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Government proposes regulatory overhaul of UK payment systems

The Government has outlined plans to overhaul the regulation of payment systems in the UK after identifying concerns about the ability of large banks to exert influence in the sector.28 Mar 2013

The Treasury has unveiled proposals that could see the new Financial Conduct Authority, or another "existing regulator", deployed to ensure that all banks, and not just major players, have access to payment systems on "open, fair and transparent terms".

"The Government intends that the regulator should have powers over UK retail payment systems, and their direct members," the Treasury said in its 'Opening up UK payments' consultation paper (28-page / 261KB PDF). "The Government proposes that, in the first instance, this will cover the cheque clearing systems; automated payments systems (Chaps, Bacs, Faster Payments); the LINK ATM network; and three and four-party card schemes."

Under the planned framework, payment system operators and their direct members would be subject to licensing conditions. Those conditions, compliance with which would be enforced by the regulator, include adhering to rules on efficient and transparent pricing, non-discriminatory access, good governance, maintaining and developing their payment system and on co-operation.

The new regulator would be empowered to set prices relating to the access to payment systems if it deems licence-holders not to have calculated terms fairly.

"Where the regulator is not satisfied that the licence-holder is using an acceptable pricing methodology, and having given it sufficient opportunity to remedy the situation, the regulator will have the power to intervene to directly set prices for direct access to a payment system, indirect access to a payment system via an agency relationship and interchange fees," the Treasury has proposed.

The regulator would also be given the powers to take action against companies subject to the regime that act in breach of competition rules. The Treasury deemed that it would be "necessary" for the regulator to be able to act against those that abuse a dominant market position or form anti-competitive agreements.

"The nature of the market provides both significant incentive and opportunity to take actions that would inhibit competition and is technically very complex," the Treasury said. "A specialist regulator will have a deep understanding of the market and its participants, the issues that prevail at any particular point in time and an obligation to keep the functioning of the market under review. It will therefore be well placed to assess the market and consider any potentially anti-competitive features."

The Treasury said that it has concerns relating to the ownership of payment systems. It said that because some of the major banks both own and use payment systems, smaller banks may difficulties in breaking into the market. It said there was the potential for the big banks to give themselves preferential treatment whilst "creating unnecessarily burdensome conditions for access" to others.

Under its proposals the new regulator would be able to refer matters to the Competition Commission in a bid to resolve concerns over payment systems ownership. In addition, the Treasury said banks could be forced to give up their control of payment systems altogether.

"The regulator will have the power to impose additional requirements on a regulated payment system, should it regard this as necessary to promote effective competition," it said. "This could include a range of mandatory actions relating to the governance of the payment systems to increase their independence from their owners (possibly by making them directly accountable to a wider group of stakeholders) and address any abuses of ownership. Alternatively, where the regulator was satisfied that this was justified, this would include the regulator having the power to take steps that would result in the divesting from the banks of their stakes in the payment systems."

The Treasury's proposals follow a Government strategy for UK payments published last year . One of the broad goals set was to ensure that the UK payments systems facilitated competition by allowing open access to market players on reasonable terms. The strategy had outlined concerns relating to industry arrangements where smaller financial institutions were required to engage with payment systems through larger banks. It said there was a "lack of transparency" over these arrangements.

"Many of the issues relating to the payment systems stem from the fact that a number of large banks dominate the industry at every level," the Treasury said in its consultation paper. "These banks dominate the decision-making process of the Payments Council; own the payment schemes; operate as direct users offering services to consumers; and operate as agents for smaller financial institutions who do not want, or cannot obtain, direct access to the schemes."

"Because of their involvement at each level of operation, there is considerable opportunity for these banks to manipulate their involvement in the process for their own benefit," it said.

The Treasury's consultation is open until 25 June.