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The UK's new PSR: The shape of things to come
This piece considers the impact of the UK’s new Payment Systems Regulator (PSR), which was created on 1 April 2014 by the Financial Services (Banking Reform) Act 2013. The PSR will be operational by 1 April 2015 as an independent subsidiary of the Financial Conduct Authority (FCA).
Hannah Nixon, who was previously a senior partner at Ofgem, will lead the new PSR as Managing Director as it takes responsibility for the payment systems industry. When money moves between individuals, businesses and government - when buying goods and services, receiving income or paying taxes - the transfers are made through payment systems. Each year, payments systems in the UK handle more than 20 billion transactions worth over £75 trillion.
Major questions around the future of the payments industry fall to be considered by the PSR. At a roundtable discussion hosted by techUK, which represents some 850 technology sector firms, on 22 September 2014, Nixon provided some key insights, discussed below, into what the impact of the PSR will be.
The PSR has three objectives:
- to promote effective competition in the markets for payment systems and the services they provide
- to promote innovation in payment systems
- to ensure payment systems are operated and developed in the interests of service users
The PSR aims to be a competition-focused, utility-style regulator, similar to other economic regulators such as Ofcom.
The PSR will have the power to:
- give direction on actions and standards
- impose requirements regarding system rules
- require that payment systems give access to payment service providers
- amend agreements relating to payment systems
- act where it sees anti-competitive practices, alongside the Competition and Markets Authority (CMA)
How the PSR will affect payment systems operators
Although the legislation is focused on payment systems, all participants within ‘designated’ systems will fall within the scope of regulation. The participants have been defined as:
- the operator of the payment system, such as Bacs Payment Schemes Limited
- any infrastructure provider, such as Vocalink
- any payment service provider, such as direct member banks and indirect participants
The UK Treasury has the power to 'designate' payment systems for regulation by PSR and, Nixon anticipated, will announce designations in November 2014. Clearly, the impact of the PSR on an individual entity, for example PayPal or Bitcoin, will depend on whether it is designated.
By contrast, although telecommunications providers can offer services similar to banks, and are commonly perceived as less regulated than banks, PSR can only regulate the payment systems whereas telecommunications providers are regulated by Ofcom.
Regarding multi-national payment businesses such as American Express, only the UK operations will fall within PSR regulation, however, international fees charged by entities regulated by the PSR are part of the PSR’s remit.
The PSR's relationship with other regulators
Some payment services institutions are already covered by the Payment Services Directive (PSD), for which the FCA is the regulator. These firms will fall under both the FCA and PSR’s remit from April 2015.
As an independent subsidiary of the FCA, the PSR has its own statutory framework. The PSR is primarily an 'economic regulator' whereas the FCA is a 'conduct regulator'. There is no definition of the term 'economic regulator' but the PSR has taken it to mean regulation directed chiefly at factors with market-wide influences, in contrast to the conduct of individual market participants. This focus notwithstanding, Nixon made it clear that the PSR would regulate the conduct of individual firms if considered necessary.
Nixon said that the PSR will seek to establish itself both as a standalone regulator and as a collaborator, in particular with the FCA. The PSR will also frequently interact with the Bank of England and the Competitions and Markets Authority.
Relationship between the PSR and EU legislation
While the PSR works towards becoming operational, European policymakers approach a finalised second Payment Services Directive (PSD2), which is expected to introduce wide-ranging measures to develop an effective European payments market. The PSR can only operate in accordance with EU legislation. However, the PSR will engage in interpreting PSD2 and the approach it takes will have a significant impact on the UK payments industry.
There is a pressing need to tackle security concerns in the payments industry, with firms required to ensure that consumers' sensitive personal data and funds are secure and that technology can cope with changes in consumer behaviour. Processes must continue to evolve to match more sophisticated threats. There are a number of initatives, and a fast growing industry, around combatting payment fraud, e-crime, and cyber-attacks.
Nixon considers security related issues generally to be the responsibility of other authorities, with which the PSR would not interfere. However, Nixon believes that there is some overlap with the remit of the PSR. Nixon envisions that the PSR will be involved in some way but did not specify how.
Innovation in payments systems is ever increasing, with developments across mobile payments, image-based cheque processing and alternative settlement mechanisms. Nixon emphasised that it is an important goal for PSR to ensure that the payments industry is open to innovation. Indeed, she specifically does not want to see a hiatus in progress while firms wait to hear what the PSR will do.
Nixon acknowledged that in an industry that is technology based but nonetheless founded on coins, notes and cheques, there is an ongoing question about whether the focus on electronic means is the way forward, and if so what will happen to those who lose out. The industry has a variety of end users to cater for, including not only cyber-savvy consumers but also more traditional customers and disadvantaged groups.
Nixon confirmed that the PSR views this as an area for debate which she hopes can proceed in a sensible manner. Notably, legislation was recently introduced in the Small Business, Enterprise and Employment Bill, that provides for “cheque imaging” allowing cheques to be paid electronically by presenting an electronic image instead of the physical cheque while the traditional methods for paying in physical cheques will be preserved. The Bill is expected to receive Royal Assent early in 2015.
Competition and access to the payments industry
A key stated aim of the PSR is promoting effective competition, to increase access to payment services and with implications for infrastructure providers, new entrants and market stakeholders. Nixon confirmed that the PSR views access to the payment services industry as important, but indicated that the PSR hopes to encourage rather than force competition, while striking a balance with the need for cooperation.
Some have suggested that the established banking sector creates a barrier to entry for new businesses and questioned whether the PSR will really cause incumbents to make changes to facilitate innovation and competition. Concern has been expressed that established banks' shareholders prefer to maintain the status quo, having little incentive to invest in innovations from which the wider industry can benefit.
Nixon acknowledged that there may be difficulties for prospective entrants but stated that although PSR could intervene if necessary it should generally be the industry itself allowing access. She indicated that banks have so far responded positively and hopes they will act in the consumers’ best interest.
A major question for businesses within the scope of PSR regulation is how the PSR will assess compliance and clarify what is expected of them, for example through the imposition of specific rules and guidance. There will also be challenges for implementation and enforcement. Nixon indicated that the PSR would prefer to remain relatively 'hands-off' but that if it does not see the desired response it may take a more interventionist approach.
The PSR wants to see an industry that takes control of itself. Nixon emphasized stakeholder engagement and PSR’s desire to maintain a positive relationship with the industry. Indeed, as this stage it appears that the PSR wants the industry to provide a clear sense of direction and to harness the collective expertise in the industry for the collective good. There is a clear invitation to stakeholders to inform the PSR about blocks to innovation.
Conclusion and timeline to regulation
The PSR has thus far been working on developing its regulatory approach, fees, rules, priorities and other issues identified from responses to its call for industry input. The PSR has also been finalising outstanding legislative governance requirements, such as Memorandums of Understanding, and establishing Panels (including consumers and industry representatives) and budget.
A formal consultation period will begin in November or December and remain open for approximately two months, with statements to be published in the lead up to 1 April 2015 and thereafter.
By 1 April 2015 at the latest, the Treasury will need to have announced which payment systems are designated to be regulated by the PSR. The PSR will become fully operational, assuming its regulatory and its concurrent competition powers.
Encouraging competition and innovation in financial services is increasingly prioritised across the regulatory and policy landscape and the technology industry will continue to have a central role in driving this agenda. Stakeholders interested in having their voices heard by the PSR are therefore encouraged to seize the opportunity now.
It seems clear that if the established and challenger elements of the payments industry can succeed in cooperating to produce innovation and competition in the interests of end users the PSR will be a relatively light touch regulator. It remains unclear, however, what concrete measures the PSR would take in the absence of cooperation.
For more information on this topic please contact Lina Monten-Lister.
Published originally in the E-Finance & Payments Law & Policy [October 2014]