Supplementary written evidence submitted
by the Office of Fair Trading
Following my appearance at the Treasury Select Committee,
I am writing to you to provide further details on two issues that
were discussed at the session—payment systems and fraud.
PAYMENT SYSTEMS
By way of background, from 2004 until early 2007
the OFT chaired the Payment Systems Task Force, made up of consumer,
industry and government bodies, set up to tackle competition problems
identified in the payments industry. For example, in 2006, the
Task Force made a number of recommendations on improving the openness
of both Bacs (the bankers' automated clearing scheme for processing
electronic transactions) and LINK (the UK ATM network) to stakeholders.
One of the outcomes of the Task Force was the creation
of the Payments Council, an umbrella body for the payments industry.
The Task Force considered that one of the main duties of the Payments
Council should be to ensure open access to the payment schemes
under its remit. To ensure this, one of the three main objectives
of the Payments Council was agreed to be "to ensure payment
systems are open, accountable and transparent". In March
2009, the OFT published a review into the operations of the Payments
Council. In reviewing progress against that objective, no significant
concerns over access to membership of individual payment systems
emerged.
As well as the development of the Payments Council,
payment systems (or money transmission systems) in the UK are
now subject to the Payment Services Regulations 2009 (PSRs 2009)
that implement the EU's Payment Services Directive into national
legislation. These regulations require payment service providers
to be authorised or registered by the FSA and to comply with certain
rules about the provision of payment services. In addition, they
aim to support competition among payment service providers, by
stipulating that rules governing access to payment systems should
be objective, proportionate and non-discriminatory, subject to
certain exemptions.
Under Part 8 of the PSRs 2009, the OFT has the power
to take action to enforce a prohibition on restrictive rules on
access to payment services not designated under the Financial
Markets and Insolvency (Settlement Finality) Regulations 1999,
such as the UK ATM network (LINK) and Visa and MasterCard credit
and debit card systems. In addition, the OFT can, of course, investigate
relevant potential competition issues related to these (and other)
systems under the Competition Act 1998 or Articles 101 and 102
of the Treaty on the Functioning of the European Union (TFEU)
or consider them under its Enterprise Act 2002 powers.
As part of our review on barriers to entry, expansion
and exit in retail banking, we examined whether new entrants faced
difficulties in gaining access to payment systems and if the costs
are prohibitive.
We found that new entrants have the choice of either
becoming a direct member of payment schemes such as Sacs, CHAPS
and Faster Payments, or accessing these schemes through an agency
agreement with an existing member. The choice between these two
options depends on the necessity of direct access, the relative
costs and the eligibility criteria.
Our review found that new entrants and smaller players
typically enter into agency agreements with existing member banks
to access automated payment systems such as Sacs, CHAPS and Faster
Payments. The main reason for this is that they do not process
sufficient numbers of payment transmissions to find it profitable
to apply for direct membership of the schemes. Indirect access
to payment systems is subject to the criteria set out by the clearing
bank serving as agent. These relate to connectivity, their credit
policy, rules and procedures laid down by the schemes and criteria
set by regulators.
We did not receive evidence from institutions holding
agency agreements suggesting that the cost of these was prohibitive
and hindered access to payment schemes, although the cost was
reported to be higher for new services, such as Faster Payments,
compared with older schemes.
While not every member of payment schemes provides
for agency arrangements for indirect members, there appear to
be enough to allow an indirect member to compare competing offers.
It is possible for indirect members to switch providers, albeit
after incurring certain costs.
However, it is worth noting that some respondents
to our review did report that they had encountered difficulties
in the past in finding a clearing member willing to act as their
agent. It is worth noting in that context that the PSRs 2009,
as described above, have clarified the authorisation and prudential
regime for payment service providers that are not banks, building
societies or e-money issuers (already authorised or certificated
by the FSA), as well as the rules governing access to payment
systems. These regulations have the potential to remove ambiguity
surrounding the regulatory regime to which a payment service provider
is subjected to, and may remove some of the difficulties faced
by firms with unconventional business models being accepted as
an indirect member of a scheme by one of its members.
Overall, our review found that direct and indirect
access to payment networks does not appear to raise insurmountable
barriers to entry or expansion. Fraud
You mentioned a concern that consumers may worry
that switching provider may increase the likelihood of being subject
to fraud. For example, there may be a fear that individual customer
details are not securely transferred during the switching process,
leading to the possibility of falling victim to identity theft.
This risk of identity theft may be perceived to be
higher across certain banking channels than others. For example,
consumers may be reluctant to switch to online providers for fear
of falling victim to internet scams. Similarly, if online providers
still require potential customers to post identity documents,
this may dissuade customers from switching. Indeed, as identified
in our e-consumer protection study, there is a common perception
that the internet is susceptible to fraud; with concerns over
the security of financial details the most often cited reason
for not buying goods and services online. However, this concern
is often uncorrelated with the number of fraud cases occurring.
For example, in 2009, reported internet fraud in the UK decreased
by 15% from 2008, whilst internet transactions increased by 14%
during the same period.
As part of our retail banking work we have explored
the reasons why consumers are reluctant to switch. Our research
has not identified the fear of fraud as a key factor — the
most significant factor deterring switching was a fear that the
process was too complicated and problems occurring that disrupt
regular financial transactions. It is also worth noting that in
our review on barriers to entry we found that many providers often
take an overly risk averse approach in requesting documents to
meet requirements sent out in the Money Laundering Regulations
2007 when there is scope for a wider range of documents to satisfy
these requirements. For example, they often request original copies
of identity documents, such as passports, when other documents
may suffice. A wider approach to meeting these requirements might
allay customer concerns about fraud if they are able to send less
sensitive documents (that are less likely to facilitate fraud)
or if identity can be reliably verified by other means that still
meet regulatory requirements.
Similarly, there may be value in providers publicising
the redress mechanisms available to customers if they are subject
to fraud as a result of the switching decision. It is also worth
considering that the Data Protection Act already requires financial
institutions to ensure that appropriate technical and organisational
measures are taken against unauthorised or unlawful processing
of personal data and against accidental loss, destruction or damage
of such data.
I hope that the Committee will find this useful and
look forward to its findings.
January 2011
| 
