HM Treasury consults on implementation of the Interchange Fee Regulation

On 27 July 2015, HM Treasury published a consultation on implementing the Regulation on Interchange Fees for Card-Based Payment Transactions (the Regulation). 

The Regulation was formally adopted by the Council of the EU on 20 April 2015. The key objective of the Regulation is to cap interchange fees, although it also aims to improve transparency and competition in the card market by removing barriers to entry. We summarised the key provisions relating to the interchange fees and business rules in our previous Payments Law Update.

This consultation invites views on the government’s proposed steps to meet the UK’s obligation to establish a regulatory regime to supervise compliance with the Regulation. It also seeks views on exercising the national discretions afforded under the Regulation. 

The proposed approach to implementation 

It is the government’s intention to designate the Payment Systems Regulator (PSR) as the ‘competent authority’ for the purpose of supervising compliance with the Regulation. Although the PSR is currently well placed to achieve this aim, the government anticipates some modifications and additions to the PSR’s existing powers to ensure that it can fulfil this role adequately as well as assigning roles to other regulatory bodies to supplement the powers of the PSR. The intended approach to the regulatory regime can be summarised as follows:

• strengthening the enforcement powers of the PSR and the penalties regime (i.e. based closely on the enforcement regime that currently exists under the Financial Services Banking Reform Act 2013);
• assigning a role to the FCA where provisions of the Regulation overlap with the FCA’s existing remit (e.g. cross over with the Payment Services Regulations 2009);
• assigning a role to Trading Standards for supervision of compliance with the ‘Honour All Cards Rule’ (article 10 of the Regulation);
• assigning a role to the Competition Appeals Tribunal to hear appeals against penalties imposed and other decisions made by the PSR; and
• providing powers to the PSR to establish an out of court redress procedure allowing them to adjudicate on business-to-business disputes. 

Exercising national discretions 

Although the provisions of the Regulation are directly applicable in the UK, it provides for national discretions in three main areas:

1. Member States can decide to implement lower caps on interchange fee caps for domestic credit card transactions. The Regulation caps interchange fees for credit card transactions at 0.3%, whereas the current rate of credit card interchange fees in the UK is approximately 0.85% per transaction on average (representing a significant saving for merchants). The government does not intend at this stage to implement a lower cap for domestic credit card interchange fees than the default 0.3% cap provided for in the Regulation.
2. Member States can also decide to implement lower caps for domestic debit card transactions than the 0.2% set out in the Regulation. There are also other flexibilities in the way Member States can apply interchange fee caps to domestic debit card transactions, such as being able to applying a weighted average for a period of up to of five years. The government intends to allow payment service providers to apply a weighted average. This means that interchange fees cannot exceed more than the equivalent of 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme. This will allow the status quo to be maintained for the vast majority of transactions and will help to provide an easier transition when the Regulation caps come into effect on 9 December 2015.
3. Member States can exempt three-party card systems that use issuers and/or acquirers from caps to interchange fees for a period of up to three years, provided that the scheme’s market share remains below 3%. The government intends to exercise this time-limited exemption to provide a transitional period in which three-party schemes which use issuers and acquirers can adjust their business models. The PSR will monitor the market share of UK card schemes, to assess whether any three-party scheme exceeds a 3% share of the market and thus become subject to the interchange fee caps.

Next steps

The consultation invites responses from any individual, firm or group that is a stakeholder in the UK payments market including: banks, card schemes, merchant acquirers, business groups, consumer groups, and other interested parties affected by the Regulation. The consultation seeks feedback on whether interested parties agree with the proposed approach outlined above and closes on 28 August 2015. The interchange fee caps come into effect on 9 December 2015 and the majority of the business rules set out in the Regulation on 9 June 2016.