Payment systems: the regulatory challenge
Hannah Nixon, PSR managing director, speech at the European Payments Regulation Conference on 3 December 2014 in London.
In the time it takes me to deliver this speech, more than 600,000 transactions will have been made in the UK using a payment system.
That’s about 40,000 for every minute I am on stage, or a little under 700 every second.
These are mind-boggling figures. They are a reminder that payment systems underpin virtually every financial transaction we make – be it buying a coffee using contactless or the high value transactions between City traders, and everything in between. They allow the UK to go about its daily business.
These figures are reminder of what is at stake and, for me, they will always be front of mind.
Making sure we have reliable payment systems is imperative.
But it’s not just about reliability. The way people spend, move and manage their money is constantly changing. Payment systems need to keep pace with that. Payment systems need to keep innovating to provide new options for consumers, to make existing options better and easier to use, and to deliver wider system improvements for users.
Payment systems are a key part of the jigsaw that enables competition in retail banking and payment services more widely. So it’s about competition too.
This morning I will set out how the Payment Systems Regulator, working with industry, intends to drive the industry forward to ensure payment systems really do work for consumers and users.
But before I go into detail, I’d like to very quickly recap on the Payment Systems Regulator: who we are and what we’re here to do.
The Payment Systems Regulator is independent of the Financial Conduct Authority and we have our own Board.
We are a subsidiary of the FCA but have own objectives, powers and staff. Our focus is on the payments industry, and nothing else.
Our objectives underpin everything we do, drive what activities we undertake and inform how we prioritise out work. These objectives are:
- to promote effective competition in the interest of service-users
- to promote the development of innovation in the interest of service-users, and
- to ensure that payment systems are operated and developed in a way that considers and promotes the interests of service-users
So we have a set of three mutually reinforcing objectives.
The Treasury is currently consulting on which payment systems we will regulate and has proposed: Bacs, CHAPS, Cheque and Credit Clearing, Faster Payments, LINK, Mastercard, Northern Ireland Clearing and VISA. The final roster is expected to be confirmed soon.
Our vision is simple: we want the UK to have payment systems that work for consumers and users. We want world class payment systems operating in the best interests of service users and the wider UK economy.
That sounds simple. But achieving it will require an industry that:
- is focussed on the needs of users and consumers
- is innovative, and open to commercial as well as technological innovation
- forges new partnerships to meet the challenges of the future, and
- invests for the long term, but with a strong focus on efficiency
Delivering that will need a real change in mindset.
Recently, as many of you will have seen, we published a consultation paper setting out our approach to regulating the payment systems industry. This is our approach to driving that change in mindset. You will probably have lots of questions, and today I hope to answer at least some of those.
Interest in payment systems is, of course, nothing new – we had the Cruickshank Review in 2000, there have been OFT reports, as well as committees and inquiries in Parliament. Indeed, last week I took part in my first Treasury Select Committee hearing as managing director of the Payment Systems Regulator.
So payment systems regulation and indeed the Payment Systems Regulator have been 15 years in the making. And financial services more broadly – with its four new regulators (FCA, Prudential Regulation Authority, Competition and Markets Authority and Payment Systems Regulator) – is experiencing something of a tectonic shift.
I recognise that a lot is being asked of you. My goal today is to leave you with a good understanding of our priorities and the next steps that the payment systems will need to take.
It’s fair to say that Payment Systems Regulator’s approach to regulating the industry will be more challenging than what has gone before it. We are determined to drive real change. And we have strong powers to make things happen. What we are proposing is balanced and achievable, and will hold the industry to account for delivering the real change that is needed.
So, on to our approach. We have identified three core areas that we believe can and should be improved. They are:
- the industry strategy setting process
- ownership, governance and control of payment systems, and
- access to those systems
First, realising a vision of world class payment systems will require effective industry-wide strategy development, setting, and delivery. The industry displays significant network effects, which means some degree of collaboration will always be needed.
Industry has collaborated well in some respects, for example the development of the Current Account Switch Service and Paym.
But a number of other infrastructure-related themes have suffered through a lack of coherent approach. The pace of innovation is not what it should be.
The industry has varying and competing demands, so getting everybody onto the same page, at the same time, is tricky. We recognise that.
But an effective overarching strategy is required. That is why our first core proposal is to launch a new Industry Strategy Forum.
The Forum will develop and agree strategic priorities for the long-term development of payment systems in the UK.
The Payment Systems Regulator will appoint an independent chair for the Forum and, at least initially, provide the secretariat. We will also set out some guiding principles under which it should operate.
The Forum will be an ‘open house’ so all payment system participants, especially users and consumer representatives, will be welcome. This will boost the identification, assessment and development of strategic priorities for payment systems and their corresponding services.
The cards sector will also be represented, which is key given the significant and growing share of payments that are made using cards in the UK.
Through the Forum, we intend to ensure there is increased momentum and drive in developing strategy and we will hold industry to account for delivery.
Ownership, governance and control
The second of our key issues relates to the ownership, governance and control of payment systems, and there is a shared theme with what I have just described around strategy setting.
For if the industry is to come together and collaborate then it is important that the UK payments infrastructure can support new developments and innovations. Currently, this is not the case.
And this is not just my view. Many have raised concerns about the ownership, governance and control of payment systems. They are concerned about how open they are, or not, and also how the voices of those using them are heard, or not.
The fact is: the governance of payment systems is not clear; decision making is opaque and known only to a select few. That those select few are also the banks that own the systems breeds suspicion. This needs to change.
Therefore we are planning to change the way these systems are controlled and how decisions are made.
To achieve our vision of world class payments we will make it a requirement for all Operators to ensure the interests of service-users are appropriately represented at board level.
There will also be requirements that protect against individuals being both simultaneously a director of an Interbank Operator and of a Central Infrastructure Provider to a payment system. Board minutes and votes will have to be published and Operators will also have to report to us annually to show how they have complied with our directions.
This should fundamentally change the way decisions are taken and provide much greater transparency of how and why decisions are taken. But if our proposals don’t achieve those ends, then we will take further action – including, if necessary, using our divestment powers to force ownership change.
We also want to look more closely at the specific issue of ownership of the infrastructure, the underlying pipes and wires - or what have some have come to call ‘the VocaLink question’. That’s why we have said that we will do a market review to dig well beneath the surface and assess the competitiveness of the current infrastructure. We will also consider other possible infrastructure models and ownership structures that may deliver better outcomes for all service users. All options are on the table.
The third pillar of our regulatory approach focuses on access to payment systems.
Currently the criteria for gaining access to a payment system, either directly or indirectly, are controlled by the incumbent banks that own the system.
We have heard many concerns about access – direct and indirect via sponsor banks – being overly onerous, with processes that are opaque and time consuming. This is hampering the ability of new providers to enter the market and compete. That can’t be right. And it certainly isn’t fair.
As with some of the issues in governance and control, this is a part of the payments industry that is too murky. The proposals we have outlined will shine a light on the process, and improve both direct and indirect access.
We are proposing to introduce a package that includes an Access Rule and a Reporting Rule.
Operators must provide access on an objective, risk-based and open basis, and report to us annually showing how they have complied. This will ensure access criteria are fair and proportionate. It cannot simply be the case of ‘one size fits all’.
We are also proposing a regulator-approved industry Code of Conduct governing arrangements for Indirect Access provided by Sponsor Banks.
And finally, we will conduct a market review into the sponsor market for access to really understand the key issues at play. Only four of more than 30 banks that directly access payment systems offer sponsored access. That limits choice. We need to understand why so few choose to provide the service.
We have already begun our scoping work and anticipate launching the review in the first quarter of next year.
In taking all our work forward, we will work with the Treasury, FCA and Bank of England to ensure we play an active and vocal role in Europe. We will work to ensure any new requirements that intersect with our regime take account of our objectives.
On PSD2, for example, we are working with the FCA to feed in our initial thoughts to the Treasury on access.
On interchange fees, which will probably be subject to regulation next year, we expect to be the competent authority for Interchange Fee Regulation.
We will continue to track developments ahead of our launch in April 2015 to help us define and assess what actions, if any, we might need to take to ensure any impact on the UK is proportionate.
We believe the measures we have proposed in each of these core areas will improve the payments industry, making it more competitive, accessible and innovative.
So far, early feedback indicates that the industry recognises the need for change. But it is vital we capture as many of your views as possible to make sure the final policy is well-rounded.
The consultation is open until Tuesday 12 January and I encourage you all to take part.
So far I’ve set out our vision, highlighted some of the key powers we will have, main areas of work, and our general expectations.
I’m a strong believer in the best regulation being that which the industry doesn’t fight, but understands, respects and is invested in.
The Payment Systems Regulator is new - as am I as its managing director - so I don’t expect you to put your trust in me simply because of who I am, or where I work.
The Payment Systems Regulator needs to earn your respect.
Therefore my promise to you is that we will always show you why we think change is needed, and consult with you before we make significant changes. Our door will always be open.
I will also promise you that we have no interest in making rules for rules’ sake, or adding layer upon layer of red tape. As an economic regulator we will always be evidenced-based.
Of course the work of the Payment Systems Regulator is just one part of the regulatory landscape and government efforts to improve banking outcomes for consumers.
What we are doing ties in well with the work of the FCA with its reviews of the Current Account Switch Service, account number portability and credit card market study.
We will also be engaged with the CMA as part of their market study of competition in the current account space.
Together we will all be working towards a common goal of driving up standards in the payments industry for the benefit of users and consumers.
I’d like to conclude by distilling all of this into one simple call to action.
The financial services industry has seen huge change in the last few years. Four new regulators have come along in a short space of time.
This is right. Society demanded more of its financial industry and wants firms held to account.
It’s early days for payment systems regulation but we are, so far, encouraged by the response from you. Before we had even published our consultation we had held nearly over 170 meetings and met with 75 different organisations. The level and nature of engagement is a real positive.
But, with the way people spend, move and manage their money changing rapidly, adding new shiny buttons or widgets is not going to be enough.
What we need is a serious change in mindset.
I believe the measures we have proposed will deliver this, but real success will come by working together. I look forward to doing so. Thank you.