Market assessment of card collection services | Card fees: PSR publishes final terms of reference for two market reviews | Use of AI and machine learning in financial services
Market assessment of card collection services
In October 2022, the Payment Systems Regulator (PSR) published a policy statement (PS22/2) setting out its final decision on remedies to address the concerns raised in its card acquiring market review, including that the market may not be working well for merchants and ultimately consumers.
The PSR has imposed the following three remedies:
- Summary boxes containing tailored key price and non-price information to be sent individually to each seller and made available on their online account. Sellers use these with new online bidding tools, which suppliers are required to offer. This helps sellers compare all available offers.
- Trigger messages to induce merchants to shop around and/or switch must be sent by card acquisition service providers to their merchant customers and prominently displayed on their online account. The timing of these notices is linked to the minimum contract expiry dates or, where contracts are indefinite, they must be given at least once every 30 calendar days.
- Maximum duration of 18 months for terminal leases and rental contracts on POS (POS), and a maximum of one month’s notice after any renewal.
The PSR implements the remedies through specific instructions: Specific Direction 14 requires providers of card acquisition services to provide information to merchants, Specific Direction 15 requires providers of card acquisition services to provide notices to merchants and Specific Direction 16 limits the length of POS terminal contracts.
The PSR has also published advice on the format and content of information required under specific guidelines 14 and 15.
The 14 firms subject to the specific guidelines must implement the solution relating to POS terminal contracts from January 2023, and the two remaining remedies from July 2023.
Card fees: PSR publishes final mandate for two market reviews
On 27 October 2022, the PSR published the final terms of reference for its market assessments on card schemes and processing fees (MR22/1.2) and cross-border consumer intermediation fees between the UK and the EEA (MR22/2.2). The PSR has decided to launch the market reviews in the face of concerns about increases in both sets of fees.
- Initial market research: PSR wants to understand whether the markets for schemes and processing fees are working well, and will examine the levels, structure and types of schemes and processing fees, based on PSR’s findings in its market review for card acquisition services findings. In particular, it intends to examine the extent of barriers to entry and network effects, and whether Mastercard and Visa have a “must take” status for merchants.
- Second market research: PSR wants to understand why certain cross-border interchange fees between the UK and the EEA for non-present transactions using consumer debit and credit cards have increased fivefold since the UK left the EU. The PSR intends to investigate the rationale for and impact of these fee increases and whether the ability of card scheme operators to increase fees is an indication that the market is not working well. See our previous Insight for more information on this issue.
The PSR intends to publish a report outlining its preliminary conclusions on card scheme and processing fees in Q4 2023 and a final report in Q2 2024. The PSR plans to publish a report outlining its preliminary conclusions on cross-border consumer exchanges between the UK and EEA fees in Q2/Q3 2023 and a final report in Q4 2023.
While fees charged by the card schemes are the focus of the assessments, participants from across the payment ecosystem will see their bottom line affected by changes in the level of the scheme/processing fees and cross-border interchange. As customers of the schemes, banks and other actors can also receive direct information requests from PSR as part of the regulator’s information gathering and analysis exercise. Companies may wish to begin collecting and reviewing relevant internal data and documents, and develop a strategy for engaging with PSR during the reviews. The studies also represent an opportunity for companies to assess their forward-looking strategy for payments, in light of the economics of the market(s) and the political agenda.
Use of AI and machine learning in financial services
Financial services firms are increasingly using artificial intelligence (AI), machine learning and across a range of areas, including fraud and money laundering detection, insurance risk assessment and creditworthiness and fairness assessment. This is likely to continue due to increased availability of data, improvements in computational power and wider availability of AI skills and resources.
The key question for financial services is whether AI can be managed through fine-tuning the existing regulatory framework, or whether a new approach is needed. In that context, the Bank of England, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) (together, the supervisory authorities) have published a discussion paper on AI and machine learning (ML). The purpose of the discussion paper is to explore how the current UK regulatory framework applies to AI and ML, and to address any identified gaps. The paper also considers how policy can best support further safe and responsible adoption of AI and ML, and whether further clarification of the existing regulatory framework may be useful. In particular, the supervisory authorities are interested in the additional challenges and risks that AI brings to companies’ decision-making and governance processes, and how these can be handled through senior managers and the certification regime and other existing regulatory tools.
On 9 November 2022, the FCA published a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, on the use of AI. Rusu reminds companies of things they need to consider when using AI, including the need for a company’s governance framework to take a central role in ensuring that companies take responsibility for AI models and the importance of creating a framework to deal with new challenges.
Nevertheless, the use of artificial intelligence in financial services is accelerating, with the largest uptake in the insurance and banking sectors. Rusu notes that a recent survey published by the Bank of England and the FCA identified that the biggest risk for consumers is data bias and data representativeness, while the biggest risk for firms is a lack of AI explanation. In a speech given on 17 November 2022 by Nikhil Rathi, Chief Executive of the FCA, a number of use cases for artificial intelligence were identified as a way of solving problems related to companies’ implementation of the new “consumer duty”. For example, detecting signs of vulnerability, tailoring products to individual needs and receiving accurate feedback and data from customers.
These AI discussions make a valuable contribution to this wider policy debate and occur as the UK government looks to publish its delayed white paper on AI regulation. Meanwhile, a policy document on a pro-innovation approach to AI regulation was published on 18 July 2022 alongside the AI Action Plan, which is part of the National AI Strategy released in September 2021.
The discussion paper closes for comments on 10 February 2023.
Given the wide-ranging implications of AI, regulators are keen to hear from a wide range of stakeholders. This includes firms regulated by the Bank, PRA and/or FCA, as well as non-regulated financial services firms, professional services firms (such as accountancy and audit firms), third parties (such as technology companies), trade associations and industry bodies and standard-setting organisations. Stakeholders should look for any responses to this discussion paper and the UK Government’s future approach to regulating AI.
UK Regulation of Crypto Assets
On 4 November 2022, the revised financial services and markets bill was published after the public bill, where a number of changes were introduced. The Bill represents a landmark in post-Brexit financial services legislation, addressing issues such as the approach to retained EU law, changes to the UK financial promotions regime and financial market infrastructure.
Among other things, the revised bill proposes certain changes to the Financial Services and Markets Act 2000, which, if passed into law, could bring crypto-assets generally within the UK regulatory perimeter and therefore subject to supervision by the FCA. Additionally, the broader (technology-neutral) definition of “cryptoassets” included in the bill may capture a broader class of digital assets (including, for example, non-fungible tokens) than previously anticipated.
As part of the proposed measures, the bill would also strengthen the powers of law enforcement by enabling them to seize suspected criminal crypto-assets, and the powers of courts by simplifying the enforcement of warrants against defendants’ crypto-assets.
This proposal is just the first step on a long road towards full regulation of crypto assets in the UK. The timeline for the bill’s passage is unknown: it still needs to go through the House of Lords before receiving royal assent. However, even if the above amendments to the Bill are retained, it will still be necessary for HM Treasury to amend the Financial Promotions Order and the Regulated Activities Order in order for crypto-assets to be brought within the UK regulatory perimeter. We expect HM Treasury to engage in a public consultation on these changes and for the FCA to consult on implementation.
The companies will therefore have some time before the exact scope and impact of the bill becomes clear, and any rules come into force. Companies should follow these developments closely.
See our Insight for more information.
FCA publishes discussion paper on its competition approach for large technology companies in UK financial services
On 25 October 2022, the FCA published Discussion Paper 22/5 “The potential competition impacts of Big Tech entry and expansion in retail financial services” (DP22/5).
The FCA notes that Big Tech firms’ presence internationally and in UK financial markets has increased, with the potential to grow and change market outcomes rapidly. Big Tech firms can offer innovative and efficient products and services. However, in the FCA’s view, based on evidence from Big Tech firms’ core markets and their expanding ecosystems, competitive risks may arise in the future from their rapid gains in market share, the markets “tipping” in their favor and the potential exploitation of market power. which would be detrimental to competition and consumer outcomes.
The FCA is not proposing any regulatory or policy changes, but the purpose of DP22/5 is to stimulate a discussion about the potential competition impacts identified using existing research to inform the FCA’s approach to Big Tech firms. The FCA wants to hear views on where Big Tech entry is likely to create the greatest competitive advantages for consumers and the areas where there is the greatest risk of significant harm if competition develops in a particular way.
The FCA has focused its analysis on four retail sectors: (i) payments; (ii) deposit taking; (iii) consumer credit; and (iv) insurance.
The discussion is also intended to inform the regulator’s approach to and understanding of Big Tech firms, in the context of the new UK pro-competition regime for digital markets and those in other jurisdictions such as the EU and US, the UK’s future Regulatory Framework, and the FCA’s new consumer duty.
The deadline for comments on DP22/5 is 15 January 2023. The FCA plans to publish a feedback statement in the first half of 2023 outlining how it will develop its regulatory approach in response to the feedback received.
See our Insight for more information.
