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In light of the Payment Systems Regulator (PSR) becoming operational as of today, Jacob Ghanty, partner at Berwin Leighton Paisner LLP, discusses its proposed approach to regulation and how the changes will impact the payment systems industry.
Is much likely to change in the PSR’s approach to regulating payment systems following the publication of its consultation response and policy statement?
The PSR published its first consultation paper (PSR CP14/1) in November 2014, in which it sets out its vision for a new regulatory framework for payment systems in the UK (see New Payment Systems Regulator consults on how it intends to regulate LNB News 13/11/2014 119). The PSR states that it intends to open up the payments industry, making it easier for a wider range of parties to access payment systems, and compete and innovate around them.
Alongside the consultation, the PSR issued a series of supporting papers, each of which focuses on a particular aspect of the PSR’s policy proposals. The proposals are grouped into these topics:
As a subsidiary of the Financial Conduct Authority (FCA), I expect the PSR to take more of an FCA-style watchdog approach, rather than a Bank of England/Prudential Regulation Authority (PRA) prudential style of regulation. However, I believe it will be more than simply a mini FCA. The PSR will have a different feel from the FCA, in the sense that it intends to lead payments industry strategy. It will replace some functions of the UK Payments Council, which will give it a slight sense of being a trade association.
I don’t expect there to be too much change in the PSR’s approach as set out in PSR CP14/1. Many of the issues are long-term ones (eg ownership of the interbank systems) and I would be surprised if there was any change of direction in terms the main policy proposals.
What are the main impacts on the payments industry (ie payment systems operators and PSPs) now the PSR has become fully operational?
There are a multitude of impacts on the industry, but here are three:
Adapting to regulation for the first time
Some players in this space will be new to regulation. Thus, although firms will not need to go through an authorisation process as such—there is a designation regime rather than an application process—they will have to adapt to dealing with a regulator and being answerable to it, in contrast with dealing with self-regulatory organisations.
The PSR’s regulatory powers
Obviously the PSR has some quite significant powers (eg the power to effectively order changes of ownership of payment systems operators) and there has been much focus on how the new regime will affect operators. However, once a payment system becomes designated as a regulated payment system, any firm regarded as a ‘participant’ under the legislation in relation to such a system also becomes subject to regulation by the PSR.
The PSR’s market reviews
The PSR has stated that it will initiate market reviews into the ownership and competitiveness of infrastructure provision and into indirect access, each commencing by April 2015. Engaging with a regulator under a market review can be a resource and time-intensive process for firms.
What will the PSR’s new ownership, governance and control requirements entail for operators, infrastructure providers and payment service providers (PSPs) and to what extent are they likely to increase openness within the industry?
All operators will be required to ensure service-users are appropriately represented in decision making. Interbank and card operators will be required to ensure appropriate representation of the interests of service-users in their board decision-making processes. In addition, the PSR has concerns in relation to conflicts of interest. Specifically, individuals will not be able to be simultaneously a director of an interbank operator and of a central infrastructure provider to the same payment system. Also, all operators will also be required to publish board minutes and votes and to report annually to the PSR in compliance with the PSR’s service-user direction.
The proposals are intended to give a broader spectrum of players in the industry some form of representation in relation to how operators are governed internally. However, the proposals mentioned above do not necessarily confer any concrete powers on non-owners/controllers of the operators. Hence it could be the case that such measures by themselves will not be sufficient to address some of the historical issues around ownership and control.
What new transparency requirements will operators and sponsor banks have to comply with in regard to ‘access requirements’? Are they likely to be a significant burden?
Direct access to payment systems
Operators will be required to have objective, risk-based and publically disclosed access requirements to permit open and fair access to persons wishing to obtain direct access. In addition, operators must report to the PSR annually on compliance with the relevant access obligation. Operators will, therefore, have the burden of conducting an annual exercise to confirm that they are complying with this rule in order that they can file their report with the PSR.
Indirect access to payment systems
Sponsor banks that provide indirect access to payment systems to payment services providers (PSPs) will need to publish access-related information including:
Sponsor banks will also be required to work with the PSR to develop a PSR-approved code of conduct in relation to indirect access.
My sense is that it will be quite a significant undertaking to initially develop compliant access propositions, but once the frameworks have been established, the ongoing requirements will hopefully be less burdensome.
To what extent are the PSR transparency requirements regarding access requirements likely to remove barriers to entry or limit the current constraints imposed by ongoing obligations on direct PSPs?
I expect a number of indirect PSPs to take advantage of the direct access proposals and become direct members of the interbank payment systems themselves. However, the standard for becoming a direct member needs to be maintained at a sufficiently high level to ensure the overall integrity of the system, so I do not expect that there will be a substantial number of new players acquiring direct access.
What sanctions will the PSR be able to impose on those operators who are non-compliant with the new regime? Are they likely to act as an effective deterrent?
The PSR will have a range of sanctions available to it which are listed in the Financial Services (Banking Reform) Act 2013 for compliance failures, which include failure to comply with a PSR direction or failure to comply with a requirement relating to a regulated payment system’s rules or access. The sanctions include:
Perhaps it is being slightly pessimistic, but I believe that the real deterrent will come from the PSR being seen to exercise its enforcement powers and imposing sanctions.
How should the industry be preparing?
The industry should take careful note of the proposals in PSR CP14/1 as they are unlikely to change substantially before implementation. Firms should be considering how they are going to comply with various new obligations (eg access requirements) and also preparing for engaging with the PSR under either of its proposed market reviews.
The industry and stakeholders should also take note of the recent policy statement PS 15/1 published by the PSR on 27 March 2015, which confirms how the PSR proposes to regulate the payment services industry.
Interviewed by Camilla Cardozo.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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