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Mark Falcon's speech at the Association of Foreign Banks International Banking Conference

Published 15 05 2015

Speech by Mark Falcon, head of regulatory policy and strategy at the PSR, at the Association of Foreign Banks International Banking Conference on 12 May 2015 in London.

This is the text of the speech as drafted and may differ from the delivered version.


Hello. Thank you for inviting me here today. It is a pleasure to be here.

You have asked me to tell you about the new UK Payment Systems Regulator: what type of regulator we are, what our objectives are and how we’re planning to carry them out.

I'd also like to say something about what it means for you specifically. Foreign banks make a significant contribution to London’s standing as a major global financial centre and are an important user of UK payment systems. So we recognise that you have a strong interest in understanding of how we will regulate, especially how we will make payment systems more open, helping new players to challenge the market.

In short: the Payments Systems Regulator, the PSR, is the new independent economic regulator for UK payment systems. We’ve been building the PSR behind the scenes for the last year, but came into formally into operation at the beginning of April.

And we’re the first dedicated payments regulator in the world. Nobody else has done what we are doing so far, which is why we know there's a lot of interest.

I joined the PSR from the largest foreign investor into the UK, Hutchison Whampoa – present across multiple regulated industries – so I know the importance of  good regulation for supporting inward investment, and with that, competition, innovation and economic growth.

So what is economic regulation, how does it differ from other regulators, and what does it mean for payment systems?

The Government recently set out its principles of economic regulation. These highlight that in certain sectors of the economy, network effects or other economies of scale can lead to market power and monopoly. This creates large barriers to entry and limits effective competition. In these sectors, economic regulation is needed to protect consumers while at the same time creating incentives to invest and innovate in reliable and sustainable services.

Primarily, the job of economic regulators is to promote effective competition where this is possible, and where it’s not, to provide a proxy for competition, with protection of  consumers’ interests at its heart.

For example, in the traditional utilities, such as energy and water, regulation caps the prices that dominant companies can charge, in order to promote efficiency and fairness, while providing firms with a fair return on their assets and investments. In doing so, this regulation has delivered significant benefits to consumers and the economy.

So what about payment systems? Payment systems have been around since economic activity began. Ancient Turkey was the first place to use coins, as far as we know. The Chinese invented banknotes. And the Romans were the first to use cheques.

But the most important feature of a payment system is its need for widespread, if not universal, acceptance. This is the definition of a network effect: where the value of the network depends on how many other users are also connected.  This makes payment systems like other network industries, such mobile telecoms or the internet. It's no coincidence that there aren't two internets: its value is that we're all connected.

But these network effect can create very large barriers to entry and market power in the underlying infrastructure, systems and technology. And without regulation, competition wouldn't happen and consumers and other users would suffer.

Predictability, transparency and consistency of regulation is also critical in industries with large long-term investments. This is why economic regulators are set up to be accountable to parliament, but independent of direct political control.

But payment systems are of course also subject to  other regulators, in the UK:

  • The Financial Conduct Authority, primarily a conduct regulator, concerned with direct consumer protection, but also now with competition powers.
  • The Bank of England and Prudential Regulation Authority, charged with ensuring with financial stability, and also a supplier of central bank settlement services.
  • The Competition & Markets Authority, the UK competition agency, which has concurrent competition powers with the PSR and is also currently conducting a market investigation into retail banking.
  • HM Treasury, which has overall responsibility for UK financial services regulation.

We realise that this number of overlapping regulators is challenging for  industry, especially where some regulatory objectives can appear to conflict. It is therefore our job to explain our respective roles and to stay joined up with and where necessary challenge our co-regulators.

So, what are the PSR’s specific objectives and what are we currently focusing on?

Our statutory duties are to promote competition, innovation and the interests of users of payment systems. The last of these is always our ultimate objective.

By competition, we mean:

  • competition between payment systems;
  • competition between payment services providers; and
  • competition in supply of payment systems infrastructure.

Of these, our main immediate focus is on access to payment systems – direct and indirect – to ensure that access is not barrier to competition barrier in relevant downstream markets, for example, personal or business bank accounts, or e-money services.

We are doing this by putting directions on the major payment systems for their access criteria to be objective and transparent. We are also starting a market review into indirect access to payment systems.

Our other big focus is innovation. Innovation and competition go hand in hand: strong competition drives innovation, along with lower prices, investment and all the other benefits of competition. Our role here is to remove barriers to competition and otherwise get out of the way.

But much of the innovation that's needed in payment systems can only happen collaboratively, with industry working together. For example, the creation of a new payments system, such as Faster Payments, or development of greater inter-operability between payment systems. Unfortunately this has been the frequent criticism of payment systems: that industry has been slow to innovate collaboratively.

But collaborative innovation is difficult in any industry: because there's little competitive advantage and because it's hard to coordinate. This means that both end-users and industry can lose out.

This is why we are creating the UK Payments Strategy Forum: to be a partnership between regulator and industry to make collaborative innovation happen. Not innovation for innovation’s sake, but innovation that will benefit payments users, but might not happen otherwise or with much delay. We are soon looking to appoint an independent chair and members of the Strategy Forum to work with us in this venture.

Finally, other workstreams we have started include:

  • becoming the competent authority for the European Interchange Fee Regulation for credit and debit cards;
  • helping to develop the Future Clearing Model for continued use of cheques in the UK; and
  • a market review into UK payment systems infrastructure.

So thank for your interest in the new Payment Systems Regulator and we look forward to working with you.

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