CUBE RegNews: 13th December

Posted: 2023-12-13

PSR proposes remedies to address distortions in cross-border interchange fees

The Payment System Regulator (PSR) has released an interim report regarding their ongoing market review of cross-border interchange fees (IF). The regulator is seeking feedback on their provisional findings and approaches to remedies, which will help to inform the final report. 

• Findings 

The PSR’s provisional findings indicate that Mastercard and Visa lack effective competition on the acquiring side, leading to distortions in the market against UK merchants and their customers. This distortion is to the detriment of UK acquirers and merchants and is likely to increase UK-EEA Card Not Present (CNP) IF and retail prices without adequate justification. 

The current levels of IF are not relevant to the UK-EEA context and have, therefore, likely pushed UK-EEA CNP IF to an unduly high level. The PSR is concerned that Mastercard and Visa may continue raising outbound IF while UK merchants cannot avoid or benefit from them. 

The evidence shows that the 2022 increase in outbound IF amounted to approximately £150 million to £200 million extra paid that year by UK merchants and consumers. 

• Proposals 

The PSR is proposing potential remedies to address or mitigate these issues and is seeking feedback on their analysis of and provisional findings. This includes introducing a price cap for UK-EEA consumer CNP outbound IF using the MIT methodology. However, developing an appropriate and proportionate methodology may take time as information on merchant costs for accepting different payment methods is not generally available from public sources. Therefore, the PSR is provisionally considering a staged approach, and it may be appropriate to apply an interim cap of 0.2% for CNP consumer debit transactions and 0.3% for CNP consumer credit transactions until a longer-term solution is established. 

• Next steps 

The deadline for feedback is 31 January 2024. The PSR intends to publish its final report on cross-border IF in Q1 2024 but will confirm these timeframes in due course. If the PSR concludes the market is not working well and it warrants intervention, this report will be followed by appropriate regulatory action. 

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EIOPA proposes principles to limit greenwashing

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation on its draft opinion on sustainability claims and greenwashing. 

The draft opinion sets out four principles to be observed when providers make sustainability claims and propose that National Competent Authorities monitor providers’ adherence to these principles.  

Principle 1: Sustainability claims made by a provider should be accurate, precise, and consistent with the provider’s overall profile and business model, or the profile of its product(s). 

Principle 2: Sustainability claims should be kept up to date, and any changes should be disclosed in a timely manner and with a clear rationale. 

Principle 3: Sustainability claims should be substantiated with clear reasoning and facts.  

Principle 4: Sustainability claims and their substantiation should be accessible by the targeted stakeholders. 

The consultation closes on 12 March 2024. 

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EIOPA Financial Stability Report highlights risks and developments for pensions and insurance sector

The European Insurance and Occupational Pensions Authority (EIOPA) has published today its December 2023 Financial Stability Report. 

Opening the report, EIOPA chair Petra Hielkema notes a number of key developments that have helped the sector during the year. 

• Development of tools such as the natural catastrophe dashboard. 
• A recommendation to develop pension tracking systems to provide information to consumers that helps them make better decisions about their long-term savings as well as work on pension dashboards that provide accessible data in one place. 
• Work to enhance cyber resilience including the draft Regulatory Technical Standards and Implementing Technical Standards for the Regulation regarding digital operational resilience (DORA). 
• Regular publication of the EIOPA Risk Dashboard. 

Hielkema notes that in 2024 EIOPA will focus its financial stability activities on stress test and scenario analyses to ensure the resilience of the capital and liquidity positions for European insurers in an adverse economic scenario with higher yields and inflation. 

The report then identifies a number of on-going risks and developments including: 

• On-going conflict in Ukraine. 
• Upward trend in interest rates. 
• The return of inflation. 
• The real likelihood of recession. 
• Liquidity risks. 
• The pensions gap. 
• Cyber attacks. 
• Droughts and wildfires and the impact on insurers. 

The report also covers in detail four topical focuses on specific areas of interest to EIOPA stakeholders: recent developments in the liquidity position of insurers; Evolution of insurers’ asset allocation in an environment of rising interest rates; the liquidity needs of IORPs on interest rate derivatives, and the impact of past recessions on insurers and lessons for the future. 

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EBA publishes peer review on mortgage borrowers’ treatment

The European Banking Authority (EBA) has published a peer review of the supervision of creditors’ treatment of mortgage borrowers in arrears under the Mortgage Credit Directive (MCD). 

The report found that competent authorities’ supervision is effective overall but identified differences in the level of scrutiny applied to MCD creditors, including identifying risks borrowers face. 

In the report, the EBA sets out follow-up measures which apply to all competent authorities, including the adoption of policies clearly indicating internal unit responsibilities and establishing formal written procedures regarding this area’s supervision. 

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OCC guidance on buy now pay later

The Office of the Comptroller of the Currency (OCC) has issued a bulletin addressing the risks associated with “buy now, pay later” (BNPL) lending which provides guidance for banks offering or considering offering BNPL loans. The bulletin stresses the importance of managing risks effectively, ensuring fair access to financial services, and compliance with relevant laws and regulations. 

Background: The bulletin provides comprehensive background information on BNPL loans, highlighting their increasing popularity, especially among tech-savvy younger generations and consumers with limited or no credit history. It discusses various characteristics of BNPL loans, including payment terms, approval processes, and the role of third-party providers. 

BNPL risks: The bulletin identifies several risks associated with BNPL lending, including: 

• borrower over-extension; 
• underwriting challenges for applicants with limited credit history; 
• unclear disclosure language; 
• issues related to merchandise returns and disputes; and 
• elevated operational and compliance risks in third-party relationships. 

It also notes the potential difficulties in credit reporting due to the short-term nature of BNPL loans. 

Guidance for banks: The guidance emphasises the need for a robust risk management system tailored to the unique characteristics of BNPL loans. This includes maintaining clear and conspicuous disclosures, ensuring fair treatment of consumers, and incorporating BNPL lending into the bank’s overall risk management and compliance frameworks. 

Credit risk management The bulletin notes the importance of prudent lending policies to identify, measure, monitor, and control credit risk associated with BNPL loans. It suggests establishing policies and procedures for BNPL lending, including underwriting criteria, repayment terms, and considerations for credit loss allowances. 

Operational risk management Operational risk management is highlighted, focusing on the highly automated nature of BNPL lending and potential issues such as fraud risk, challenges in handling merchandise returns and disputes, and the need for effective model risk management. 

Third-party risk management: The OCC stresses the importance of effective third-party risk management, whether BNPL activities are performed in-house or through third-party providers. Banks are expected to operate in a safe and sound manner and comply with applicable laws and regulations. 

Compliance risk management: The guidance notes the need for clear and standardised disclosure language, appropriate marketing practices, and consideration of consumer protection-related laws and regulations. The bulletin also advises incorporating BNPL lending into the bank’s compliance management system. 

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Two charged for crypto AI Ponzi scheme and inventing fake regulator 

Two men in the US have been charged with operating a cryptocurrency Ponzi scheme that netted them more than $25 million from unsuspecting clients. 

David Gilbert Saffron and Vincent Anthony Mazzotta Jr allegedly created the fraudulent scheme by which investors paid into various trading initiatives that falsely promised to employ an artificial intelligence automated trading bot to trade victims’ investments in cryptocurrency markets and earn high-yield profits. 

To further deceive investors, Saffron and Mazzotta allegedly created a fictitious entity called the Federal Crypto Reserve and fraudulently solicited victims to pay the Federal Crypto Reserve for services that would supposedly investigate and recover their losses, further perpetuating the scheme and generating more money from unsuspecting investors. 

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RBA speech on modernising payments systems in Australia

Michele Bullock, Governor of the Reserve Bank of Australia (RBA), spoke on the subject of modernising Australia’s payments system at the Australian Payments Network Summit in Sydney. 

Bullock began by outlining RBA’s strategic priorities including the following.

• Electronic payment systems: Strengthening the resilience of electronic payment systems, particularly the New Payments Platform (NPP) and card schemes, due to increased reliance on electronic payments. 
• Government’s payments reforms: Advancing and implementing government payments reforms to modernise regulatory architecture and ensure a safe, efficient, and competitive payments system. 
• Promotion of competitive electronic payments:
• Promoting competitive, cost-effective, and accessible electronic payments. 
• Encouraging payment service providers to implement least-cost routing to lower payment costs for businesses. 
• Expecting financial institutions to deliver faster payment capabilities, particularly through the NPP’s PayTo service for modernising direct debits. 
• Enhancement of cross-border payments:
• Working with other G20 countries to improve cross-border payments in terms of cost, speed, transparency, and accessibility. 
• Standardising messages for cross-border payments and setting a global implementation target by 2027. 
• Introducing the NPP’s International Payments Business Service for real-time 24/7 processing of inbound cross-border payments. 
• Shaping the future of money:
• RBA has completed research on potential use cases for a central bank digital currency (CBDC). 
• Planning a project to explore how digital money and infrastructure could support the development of tokenised asset markets. 
• Collaborating with the Treasury on the policy case for a CBDC, with a joint paper expected in mid-2024 to summarise CBDC analysis and outline a roadmap for future work. 

Bullock then focused on three key issues: 

• The RBA’s plan to conduct a comprehensive review of retail payments regulation under its expanded regulatory perimeter. 
• How industry and government can work together to maintain access to cash. 
• How to ensure a successful transition from BECS to modern payment systems. 

Review of retail payments regulation 

Bullock explained that the RBA is expanding its regulatory scope as part of the government’s payment reforms. The upcoming reforms aim to include newer players like ‘buy-now-pay-later’ providers, payment gateways, payment facilitators, and mobile wallet providers under RBA regulation, expected to be in place during 2024. This expansion provides the opportunity for a comprehensive review of retail payments regulation, including a consultation on existing regulations and potential areas requiring regulation for safety, competition, and efficiency. 

Bullock noted that the RBA’s payment regulation historically has adhered to principles promoting safe, efficient, and competitive markets, emphasising transparent costs, freedom for businesses to choose payment methods, and businesses passing on end-users’ chosen payment method costs. The forthcoming review, she said, might question whether these principles remain sufficient and, if so, how to apply them to a broader range of payment systems within the expanded regulatory perimeter. 

The review will specifically address: 

• Least-cost routing (LCR):
• Highlighting the importance of LCR in pressuring card payment schemes to lower fees for merchants. 
• Recognising slow progress and considering formal regulation to ensure full LCR benefits for businesses. 
• Mobile wallets:
• Acknowledging the rapid growth of mobile wallets but expressing concerns about opaque costs and potential access barriers for payment service providers. 
• Contemplating the need for regulatory action in this area. 
• Buy-now-pay-later (BNPL) Services:
• Asserting that merchants should have the right to surcharge BNPL services, similar to card payments, to incentivise payment schemes to keep fees low. 
• Considering the necessity of formal regulation to enable this surcharging right. 

Maintaining access to cash 

Bullock stressed that the RBA is maintaining a focus on ensuring access to cash for Australians despite declining use in favour of digital payments. The RBA recognises cash’s importance for certain individuals and as a backup during system outages or emergencies. To address challenges in the cash distribution system, the RBA conducted a review in 2021, suggesting improvements to enhance effectiveness, efficiency, sustainability, and resilience. 

The economic challenges of cash distribution led to the merger of major cash-in-transit (CIT) providers, Linfox Armaguard and Prosegur, approved by the Australian Competition and Consumer Commission (ACCC). However, despite the merger, the sustainability of Linfox Armaguard’s CIT business remains uncertain. 

To address these issues, Bullock noted that the RBA had convened a roundtable discussion with industry participants to explore measures promoting the sustainability of the cash distribution system. The RBA is now considering different models, including a cooperative approach, to improve the wholesale cash distribution system’s sustainability. Bullock also added that the Australian Banking Association (ABA) has sought authorisation from the ACCC to develop solutions for the challenges faced by the cash distribution industry, with the RBA participating in these discussions. 

The decline in cash use also affects retail cash services, evident in the reduction of cash access points, including ATMs and bank branches. Despite ongoing challenges, the RBA retains its Access Regime, regulating pricing aspects of the ATM industry to ensure fair access and promote competition. However, Bullock acknowledged the industry’s challenges and rising deployment costs and will engage with industry participants to assess whether adjustments to the regulation are necessary. 

Supporting the transition from BECS to modern payment systems 

Finally, Bullock addressed the industry’s plan to transition from the Bulk Electronic Clearing System (BECS) to more modern payment systems. BECS, a longstanding low-cost and reliable system, processed around three-quarters of non-cash payments by value in 2022/23. The industry, through AusPayNet (the Australian payments network), has decided to retire BECS by 2030 due to its limitations compared to modern alternatives like the New Payments Platform (NPP). 

Bullock noted the key reasons for transitioning away from BECS including its batch processing, limited remittance information, and lack of advanced addressing features. The NPP, with its 24/7 operation and data-rich ISO 20022 messaging format, offers real-time transfers, enhanced information, and features like PayID addressing. 

Bullock outlined some of the challenges the transition will likely incur including connecting all relevant accounts to the NPP, addressing cost disparities between BECS and the NPP, ensuring NPP services handle the full range of BECS payments, and addressing the reliability of NPP services. Financial institutions must invest time and effort, she added, to make accounts reachable via the NPP, and the RBA plans to review end-user costs for transparency. 

Bulk payments, a significant BECS use case, pose challenges in transitioning to the NPP’s line-by-line processing. Bullock suggested that standardising the industry approach for processing bulk payments through the NPP could promote interoperability and efficiency. 

Bullock ended by suggesting that the industry’s target end date for BECS retirement by 2030 should help focus efforts on migration. Despite challenges, Bullock emphasised the importance of monitoring industry progress and addressing issues to ensure a smooth transition. Improving the reliability of NPP services will be a major focus in the coming years, given the shift in payment volumes from BECS to the NPP. 

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