In issue 5 of our New Payments Architecture Unpacked newsletter we shared nine takeaways from the Payment Systems Regulator’s (PSR) decision on lowering the risks to delivery of the New Payments Architecture but have you ever thought about how the PSR compels the scheme operators to act?

Regulatory Tools

The PSR has a number of regulatory tools including legislation, rules issued by the PSR (called general directions and requirements), written guidance, and decisions (sometimes called specific directions and requirements).

These rules, decisions and guidance apply to the participants of the payment systems that the PSR regulates:

  • operators of regulated payment systems
  • payment systems providers
  • infrastructure providers

In the case of compelling the scheme operators to act in relation to the proposed New Payments Architecture the PSR has chosen to issue Specific Directions in relation to the operator of both the Faster Payments and Bacs schemes.

Specific Directions

Specific Directions and requirements are the decisions that the PSR adopts under FSBRA which relate to individual named industry participants and are based on individual cases.

Individual specific directions and requirements may include guidance to clarify how a decision will be applied.

Bacs, Faster Payments and the New Payments Architecture 

The PSR currently list ten Specific Directions on their website two of which relate to Bacs and Faster Payments as an integral part of the proposed New Payments Architecture and these were published in July 2018:

Specific direction 2 – this requires the operator of the Bacs payment system to procure any future contracts for central infrastructure services in a competitive manner. Additionally, the first central infrastructure contract competitively procured in accordance with this specific direction should be capable of receiving and sending all relevant messages (used in the payment system) in the ISO 20022 messaging standard.

and

Specific direction 3 – this requires the operator of the FPS payment system to procure any future contracts for central infrastructure services in a competitive manner. Additionally, the first central infrastructure contract competitively procured in accordance with this specific direction should be capable of receiving and sending all relevant messages (used in the payment system) in the ISO 20022 messaging standard.

The original deadlines were 2 December 2020 (SD2) and 1 July 2020 (SD3) however following applications under section 4 of each Direction the deadlines were extended to 2 December 2023 and 30 June 2023.

Subsequently, the PSR told Pay.UK that, pending further review and consultation, it did not need to to take the actions necessary to meet the 2023 deadlines under SD 2 and SD 3 to have a competitively procured central infrastructure contract in place for Bacs and Faster Payments

Following the PSR’s consultation on lowering the risks to delivery of the New Payments Architecture which was launched in February 2021 the PSR plan to review SDs 2 and 3. 

The PSR have stated that, as a result, they may vary, revoke or replace the Specific Directions, for example by imposing new deadlines for the current obligations or making more substantive changes. 

The PSR are consulting on the proposed changes to the Specific Directions required for the PSR to implement their decisions relating to Bacs and Faster Payments – these consultation document can found here: Annexes 3 and 4.

The PSR’s consultation closes on the 10 September 2021.

Comments on the revised SD2 and SD3

Having reviewed the PSR’s proposed changes to SD 2 and SD 3 the following response has been submitted to the PSR:

General Comments

Notwithstanding the fact that it is four years since SD 3 and SD 4 were first directed to the operator of the Bacs and Faster Payment schemes and five years since the Payments Strategy Forum (PSF) set outs its ‘blueprint’ strategy we agree that the current position of the New Payments Architecture procurement process necessitates that SD 3 and SD 4 are revised. Northey Point welcomes the opportunity that the PSR has given to provide comments on the proposed revised statutory instruments.

We agree that the proposed revisions to the Specific Directions are required to reflect the narrow ‘Faster Payments first’ strategy published by the PSR in July 2021.

SD2 (Procurement: Bacs)

We welcome the requirement for the operator to consult in relation to any new contract or the extension of an existing contract as part of the PSR’s non-objection process and that the PSR will take into account the conclusions of the consultation.

Whilst we welcome the requirement on the operator to report to the PSR on work considering the future of the Bacs system and the services it operates, we would argue that a first reporting date of the 30 June 2022 is too far out. The future strategy for Bacs ‘push’ payments (Direct Credit) needs to be considered as part of the ‘Faster Payments first’ strategy.

In a similar vein, we’d argue that innovation and developments in ‘pull’ payments (Direct Debit) has diminished over recent years, that both the scheme that the strategy has been set in aspic and that Direct Debit faces an immediate threat / opportunity from Open Banking Variable Recurring Payments. On this basis, we urge the PSR to reconsider the scope and timeline of a review of the Bacs system, the schemes it operates and consider whether these services sit within or outside of the proposed New Payments Architecture.

In a recent NPA:Unpacked newsletter we stated that:

Any functionality to enable or prepare for the migration of either Bacs Direct Credit or Direct Debit can only be included in scope if Pay.UK specifically ask the PSR and they subsequently agree. There is a suggestion in the PSR’s policy document that the outcome of work on the long-term strategy of Bacs might lead to more radical solutions for the future of the UK’s bulk ACH transactions. That said, the PSR suggest that work to define the future strategy for Direct Debits can be deferred while Pay.UK gets the initial CIS procurement back on track. Given the role of Direct Debit in the nations payment habits and the threat and or opportunity provided by Open Banking Variable Recurring Payments (VRP’s) this is a real shame.

We are concerned by the apparent lack of a clear timeline for the procurement of Bacs services being set out in the revised Specific Direction. This appears to be inconsistent with the approach taken for Faster Payments in the revised SD3 and, given the underlying end user dependency on the Bacs services continued uncertainty is unhelpful.

We think it would be helpful for the minimum reporting criteria described in section 3.3b to include the consideration of alternative replacement options other than a ‘new central infrastructure contract.

We are supportive of the reporting requirement on payment migration from Bacs to the NPA (3.3e) but note that the proposed reporting timescales and the narrow ‘Faster Payments first’ strategy may result in the fulfilment of this criteria being too late to be resolved via the proposed NPA procurement timeline.

It is our view that there is an urgency to consider the future of the Bacs system and the services it offers and, whilst we are supportive of the need for the operator to report to the PSR, we believe that the first reporting date of 31 March 2022 should be brought forward.

SD3 (Procurement: FPS)

We note the 1 April 2026 milestone for Faster Payments and calculate that this will be nine years since the original Specific Direction was issued and ten years since the PSF ‘blueprint’ strategy was published. Whilst it is not possible to address the pathway to this point, we urge the PSR to ensure that a realistic and robust programme plan with appropriate accountabilities is set by the operator and measured by the PSR that ensure that the revised milestone is achieved.

Para 3.4 proposes a new clause (2.3a) which sets out the approach to both minimum and additional scope for a central infrastructure contract. We have a concern over potential unintended consequences of this approach, this concern was published in a recent NPA:Unpacked newsletter.

As a minimum the mandated narrowed scope of the CIS contract must “…buy services needed to support single-push payments (which will allow most Faster Payments transactions to migrate to the NPA).” This minimum mandated scope has the potential to prevent some of today’s Faster Payment variations from migrating to the proposed NPA. It also enables the development of future Faster Payment variants to become a later optional extra. On the face of it rather than the NPA delivering Faster Payments 2.0 there is a danger that the NPA actually only delivers Faster Payments 0.9 and constrains the desired innovation and increased competition.

As part of its non-objection process, we welcome the fact that the PSR recognises the need for the operator to have undertaken consultation, that the PSR will take the consultation into account and that competition and innovation will form part of the non-objection process

Similar to our view expressed regarding SD2 we welcome the reporting requirements set on the operator but believe that the first reporting date of 31 March 2022 should be brought forward.