having a fair opportunity to win contracts.
In addition General Direction 4 requires all Operators to submit annual compliance reports including a self-assessment of how the interests of service-users are being represented, and details of past and anticipated engagement with service-users and consideration of their views.
Facilitating direct access:
The Consultation which preceded the Policy Statement identified unmet demands for direct access, with requirements for gaining access apparently acting as a barrier to entry.
The PSR has therefore used its s54 power to make General Direction 2, setting out a package of measures on direct access, included the introduction of:
- an Access Rule to ensure that access requirements do not disproportionately restrict access or act as a barrier to entry or expansion; and
- a Reporting Rule requiring Operators to publish their access requirements, keep those requirements under review and provide the PSR with an annual compliance report.
General Direction 2 only applies to Cheque & Credit, CHAPS, Bacs and Faster Payments because LINK, MasterCard and Visa are already subject to access obligations under §97 of the Payment Services Regulations 2009. However, General Direction 3 requires LINK, MasterCard and Visa to publicly disclose their access requirements and to report on compliance with the 2009 Regulations.
The Reporting Rules supports the access obligations (under §97 or the Access Rule) by requiring publication of information to allow Service Providers to evaluate the most suitable route to access.
The Consultation also identified concerns of Indirect Services Providers about a lack of information about indirect access arrangements.
The PSR has therefore used its s54 power to make Specific Direction 1:
- requiring the primary sponsor banks (Barclays, HSBC, Lloyds and RBS) to publish clear and up-to-date access-related information, to allow Indirect Service Providers to compare their offerings.
The Policy Statement also announced that the PSR would work with industry to develop a Code of Conduct to address concerns about indirect access such as the risk that sponsors may discontinue supply and concerns around sharing commercially sensitive information with sponsors (who are competitors).
An interim code (subject to consultation) has now been published.