Thoughts on the Move to Regulate UK Payments

In a blog on February 5th we broke the news that there was likely to be a regulatory review of payments governance. This was as a result of a speech the chancellor had made the previous day. Whilst UK centric in topic, these changes have global implications, as more governments around the world take an interest in payments, and many regulations have followed at least the principles initiated in Europe and/or the UK. Various aspects of Durbin and Dodd-Frank are examples, such as 1073 and interchange intervention. At the time I questioned the need for such a review. The previous consultation “Setting the Strategy for UK Payments” had been due to report months earlier. Our understanding is that the Treasury feels that the responses (56 in total) gave the wrong answer. Which considering the construct of the consultation (it was extremely clear what answer the Treasury was seeking) would seem a rather clear conclusion – few people are both interested enough to respond and believe that there is a need for fundamental change. Yet the Treasury has taken this as further indications that the system is broken, and announced yesterday during the Budget (an annual statement of the Governments’ policies and priorities for the coming year) that a consultation on a PayCom will go ahead shortly. Our understanding that this will take place in a very short period of time, possibly by the end of March. An edited version of the statement follows, but the full statement can be found on p49 of this document

Competition in the banking sector

1.157 …..The Government demonstrated this commitment by asking the Independent Commission on Banking (ICB) to consider competition as part of its remit. Having accepted the competition recommendations of the ICB in full, the Government is currently delivering an extensive programme of reform. ……:

• that the Government will shortly issue a consultation document on bringing payment systems into a competition-focused regulatory regime. The regulator will have strong powers to ensure that challenger banks have the opportunity to compete on a level playing field with their larger competitors by requiring that challengers can access the payments infrastructure fairly and transparently. Subject to the outcome of the consultation, the Government intends to legislate for the new regime in the Financial Services (Banking Reform) Bill;

Some points to note. The first statement is misleading. Whilst it did accept the recommendations in full, the Treasury also seems to be including things that weren’t recommended – the ICB report clearly states that did not find evidence that access to the payment systems was a barrier to entry, nor did the report recommend a PayCom - the emphasis below are mine, not the reports:

“In its interim report, the ICB raised possible concerns about the ability of small banks to access the payment systems. It said there was some evidence to suggest that the ability of banks to access the payment systems through incumbents, and the ability of the Payments Council to maintain a level playing field in payments, were not conducive to a competitive market.

However, the evidence was not clear-cut, and this was not raised as a substantial barrier by most new entrants. Therefore, the ICB did not make recommendations in this area, beyond suggesting that the Bank of England, in collaboration with the FCA and OFT, should monitor access to the payment systems and the effectiveness of the Payments Council in providing adequate governance to ensure innovation and competition.

The Government believes that more needs to be done to bring the Payments Council within the scope of financial regulation, taking into account the relationship between the Payments Council, its members and inter-bank payment systems. The Government is therefore developing a number of options for potential reforms. HM Treasury will publish a consultation on the options, including options for creating a new regulatory structure for the Payments Council and the inter-bank payments regime, taking into account the need to preserve the stability and integrity of payment systems; enhance open competition by reducing barriers to entry; promote innovation; and reflect the needs of end users, as well as the needs of payment service providers.

The consultation will take place early in 2012.”

The ICB was very clear - it was the Government not they who believe that the Payments Council should be brought into the scope of regulation. And during my time working for one of the UK payment schemes, we had more enquiries about leaving the scheme, than joining (2 versus 1 if memory serves correct). So what does this mean? I am not suggesting a review is a bad thing, nor even that PayCom itself is a bad thing. Unless the industry reflects on what it does well and what it doesn’t well, it cannot ensure that it fixes what needs fixing and preserve what doesn’t. And that’s my fundamental issue. The Government has prescribed the medicine, ignoring the advice of the specialist it had appointed (i.e. the ICB, the Cruickshank report, the OFT and it's latest consultation), and is about to forcibly administer it yet has neither articulated the diagnosis nor listened to the symptoms. PayCom cannot ever succeed unless it is clear what it is trying to achieve, why it seeks to achieve those goals, and what the measures of success are. We can only hope that the forthcoming consultation provides some reassurance.