New Payment Systems Regulator outlines plans for first two market studies

The new regulator, which officially begins its supervision of certain payment systems in the UK from 1 April, said it will look at a number of issues relating to indirect access to payment systems.

"Many organisations gain access to a payment system indirectly, using a ‘sponsor bank’ that has direct access," the PSR said. "Currently the four primary sponsor banks are Barclays, HSBC, Lloyds and RBS, yet there are other payment service providers with direct access. Our market review into the supply of indirect access to payment systems will explore the structure of the market, what may be limiting others with direct access from becoming a sponsor bank, and consider what a more competitive indirect access model might look like."

The regulator said it will also carry out a study into the "ownership and competitiveness" of payment systems infrastructure, with a particular focus on the infrastructure provided by VocaLink to Bacs, Faster Payments Service, and LINK.

In that market review, the PSR said it wants to "explore whether status quo hampers innovation, is susceptible to conflicts of interest, or acts as a barrier to entry for new providers attempting to break into the market".

Competition law expert Jenny Block of Pinsent Masons, the law firm behind Out-Law.com, said there could be "ground-breaking" changes in the payments market in the months to come.

Block said: "The market studies are just part of an ambitious programme of work for the new PSR and take place against the background of a raft of investigatory measures into the sector already being undertaken or promised by the Competitions and Markets Authority and Financial Conduct Authority. This will be a demanding time for financial institutions and operators of payment systems, and the interventions that could ultimately be required by the regulator may prove ground-breaking."

The PSR announced its plans for the two market reviews as it published a policy statement (88-page / 973KB PDF) that outlines its initial plans for regulating the payment systems that have been designated for regulation by the UK government. The PSR is tasked with promoting effective competition and innovation in payment systems and ensuring that those systems are operated and developed in the interests of business and consumer users of those systems. 

Among the measures it has outlined is a new 'access rule' for operators of the Bacs, Cheque and Credit Clearing, CHAPS and Faster Payments payment systems. This will require the operators to set "objective, risk-based and publicly-disclosed access requirements, which permit fair and open access" to payment service providers that wish to obtain direct access to those payment systems.

A new code of conduct for 'sponsor' banks facilitating indirect access to payment systems will also be developed to "address concerns … such as the risk that sponsor banks discontinue the supply of indirect access, concerns around the sharing of commercially sensitive information with sponsor banks who are also downstream competitors, and some aspects of the contractual arrangements that govern the supply of indirect access", the PSR said.

Banking law expert Tony Anderson of Pinsent Masons said: "These measures also take account of the risks associated with ‘tiering’ of direct and indirect members in payment systems previously flagged by the IMF and the Bank of England following the financial crisis and the insolvency of various foreign banks which were indirect members of UK payment systems."

Other rules on conflicts of interest, transparency and reporting requirements have also been set out, alongside a commitment to create a new strategy-setting forum where the onus will be placed on industry to "develop and agree strategic priorities for the long-term development of payment systems".

Hannah Nixon, PSR managing director, said: "The measures we have set out recognise that payment systems must be resilient, competitive, dynamic and respond to the needs of the people and businesses using them. This is where we have focussed our initial policies. Systems need to be transparent to engender the trust of their customers and users. They need to be accessible to a wide range of businesses and others who in turn can deliver competitive services to customers."

Nixon said the PSR will use the "very strong powers" at its disposal if firms subject to its regulatory regime fail to take action expected of them.

"If firms do not step up to the mark we will use those powers to issue directions, impose fines and impose obligations that will force individual players to act differently," Nixon said.