On 14 October 2014, HM Treasury published its list of 8 payment systems which it believes ought to be "designated" for regulation by the new Payment Systems Regulator ("PSR"). The list does not contain many surprises, but there are some interesting omissions. John Worthy, Partner, and Clare Burman, Director, consider why this matters and how interested parties can make their views known.
The new regulator and the designation process
Slated to become fully operational in April 2015, the PSR will be charged with promoting competition, innovation and the interests of end-users of payment systems. The PSR's statutory regime will apply to payment systems designated by HM Treasury.
A system may be designated if HM Treasury is satisfied that deficiencies in the design of the system, or disruption of its operation, would be likely to have serious consequences for those who use, or are likely to use the services provided by the system. HM Treasury must consider 4 criteria:
- 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
- the relationship between the system and other payment systems.
Which systems are proposed for designation?
HM Treasury proposes to designate 8 payment systems: Bacs, CHAPS, Faster Payments, LINK, Cheque & Credit, Northern Ireland Clearing, Visa and Mastercard. These are not particularly controversial – 7 were flagged as likely candidates for designation in the Government's March 2013 consultation and Northern Ireland Clearing (which was not) is geographically complementary to Cheque & Credit.
It is interesting though to note which payment systems are not proposed for designation: HM Treasury does not currently believe that the number and value of transactions processed by American Express, Diners Club and PayPal are significant enough to merit their inclusion in the list. Other systems – such as Paym, Zapp, M-Pesa or Google Wallet are also currently too small or not operational in the UK.
Between them, Visa and Mastercard process 92% of the credit and charge card transactions made in the UK each year. However, will excluding players the size of Amex and Diners Club from the PSR's regulatory net inhibit the promotion of competition, innovation and the interests of end-users of payment systems? In particular, how "big" will a payment system need to be before HM Treasury will view it as warranting designation?
Why designation matters
The effects of designation are likely to be significant:
- It is not just the payment scheme operator that will be caught by designation: all providers of infrastructure to that system and all system participants (such as members, card issuers and merchant acquirers) will be brought under the regulatory umbrella. Effectively, regulation will cover the entire "payment journey" from end to end.
- The PSR will have some powerful tools in its armoury, including:
- Powers to require the establishment of system rules or changes to those rules, and to give directions to operators and other participants - the directions may cover whatever issues the PSR determines to be appropriate;
- Specific powers include requiring amendments to service level agreements, access pricing and other fees. All participants in a designated payment system will need to assess how to accommodate the potential implications of these powers in their business models and terms of service;
- Powers to issue directions to impose financial penalties for breach. Designated payment providers will be looking closely at what is required to stay within their remit;
- Powers to require players to dispose of their interests in payment systems, subject to HM Treasury consent; and
- As part of the objective of simplifying access to payment systems, the PSR will be able to require an established player to allow third party access to its system. New entrants and smaller banks should have an easier route to obtain access to essential payment systems as a consequence.
All participants in the payments industry – and those pondering entry into the market - should be considering how the designation of these 8 major players (and the omission of certain others) will impact on their business model and commercial arrangements.
HM Treasury's consultation is open for comment until 11:45pm on Tuesday 11th November 2014.
If you have any views on the list of entities proposed for designation (or on those which are to be omitted), you should respond by email (to firstname.lastname@example.org) or in writing (to Payments Consultation, Banking & Credit Team, Floor 1 Red, HM Treasury, 1 Horse Guard's Road, London, SW1A 2HQ).
The full consultation paper can be read at https://www.gov.uk/government/consultations/designation-of-payment-systems-for-regulation-by-the-payment-systems-regulator.
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