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After over half a year in development, Britain’s financial services regulatory authority, the Financial Conduct Authority (FCA) has set forth a full set of proposals as to how its new Payment Systems Regulator (PSR) will oversee the £75 trillion payments industry when it becomes fully operational on 1 April 2015.
In March this year, LeapRate announced that the FCA had planned to establish a separate, dedicated regulatory authority for the electronic payments sector. The proposals will further the PSR’s three objectives which encompass the promotion of competition, the promotion of innovation, and to ensure that payment systems are developed and operated in the interests of service-users. The PSR’s proposals, alongside initiatives from the Financial Conduct Authority and Competition and Markets Authority, will help create a more competitive banking industry.
In some respects, this ethos echoes that of the current Chancellor of the Exchequer George Osborne, who has explained that he would like to develop London’s potential as an innovator in financial technology.
Open for consultation until 12 January 2015, the package of measures focuses on driving industry strategy and encouraging innovation; opening up the ownership, control and governance of payment systems; and providing fairer and more open direct access to payment systems as well as increasing transparency.
According to the FCA, purely down to the function which payment systems perform in enabling people to spend and transfer money, they underpin the UK’s everyday financial activity.
Hannah Nixon, managing director of the PSR, today made a public statement: “Last year more than 21 billion financial transactions were made possible by payment systems. Everything from withdrawing money from a cash machine, paying a bill, making a payment by cheque, receiving your pension, and high value payments between the banks uses a payment system.”
“It’s vital, therefore, for the UK to have world class payment systems. The systems we have today have been developed incrementally over time by the major banks. So while they are relatively resilient, they are often treated as back office functions. Competition is limited, decision making opaque, and this is stifling innovation. This has to change.”
“I want to see an industry that is responsive to, and focused on, the needs of those using payment services. This will be an industry that encourages and enables competition and innovation, provides value for money, while maintaining reliability and security. In short: a UK payments industry that is world class. I am confident that our proposed package of measures will make this possible” concluded Ms. Nixon
Andrea Leadsom MP, Economic Secretary to the Treasury, further stated that “A key part of the government’s long term economic plan is to open up competition in the banking sector so that it serves the needs of Britain’s businesses and customers. That’s why we set up the Payment Systems Regulator and I welcome today’s consultation on its regulatory framework.”
“We want to ensure payment systems foster competition and innovation in the interests of customers. In particular, we want to ensure that where smaller firms want direct access to the payment systems, they can get it on a fair and transparent basis.”
“I’m pleased the PSR’s consultation sets out, for the first time, the detailed measures it is proposing to achieve these important goals, as well as the strong powers it will consider using if these measures don’t prove sufficient” he concluded.
The core proposals are comprehensive, and include the initiative to drive collaboration and deliver innovation. The PSR will introduce a new approach to industry strategy setting by creating a Payments Strategy Forum with broad service-user representation.
Furthermore, ownership, control and governance of payment systems will be opened up to give all service-users a voice when decisions are made, not just those that own the systems (typically the major banks). Publishing Board minutes and votes will be mandatory. Payment system operators will also need to identify and address conflicts of interest. From 30 September 2015, operators will need to annually report back to the PSR on how they have improved these areas.
The FCA considers that there will be fairer and more open direct access to payment system operators. BACS, Check & Credit Clearing, CHAPS and Faster Payments must provide access on an objective, risk-based, fair and open basis, and publicly disclose their access requirements.
This will mean that, in the future, banks and innovative payment service providers will be able to gain direct access to payment systems on fair terms. The application process should be quicker, simpler and not distort competition. LINK, MasterCard and Visa, which are already subject to a similar access requirement under Article 28 of the European Payment Services Directive, must also publish their requirements. From 30 June 2015 all operators will have to report annually showing how they are complying with their relevant access rule.
There will be greater transparency for those seeking indirect access to interbank systems as sponsor banks will have to publish information on their access criteria and processes; the industry will also develop a PSR-approved Code of Conduct.
The PSR will set high-level behavioural expectations through three ‘Principles’, which set out its requirements for industry to act in an open and cooperative way with its regulators, to be compliant, and to manage business and financial risks so that the smooth operation and management of payment systems is not jeopardised.
Two market reviews will be launched by April 2015: one to assess the ownership and competitiveness of the current infrastructure and consider other possible infrastructure models and ownership structures; the other will look at how indirect access is provided. Work on both of these has already begun.
Where firms fall short of its expectations, the PSR will have the power to carry out enforcement investigations, issue penalties and censures, and compel them to take remedial action. The PSR will also 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.
Who the PSR will regulate
The PSR will regulate the largest and most important payment systems which, if they were to fail or be disrupted, would cause serious consequences to their users. HM Treasury is currently consulting which systems to include and has proposed the main interbank payment systems: Bacs, CHAPS, Faster Payments, LINK, Cheque and Credit Clearing, Northern Ireland Cheque Clearing, and the two largest card systems in the UK, MasterCard and Visa.
For each designated payment system, all the participants will fall under the PSR’s remit. Therefore, as well as the payment system operator, the PSR will also have oversight of payment services providers using that system (such as a high street bank), and the infrastructure providers to the payment system (such as VocaLink).
More on the PSR’s plans can be seen on the FCA’s website here.