UK payments: utility-style regulation on the cards
The Government has published proposals to appoint a utility-style economic regulator for UK retail payments systems. The new regulator - likely to be either the Financial Conduct Authority or one of the incumbent economic regulators - will be responsible for promoting competition and innovation in retail payments. A Treasury consultation on the proposals is open until 25 June 2013.
Currently, the strategy for UK payments is set by the Payments Council, a voluntary, self-regulatory body. The Treasury's view is that a new independent regulator is needed because the existing system does not take sufficient account of the interests of a wide group of stakeholders, particularly users. Initially the Treasury considered creating a "Payments Strategy Board" with a remit to monitor and make public recommendations to the payments industry and to require the industry to explain if it chose not implement those recommendations. The recent LIBOR scandal, the challenges of opening up the payments market and of encouraging innovation have all contributed to the Treasury's view that nothing short of an independent regulator with statutory powers to enforce fair access will do.
Regulation will cover members of UK retail payment systems, currently cheque clearing systems, automated payments systems (Chaps, Bacs, Faster Payments), the LINK ATM network; and three and four-party card schemes, though there will be flexibility to revisit the definition of "in-scope" systems, if needed.
Direct members and direct participants of regulated payment systems will need to have a licence from the regulator. Clarifying the extent of the term "participants" will be a key point of concern for many across the payments sector, including distributors, to understand whether they will fall under the regulatory umbrella.
Licences will be subject to licence conditions covering transparent and fair pricing, non-discriminatory access, governance, maintenance and development of payment systems and co-operation.
There will be much debate about what the obligation to apply fair and transparent pricing means in practice. In particular, licensees and new entrants will be concerned about what is required for a fair and transparent pricing methodology, which needs to be demonstrated to the regulator. If the regulator is not satisfied by a licensee's arguments supporting its pricing, the regulator will have powers to set prices for direct or indirect access to a payment system or interchange fees. This will inevitably be controversial, not least due to the long running regulatory disputes in this area.
While the government does not propose to regulate the ownership of payment systems at present, the regulator will have residual powers to intervene where it believes this is appropriate. These could include Competition Commission action requiring banks to divest their ownership stakes in the payment systems. In addition it could impose additional regulatory requirements on the payment system. In either of these cases, the way the regulator exercises its powers will be carefully scrutinised by the affected parties to ensure it is done in line with legal requirements.
Although infrastructure providers will not be subject to direct regulation, the government proposes to indirectly regulate infrastructure providers through their contracts with the payment schemes.
These proposals mark a significant increase in the regulatory burden on players across the payments industry, with the potential for additional requirements in due course. The sector will be formulating its responses to the consultation over the coming weeks.