Payments system self-regulation is under scrutiny in the UK as HM Treasury veers towards public oversight.
Last month, the UK government published a consultation paper on “Opening up UK payments”. According to the paper, “the self-regulation of financial services…has been discredited.” Say what? The world over, payments systems have been almost entirely self-regulated, so this is a big call. The evidence cited in the paper for this includes the LIBOR-rate fixing scandal and the failed attempt to eliminate UK cheque clearing. And of course, there is enduring rancor over the public bailout of UK banks during the global financial crisis.
The paper makes clear that the UK Government does not think the industry-led UK Payments Council is up to delivering good strategic direction for the UK payments system. It proposes a new public regulator, with the future of the Payments Council left uncertain.
Initial reaction from the UK Payments Council expresses dismay, as might be expected. But as uncomfortable as this is for UK banks, better outcomes for industry and for the broader community might conceivably be achieved. Everything depends on how the new framework is set up. To the extent that the UK policymakers think that public oversight can “replace” self-regulation, I think they have the wrong end of the stick: both are needed, and the challenge is effective alignment.
The Australian payments community has done reasonably well at effective debate and collaboration on policy and self-regulatory issues. I should declare the obvious bias here: a big part of APCA’s job is to promote effective alignment on policy issues so I am keen to see evidence of it working.
In 1998, Australian financial institutions had a similar wake-up call on self-regulation, when the Wallis committee recommended a new Australian regulator for payments. This became the Payments System Board (PSB) within the Reserve Bank of Australia (RBA). At the time, there was undoubtedly some hand-wringing about what the new regulator would get up to, and how the industry would fare.
In the early days, there certainly was plenty of controversy, and even a few court cases, as interchange fee regulation was forced through against rooted opposition from the card schemes. But in recent years, the Australian payments community has learned to work pretty well with each other, and with a “light-touch” public regulator, on payment system enhancement.
Exhibit A is the RBA’s Innovation Review. In June last year, the RBA published Conclusions to its two-year Innovation Review that included five strategic objectives for Australian payments. The RBA asked industry to work out how to deliver against the five goals. Industry (through APCA) was able to quickly adopt all of them, partly because the alignment with industry’s own thinking was already there, thanks to extensive consultation.
The first objective, intraday settlement of direct entry payments, is on track for delivery by the end of 2013. The remaining four are covered in the Real-time Payments Proposal lodged by industry and accepted by the RBA in February this year. The important point is that the regulator asked the big questions, but the industry supplied the answers in its own way.
There have been several other effective debates in the last five years: a balanced, sensible approach to the decline of cheques, a negotiated outcome on account switching and collaborative policy reform of the ATM system, for example. Industry and regulator do not see eye to eye on many issues – far from it! Yet we seem to have been able to negotiate solutions when we need to.
So what is it about the Australian approach that seems to be working? From my own experience, there are three steps for getting a good outcome:
- an independent (that is, apolitical) public body needs to decide what the public interest demands, having consulted widely;
- industry participants need to find common ground on what they collectively think is needed; and
- only then can we find the best fit between them.
In Australia, the PSB is the independent public body with clear authority and responsibility for the payments system. It has the power to regulate, but has only done so on a few controversial issues. Instead, the PSB has used consultation, debate and policy announcement to seek an effective engagement with industry. In recent times, this has worked well. I think the absence of an equivalent body is a weakness in the UK system – but still better than a heavy-handed “black-letter” regulator.
It is just as important that industry knows how to bring all the competing business agendas together and work out a sensible collective position on the payments system. That is the explicit function of bodies like APCA and the UK Payments Council, but can happen in many ways. This process can often be messy and time-consuming. Business people have to grapple with political and policy issues; aggressive competitors have to try to find some common ground (without breaking the competition laws).
Only after all that can the industry and the regulator negotiate an outcome that sustainably serves the broader community. It’s to be hoped that the UK consultation will yield this kind of framework.
