Competition in the Payments Sector – a year in review of the PSR
Speech by Carole Begent, PSR Head of Legal, at Osborne Clarke LLP, on 20 April 2016 in London.
This is the text of the speech as drafted and may differ from the delivered version.
It is a pleasure to be asked to speak this afternoon about competition in the payments sector and to reflect on the past year’s work of the PSR.
Paul (Anning, Osborne Clarke) asked me to focus on three particular areas of the PSRs’ work – Concurrency, Innovation and the Indirect Access Market Review. So I will begin where Zoe (Hare, Osborne Clarke) left off – Concurrency.
You can approach the subject of concurrency in several ways and it can be a significant topic of its own. I shall focus on three aspects: the historical, the practical and the substantive.
The historical perspective
The debate around concurrency hotted-up with the reform of the anti-trust law when the Competition Act 1998 was introduced.
Concurrency had existed already amongst the some of the regulators responsible for utility sectors. These are most commonly referred to as economic regulators. The introduction of the Competition Bill invited fresh consideration of the organisation of powers within the UK, in particular who should have them.
Many of the significant decisions made at the time remain true today:-
The economic regulators would have competition powers, as did the leading competition authority - then the OFT (Office of Fair Trading), now the CMA (Competition and Markets Authority). That is, they would have powers under the Competition Act 1998 – which addresses anti-competitive agreements or conduct.
The only exception would be that the OFT, now the CMA, would investigate and pursue cartels.
The regulators would also continue - like the OFT - to be able to refer markets to the Competition Commission (CC) for phase 2 investigations. This is now within the CMA. The ongoing Retail Banking Market Investigation is, of course, an example of such a reference (though in fact referred by the CMA phase 1 to itself at Phase 2).
Almost at the same time, the reforms of antitrust law in Europe were under discussion and the UK Government also determined that the same economic regulators with concurrent powers under the UK regime would also have the equivalent European antitrust powers as the UK competition authority (the CMA).
Mergers were outside the concurrency debate (although no less a tool) and the situation then, as now, is that the lead competition authorities (OFT/CC - now the CMA) would have responsibility for decision making on mergers except when the merger was within the EU jurisdiction – in which case generally DG Comp is the decision maker.
Why did they give the regulators the anti-trust powers? There were several reasons including:
- First and foremost - recognition that the regulator likely had the greater and more detailed knowledge of the sector (essential when thinking about whether there is a competition problem)
- Second - it would enable the national competition authority to focus on the unregulated markets, of which there are many
- Third, I would suggest, to foster a competition approach by the regulator. At the time there was talk about halting the increase and ultimately reducing the number of licence conditions that regulated firms were subject to. I will come back to this point shortly.
The practical perspective
Right from the outset it was clear that there was a need to coordinate amongst the economic regulators and the national competition authority.
In Europe, the Commission had similar thoughts. In both cases the networks were set up, underpinned by legislation. These apply today though the names have changed and perhaps the underpinning is strengthened.
Zoe has mentioned the UKCN, and there is also the ECN. The PSR is a member of each in its own right.
The need for coordination appeared at first to be focused on case work allocation but with business and other persons under investigation in mind. With so many authorities with overlapping jurisdictions, it was important to develop a mechanism to ensure that they were not tripping over themselves and the industry was not being investigated by more than one authority on the same issue.
There were also sensible resource implications for the regulators. The case allocation system enables the lead competition authority to step in and take over an investigation in certain circumstances, for example if it considers that the investigation has potential precedent value more generally (for example, it would be applicable to other markets).
This can be particularly helpful at achieving consistency of approach across national boundaries.
Discussions between the regulators continue today - in fact is required of them at certain stages in their case work. But co-ordination amongst the authorities achieves more than case allocation – it helps us exchange knowledge and experience which improves the overall quality of decision making.
In the payments sector we work closely with the UK authorities (including the CMA and FCA) and also with DG Comp, which you may know not only applies anti-trust law but also has responsibility for the recently introduced Interchange Fee Regulation.
It means that in both the UK and Europe the task of competition and regulatory authority in relation to payment systems is combined.
This takes me to the third aspect I wanted to cover today.
The substantive perspective
I mentioned the ambition that regulators would, over time, reduce their regulatory interventions. The aspiration was that the need for regulation through licence conditions would be reduced as markets became more competitive.
I am not going to delay discussing the PSR and its work any longer to stray into a discussion of how successfully this aspiration is met.
So you might be thinking, what has this to do with the PSR?
The PSR was set up by FSBRA with three objectives:
- To promote effective competition (both the market for payment systems and the market for services provided by payment systems)
- To promote innovation (of payment systems, in payment systems) in the interests of users
- To ensure the payment systems are operated and developed in a way that takes account of and promotes the interests of its users
It’s a succinct but clear brief and the PSR has been established with, in effect, the economic regulator approach in mind. Our powers include the ability to make directions (general and specific), make access decisions, require divestment and we also have the concurrent competition powers that I have mentioned.
The PSR is staffed with economists as well as lawyers with competition or regulatory expertise, competition case workers as well as staff with industry experience. No less, our Managing Director, Hannah Nixon, and Head of Policy, Paul Smith both have economic regulatory backgrounds.
Our emphasis, bearing in mind our regulatory objectives, is on looking at the market and considering how it will develop in the future. We are focused on identifying barriers to competition and innovation and promoting or taking action that reduces or removes barriers, creates incentives and fosters innovation. In this sense we are not so dissimilar to a competition body.
Two key projects engaging the PSR and the sector in this past year have of course been the two market reviews. One is looking at ownership of certain infrastructure services, the other at the indirect access market.
These two reviews were launched using regulatory, not competition, powers, although the terms of reference which identified our intended approach were similar to what we might have written had we commenced a study using our competition powers.
You will also see similarities in approach when we consider what, if any, remedies are suitable. That is, we consider effectiveness, proportionality and we will also consider how the remedy fits in with the PSR’s other policies and actions.
The two market reviews have enabled the PSR to consider the issues identified in the terms of reference, to assess the data and information received and to consider what, if any remedies are needed.
Now I must be careful what I say because both are at an interim stage with final reports due later in the year.
Conclusions have yet to be reached but on the basis of our publications and provisional thinking so far, they illustrate the PSR’s economic and evidence based mind-set very well.
On the one hand, the PSR has indicated that it does consider there are problems in the way the market is working.
On the other, the PSR’s provisional response differs between the two. In respect of the infrastructure services market review, the PSR has identified a possible package of remedies and is seeking views on that.
Yet in contrast, for the indirect access market review, we are presently suggesting that it should take no action in the immediate future but take stock in 12 months’ time.
Before explaining this further, I will highlight the key points from the interim report.
Indirect Access Market Review
We said we were conducting the Indirect Access Market Review to develop a deeper understanding of the supply of indirect access and to determine whether competition is working well for those who use payment systems – or whether we need to take further action to make it more effective.
Our aim is that payment providers can access payment systems without facing anti-competitive barriers or unnecessary burdens.
We published an interim report on 10th March.
We identified some good outcomes through our review:
- Large IPSPs have a number of options to access payment systems. Our work to improve direct access to interbank payment systems means this is becoming a realistic option for larger payment service providers. Developments in direct technical access, and the emergence of aggregators, are also changing the access options.
- There is a reasonable level of overall satisfaction with the quality of the indirect access offering that IPSPs receive.
However we also said we have specific concerns about choice, service quality and the ability to switch indirect access providers.
- many small non-agency IPSPs – those without a unique sort code – have limited choice of IAPs. Large IPSPs tend to have a wider choice of access options, and many are exercising that choice. This limited choice constrains the ability of these smaller non-agency IPSPs to negotiate on price or to find an alternative provider if they are not satisfied with the services they receive.
- IPSPs in all categories are experiencing a number of specific quality-related issues with indirect access. Large agency and medium agency IPSPs have concerns about the quality of technical access to FPS and its availability. Small non-agency IPSPs have also raised concerns about notice periods for the termination of indirect access agreements and the relationship management provided by IAPs. These issues limit some IPSP’s ability to compete in related markets, such as retail banking.
- IPSPs in all categories face barriers to switching IAPs, which reduces the competitive pressure and may prevent IPSPs from securing the best possible price and quality outcomes. It is important that IPSPs have effective and credible opportunities for switching to maintain competitive pressure on the providers. There has been some switching and we are keen to hear from those who have switched about their experience.
We have already taken a number of steps to promote better choice in access services and improve service quality. For example:
- We’re opening up direct access to interbank payment systems so that larger PSPs, such as challenger banks, have a real choice between direct and indirect. Indeed, we expect a number of them to get direct access in the coming year.
- We have also made entry easier by increasing the amount of information available to PSPs and are supporting the industry Code of Conduct to improve indirect access.
- Alongside our programme of work, the Payments Strategy Forum is also considering how payment systems can be developed to simplify access for PSPs.
In addition, there are a number of developments underway or anticipated across the industry that should alleviate concerns and help deliver widespread access for banks, building societies and other PSPs. The full list of relevant industry developments is on this slide, but they include:
- Market entry and expansion: We have been working with a number of businesses that are planning to start offering indirect access or expand their current services, bringing more choice to banks.
- Review of financial crime regulation: There are at least six reviews underway or recently concluded which may affect the way financial crime regulation applies in the UK and internationally. These various reviews are aimed at improving the transparency, clarity and effectiveness of the UK’s anti-money laundering and counter terrorist financing framework.
We have therefore proposed to support the developments outlined above rather than take immediate regulatory action, which may affect the incentives for such developments to take place.
From my perspective this plays very well to the point I made earlier about the PSR being an economic regulator and the cross-over in thinking between competition authorities and regulators with concurrent powers.
There has been much work done by competition authorities over the past 15 or more years evaluating both their analysis, the remedies they put in place and the outcomes in the market. This has guided authorities when considering when to intervene and what, if any action to take.
In the context of the indirect access market review, we have proposed that we should let the market develop. However, if our concerns are not sufficiently addressed over the next 12 months we will consider whether we need to take further action.
We encourage your feedback on our initial findings and proposed next steps.
The Payments Strategy Forum
This takes me to the third topic that I was asked to speak about: the Payments Strategy Forum.
The convention in the competition village, in which I have roots, is that competition delivers lowers prices, higher quality, greater choice and innovation. In the history of anti-trust cases, innovation may feature less than the other factors – there seems to be an inherent evidence challenge when alleging anti-competitive.
However it is not non-existent.
In a landmark case of its time, the European Commission was successful in its pursuit of a case involving the inability of a willing supplier to be able to provide a comprehensive TV schedule (the innovation as such was available in other countries).
The PSR was given a specific innovation objective amongst its three objectives, demonstrating the importance of the issue.
Yet there are challenges associated with this objective. Not the least is that regulators are not known for innovation as such. This, so economic regulators and competition authorities believe, is the expertise of firms in the market.
For this reason the Forum was set up, and no doubt there are members of the Forum, the working groups or the payments community amongst the audience this evening.
In the last year the Forum chair was appointed, membership of the Forum and its working groups was determined, and topics for consideration amongst the working groups were identified.
I hear good reports as the groups and Forum mature. Last week the Forum met and considered the work and collaborative solutions of the four working groups. Some of these are acknowledged as ready for the Forum’s draft strategy.
Others require more work and there is time for this before the next step - consultation on the strategy in the summer.
There is a momentum and goodwill within the Forum - and a facility to enable competitors to collaborate where necessary and to hear and take account of users’ needs.
Much is expected of the Forum and we appreciate the commitment shown by those who are participating. The areas being considered are varied: moving the UK to modern messaging standards being one example, and much more.
There will be the opportunity for all who are interested to respond to the consultation. The deliberations of the Forum will in turn feed into the PSR’s thinking of the two market reviews.
My final slide sets out the timetable for the two projects that I have highlighted today.
There is so much more happening at the PSR, of course, but my time is up and you have already been very patient listening to me.