Hannah Nixon's keynote speech - Annual Plan 2018/19 launch event
Hannah Nixon’s speech at the launch of the PSR's Annual Plan 2018/19 event at the Glaziers Hall, London Bridge, on 21 March 2018.
This is the text of the speech as drafted and may differ from the delivered version.
Good afternoon to you all and thank you for joining me to launch our Annual Plan for 2018/19, for what I hope will be an interesting and interactive event.
In the last three years, we have delivered landmark changes and are making good progress across a number of critical issues in the payments industry.
Today, I want to reflect on the last year and give you an overview of the role we played in shaking up the market to create a more enabling environment for competition and innovation. And I’ll also look forward at what we have planned.
Later this afternoon, you’ll have the opportunity to share your views on the work we’ve done so far and to feed into the strategic issues we’ll be focusing on over the coming 12 to 18 months.
We are determined to be the type of a regulator that listens, reflects and takes proportionate action.
Since last year’s event, we’ve engaged with you in various ways through bilateral meetings, roundtable discussions, consultations, panel events and our roadshows in Leeds, Edinburgh, Cardiff and Belfast.
We’ve listened to your views and have taken them into consideration when drawing up our programme of focus for 2018/19.
We couldn’t do our job well without your feedback and I look forward to what I’m sure will be lively discussions today.
But that’s not where our engagement ends.
Our door is always open and we will, of course, continue to engage with you through consultations, roundtables and our regional visits.
Our role is fundamentally about shaking up the industry to drive competition and innovation in a way that benefits all users of payment systems, and ultimately end consumers.
I’m pleased to say that I think we’ve been pretty successful at shaking things up.
We’re seeing new players enter the market and lots of interesting innovation.
Indeed, it’s often said that there will be more change in payments in the next five years than there has been in the last 50!
While that brings many benefits in terms of choice, reliability, cost, control and speed, it also has downsides such as new ways to defraud people or the difficulties associated with shifting market dynamics.
As a result of these new issues, we’ve increasingly focused on consumer protection - in the first instance primarily looking at the issue of mitigating authorised push payment (APP) scams and maintaining the current geographic spread of the free-to-use ATM network.
So, what will we be focussing our attention on in the coming year?
Consumer protection is really going to take centre stage this year.
We know that the work we’ve been doing, new technology and changing consumer expectations mean that we’re seeing lots of new payments products and companies in the market.
That’s great, but we need to ensure that consumer protection keeps up.
Preventing fraud has always been firmly on our agenda.
Indeed, developing initiatives relating to the prevention of financial crime was a key area of focus for us through the Payments Strategy Forum, which I’ll say more about a bit later.
For the last year, we’ve prioritised work on authorised push payment scams where a fraudster tricks someone into sending money to them.
We know this is a serious issue. £236 million was lost to authorised push payment scams last year. The majority, 88 per cent of this total, was individuals losing an average of £2,784, and the remainder were businesses who lost on average £24,355 per case.
We know that in some cases, the amounts of money lost can be life changing.
That’s why we’re working hard to put in place a package of measures to make it as difficult as possible to perpetrate this type of scam and to raise the chances of someone getting their money back if they do unfortunately fall victim to this type of crime.
There’s no silver bullet here but, taken together, our package of measures should put a serious dent in APP scams.
Some of these measures are already in place.
For example, we have pushed UK Finance to develop a best practice standard for PSPs to follow when responding to reports of APP scams; which means victims get a single point of contact rather than being pushed from pillar to post.
While the industry initiatives being worked up are incredibly helpful, we believe the real key to stopping scammers will be getting the contingent reimbursement mechanism in place.
We consulted on this last year and the responses we received support our view.
Prevention is the best approach to dealing with scams and the contingent nature of the model should incentivise customers and banks to do all they can to prevent scams from occurring in the first place.
Where scams do still unfortunately occur, we expect banks to take responsibility and reimburse victims where the banking system has fallen short.
We’re clear that we want a new industry code setting out the principles underlying the reimbursement model to be in place by the end of September - that’s 6 months from now.
We’ve set up a steering group led by an independent chair appointed by us, which has clear terms of reference to make this happen.
The steering group has some tricky issues to navigate but we’ve been clear that the end product must be objective and ensure a straightforward process for victims.
Another top priority for us in the space of consumer protection is access to ATMs. In an industry that is changing so rapidly, keeping the interests of everyone who uses payment systems front and centre is a priority for us.
We know that cash is an important payment method accounting for more than 40% of all payments made by consumers.
We also know that around 2.7m people in the UK rely solely on cash and that consumers value highly the widespread network of free to use ATMs.
At the same time, we’re aware that the ATM sector is in the middle of a period of significant change as the number of cash withdrawals has started to fall, so we’ve conducted two extensive studies to understand how changes may affect consumers.
We’ve worked with LINK to understand the potential impact of its proposal to cuts its interchange fee to ensure the interests of consumers were adequately addressed in its final decision.
We’ve been clear that Link must:
- do whatever it takes to protect the current broad geographical spread of free-to-use ATMs
- make incremental cuts to its interchange fee, review the impact of each cut and take immediate positive action if there’s a negative impact for consumers resulting from these cuts and
- bolster its Financial Inclusion programme to continue to fill gaps in the free-to-use ATM network.
We welcome the fact that LINK has committed to meeting our requirements.
LINK will report to us monthly on developments and you can rest assured that we will hold it to account to safeguard continued free access to cash for customers across the country.
Moving on from consumer protection, you won’t be surprised to hear that access to payment systems will remain a focus area for us in 2018.
That’s because access is a key driver of both competition and innovation in payments.
Without open access, PSPs, particularly challenger banks, simply cannot compete on a level playing field with the bigger banks.
Our access programme of work has realised significant benefits for PSPs and service-users in recent years; and as our third Access and Governance report published a few weeks ago shows, access to payment systems in the UK continues to improve.
2017 proved to be a record-breaking year for new participants - with more access options emerging and seven new participants joining one or more of the interbank payment systems. This means that the number of direct participants in FPS will have more than doubled between 2016-18, and each of the payment systems gained new joiners.
The costs of joining payment systems have dropped by as much as 50% compared to two or three years ago; and the time to on-board has been cut from an industry norm of about 18 months to 12 months, with one bank achieving on-boarding in just seven months.
We’ve seen ClearBank, BFC Bank and Raphaels Bank enter the market to provide indirect access; providing greater choice to those PSPs who access the market through a sponsor.
We’ve also worked with the Bank of England on opening up settlement accounts to non-banks for the first time; which will enable money transfer companies and e-money licence holders to access payment systems directly instead of having to rely on agency providers.
As you can see, there’s been significant progress on opening up access but there’s more to be done, and we will continue to push for improvements.
Indeed, early projections for 2018 show that a further eleven PSPs could become direct participants in CHAPS, Faster Payments and Bacs this year.
The ambition to improve access was behind the thinking of combining the operators of the Faster Payments Scheme, Bacs and the new Cheque Image Clearing System.
The consolidation of the three operators into a New Payment System Operator, the NPSO, together with the transition to a new international messaging standard, ISO20022, will further help reduce the barriers to entry for potential market participants.
We’ve worked closely with the Bank of England to get the NPSO up and running as quickly as possible, and to oversee an orderly handover from the existing retail schemes.
We have used the opportunity presented by the consolidation to push for a new governance model, which will address some of the historic governance problems by removing the incumbent banks’ majority influence from the NPSO board and thus rebalancing its priorities.
The consolidation of the three operators will enhance the capability and capacity of the operators and will further open access by creating a single point of entry for PSPs and promoting more harmonisation of rules across the three systems.
The NPSO is already up and running, key appointments have been made and we expect it to take over responsibility for the existing schemes shortly.
Back in January, we set out our initial regulatory priorities for the NPSO in an open letter, and expect it to consider the issues we outlined as it designs its target operating model, new rules, standards and governance processes.
Another big issue we have sought to resolve is the slow pace of innovation in payments where collaboration is needed.
And collaboration is really important in payments where services need to be able to ‘talk’ to each other.
Back in 2015, we took an untested approach and created the Payments Strategy Forum to address this issue; harnessing the resource and expertise of the industry – from end consumer representatives to fintechs to big banks – to redesign the interbank payment systems to meet evolving consumer needs.
I think it’s fair to say that the approach had a number of detractors at the beginning.
But two years later, the Forum successfully completed a blueprint for a New Payments Architecture, which will entirely transform the UK’s interbank payment systems.
Having met its objectives, the Forum handed over responsibility for implementing the NPA to the NPSO, and the delivery of its financial crime solutions to UK Finance.
We closed down the Forum in December, which was a truly significant milestone for the payments industry.
The end of the Forum highlights just how far we have come on our journey to promote competition, innovation and the interests of users of payment systems.
The Forum achieved remarkable progress in a very short space of time and its work is a testament to what can be achieved by industry-led action backed by regulatory powers.
The nature of the Forum meant that for the first time, small banks, corporate users of payments, Fintechs and customer representatives were given an equal voice to the big banks to shape the agenda for our domestic payment systems.
Indeed, I am pleased that many of you in the room today were able to be involved in the Forum’s work through its various working groups, consultations and engagement via the Payments Community.
By bringing together diverse stakeholders through a process of debate and challenge, the Forum developed high quality outcomes and helped ensure broad support to deliver them.
We are pleased the NPSO will continue to build on the Forum’s stakeholder engagement model though its Advisory Councils, and we look forward to learning about its stakeholder engagement approach in greater detail.
Our work, the development of the concept of the NPA by the Forum and the creation of the NPSO and has led to a radical overhaul of the payments industry’s structure.
This year we’ll be focussing on the next stage of development of the NPA in line with the Forum’s plans, ensuring its successful implementation through a new competitive tender process for its infrastructure.
Successful implementation means:
- effective competition across all layers of the NPA with low entry barriers for service providers;
- timely delivery of the NPA with support from stakeholders; and
- a new payments architecture that is technically robust and resilient.
When successfully implemented, the NPA will provide modern and efficient processes and infrastructure that payment systems need to keep the UK at the forefront of payments and adapt to the evolving needs of users in our ever-changing technological landscape.
We will support the industry in delivering these key outcomes where we can, but we will not hesitate to step in and use our powers if sufficient progress isn’t made.
PSD2 and open banking
And, of course, the whole point of the NPSO and the NPA is to simplify and standardise the central architecture and governance to maximise the potential for competition and innovation in the interests of consumers.
At the same time as these changes take place, PSD2 and open banking are looking to do something similar.
PSD2 mandates that, where customers have consented, banks should open up access to customers’ account information to approved third parties. This should create opportunities for new firms to offer innovative services and solutions that we cannot yet even imagine.
The provisions of PSD2 are further facilitated by the use of APIs under what we call Open Banking, which essentially provides a more standardised way for third parties to access customer account information.
We have sought to ensure that the NPA is designed to align with both PSD2 and Open Banking.
Taken together, these initiatives present a real opportunity for the development of new products to benefit customers, including in the customer protection space I spoke about earlier.
For example, PSPs and vendors will be able to build APIs to deliver end-user solutions such as Confirmation of Payee on the back of the Open Banking API framework.
It is the use of technologies such as this that we would expect to be reflected in the contingent reimbursement mechanism to fight APP scams.
Continuing exploratory work
So, there’s a lot going on in the year ahead to maintain momentum and bring to fruition much of the work we’ve already started.
In addition to the work I’ve already outlined, we will be building on our exploratory work from last year - under the themes of consumer protection, changing competitive dynamics and data in payments.
We’ve been undertaking this work to fully understand developments in the payments landscape, because we’re advocates of evidence-based reasoned action and will never rush into work just for the sake of it.
- We will publish the outcome of our work looking at the use of data in payments in a discussion paper in April, and will consult on our proposed approach in this space to help determine what action to take.
- We’ve also examined the rapid rise of contactless mobile payments, which could affect all three of our statutory objectives; and will publish our thinking in the coming months.
All this exploratory work will help us stay on the front foot and determine how best to deliver our objectives in the years ahead.
There will be new projects too that we’re embarking on this year.
In particular, building on what we have learned from monitoring the interchange fee regulation for debit and credit cards, we will take a deeper look at card payment systems to better understand how that market works and whether there are issues that we need to address.
We are also reviewing our access and governance directions on the industry to ensure they remain fit for purpose in light of changing regulatory and market conditions, and we welcome your views on our current consultation.
And of course, all this work sits alongside our ongoing monitoring and enforcement work in both, the regulatory and the competition space.
We are on the cusp of a historic opportunity for UK payments and are determined to continue to drive industry momentum to ensure change is delivered for the benefit of everyone.
We’ve delivered a programme of work that has already had a significant impact on improving access, boosting competition and driving collaborative innovation in the industry.
We will continue to build on these strong foundations to keep the sector moving towards our vision of payment systems that are reliable, safe and deliver for the benefits of all users.
I’m excited you’ve joined us here and look forward to hearing your views about these changes and our work.
I’m also really delighted to have our incoming Chair, Charles Randell, with us today, and I will now hand over to him, so he can share his thoughts about the upcoming year and his vision for the PSR.
Charles, over to you.