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The new UK payments regulator: a carbon copy of its Payments Council?

Inertia set to condemn UK merchants to £1B ($1.56B) of extra costs.

The Payment Systems Regulator (PSR)’s March 2015 Policy Statement includes exemptions for Visa and MasterCard and reveals no strategy with regard to the application of interchange fee regulation (IFR) in the UK, leaving merchants exposed to up to 9 more months of unfairly high fees.

Having fought for regulation for so long, this is a source of great frustration for CMSpi. In 2012, we launched a campaign for an independent UK payments regulator. This campaign was borne out of years of first-hand experience - witnessing the frustrating burden that fixed, non-negotiable interchange fees incur on struggling merchants of all sizes.

The campaign included a petition signed by more than 30 of the UK’s largest merchants and a letter to the UK Chancellor, George Osborne. Eventually, in March 2013, the UK Treasury announced the intention to introduce such a payments regulator. Following a public consultation, the PSR initially formed on the April 1st 2014 and became fully operational on the April 1st 2015.

One of the responsibilities of the PSR is to oversee the implementation of IFR in the UK. It is a common misconception that the IFR solves the interchange debate definitively, however, this is not the case. The PSR has the responsibility to ensure that the IFR is imposed fairly and has the power to impose more stringent rules within the regulations.

The PSR has set up a panel designed to, “offer the PSR advice and early input on the extent to which the PSR’s general policies and practices are consistent with its general duties, and how the PSR is achieving its operational objectives”.

However, having reviewed the list of members of this panel, I have concerns about its composition, and I fear that it will impact on its objectivity as more than 50% of its members are from a banking background. In fact, it has occurred to me that the PSR panel is beginning to resemble the UK Payments Council, whose shortcomings were one of the reasons for the government’s desire to create a new regulator.

“The Payments Council is the body that represents the payments industry in the UK.” 

I’m concerned this failure to create a balanced panel will compromise efforts to achieve a fair outcome. There are already signs of failure of will. In its Policy Statement, the PSR announced it has decided to exempt card schemes from its service user directive, meaning that Visa and MasterCard will not need to release information about how interchange fees are calculated. Additionally, the Policy Statement revealed that there is no clear policy from the PSR regarding interchange and, with only a matter of months left until the caps come in anyway, all the indications are that they have no appetite to impose stricter interchange caps.

In other member states, such as France, Spain, Poland and Hungary, regulators have relished the opportunity to introduce fairer interchange fees sooner than the required timeframes.

There are early signs that the PSR will not be as enthusiastic to do so, and I do not anticipate the situation improving in the current environment. Hence, I fear that any attempts made by the card networks to circumvent the regulation may be ignored by the regulator, to the detriment of merchants and consumers alike.



Comments: (1)

Paul Penrose
Paul Penrose - Finextra - London 10 June, 2015, 17:33Be the first to give this comment the thumbs up 0 likes

The PSR have been in touch, and asked us to post this response:

Mark Falcon, head of regulatory strategy and policy at the Payment Systems Regulator

I read with interest the recent blog post by Alistair Combes of CMS Payments Intelligence. Alistair made a number of points that I suspect echo concerns others may have about whether we are really delivering change. These are valid questions and I would like to take the time to explain why I really do believe we are making a difference.

But Alistair also made a few criticisms that I don’t recognise – specifically on the PSR Panel, and the Interchange Fee Regulation (IFR) and card payment systems. I’ll come to those shortly, but first some context.

Operational since April 2015, just a little over two months, we’re the first dedicated economic regulator of payment systems in the world. Our role is simple enough - ‘make payment systems work well for those that use them’ - the difficult bit is making that happen.

Many of you will be familiar with our March 2015 Policy Statement which set out a range of measures that made up our final approach. And those measures will have an impact.

Because of the PSR, there will now be clearer and fairer access to the payment systems (direct and indirect), and improved transparency and governance across the interbank payment system operators. The Payments Strategy Forum, will, unlike previous arrangements under the Payments Council, make sure users are part of the process for setting the future strategy of the payments industry. And we are also conducting market reviews into the supply of indirect access and the ownership and competitiveness of infrastructure provision.

These are substantial developments with possible far reaching consequences. What we are doing, I think, will change the market for the better.

It is wrong, therefore, to suggest that we are maintaining the status quo. And this brings me to the concerns Alistair raised.

First, that the membership of the PSR Panel is not balanced.

There are, of course, members of the PSR Panel that represent the ‘old’ payments industry, but what wasn’t highlighted is the number of new voices that are representing the wider users of payment systems. The strength of the Panel is that it brings to the same table, for the first time, consumer, charity, small business, retail, smaller PSP, and government representatives along with banks, interbank and card system operators. These members have different opinions, naturally, but they speak with unanimous commitment to adding value to the work of the PSR.

Alistair also stated that he fears “any attempts made by the card schemes to circumvent the [IFR] may be ignored by the regulator”.  The IFR actually requires that circumvention is guarded against. If we are given this role, we will take it very seriously. But while we expect the PSR to be a competent body for monitoring and enforcing the IFR in the UK, as it stands we have not yet been formally appointed.

But that doesn’t mean we’re standing still. As an economic regulator being evidence-based is vital and that is why we are looking closely at what the IFR requires and what impact it might have on card payment systems and those who use them. Deciding on how best to regulate card systems in the UK without evidence would be wrong. The cards project we announced in our Work Programme will start the information gathering process and indeed we will say more on that piece of work soon.

And this applies to Alistair’s third point, that we have “exempt [ed] card schemes from [our] service user directive.”

While they may appear similar in purpose, the ‘plumbing’ of card and interbank payment systems is different, as are the governance arrangements. To overlay regulation for interbank operators onto card operators may be too simplistic, so we need to understand the best way forward.

It’s not every day that a new economic regulator comes along so it’s only right that people ask questions, and we welcome those. And while I disagree with Alistair on these points, I welcome him airing these views and CMS sharing them with us directly.

We must be open and honest with each other and not afraid to share our views.

Such an approach, I believe, combined with the policy work we have embarked upon this year, will help deliver payment systems that really do work well for those that use them.