Documents considered by the Committee on 29 January 2014 - European Scrutiny Committee Contents


8 Financial services: payment services

(a)  

(35250)

12990/13

+ ADDs 1, 3-4

COM(13) 547

(b)

(35251)

12991/1/13

+ ADDs 1-3

COM(13) 550

(c)

(35276)

13425/13

COM(13) 549


Draft Directive on payment services in the internal market and amending Directives 2002/65/EC, 2013/36/EU and 2009/110/EC and repealing Directive 2007/64/EC


Draft Regulation on interchange fees for card-based payment transactions



Commission Report on the application of Directive 2007/64/EC on payment services in the internal market and on Regulation (EC) No. 924/2009 on cross-border payments in the Community

Legal base (a)-(b) Article 114 TFEU; co-decision; QMV

(c) —

Department HM Treasury
Basis of consideration Minister's letter of 19 January 2014
Previous Committee Report HC 83-xvi (2013-14), chapter 10 (9 October 2013)
Discussion in Council Not known
Committee's assessment Politically important
Committee's decision (a)-(b) Not cleared; further information requested

(c) Cleared

Background

8.1 Cross-border electronic payments are becoming increasingly common for individuals and businesses alike. There have been EU efforts, in connection with the single market, to facilitate such payments, most notably through development of the Single Euro Payments Area (SEPA). SEPA is based on the premise that there should be no distinction between cross-border and domestic electronic retail payments in euros across the EU. The project covers key retail payment instruments — credit transfers, direct debits and payment cards.

8.2 There is also the Payments Services Directive, Directive 2007/64/EC, (PSD) aimed at enhancing competition and transparency in the payments industry across the EU and ensuring that the level of consumer protection is sufficient and harmonised.

8.3 In January 2012 the Commission published a Green Paper Towards an integrated European market for card, internet and mobile payments, which looked at the rapidly changing market for card, internet and mobile payments in the EU, set out a number of barriers to development and launched a consultation on how to achieve a fully integrated EU market for card, internet and mobile payments. The Commission invited responses to 32 questions in the Green Paper and foreshadowed the possibility of legislative proposals.[37]

8.4 In July 2013 the Commission published this draft Directive, document (a), under which the PSD would be repealed and replaced by Payment Services Directive II or PSD II, which would contain the bulk of the PSD's substance with modifications. The Commission proposes modifications to the PSD to ensure consumer protection keeps up with innovations in the market and to streamline previous sections that the industry found cumbersome, unnecessary or unclear. The draft Directive deals with the following matters: increased scope, small payment institutions, surcharges, security measures and the European Banking Authority.

8.5 Interchange fees are fees set by the card network and paid by the merchant's bank to the customer's bank for the acceptance of card-based transactions. They are passed on to the retailer in the form of a service charge and, in turn, passed onto consumers in the form of higher prices. Multilateral interchange fees are set by the card schemes (VISA and MasterCard) — these are fees standardised between card issuers and a host of card acquirers and are the most frequently used. Bilateral interchange fees, a rarer phenomenon, are agreed directly between card issuers and card acquirers — so instead of being a cross industry standard, the merchant's bank and customer's bank would have their own deal arrangement.

8.6 The draft Regulation, document (b), published with the draft Directive, would regulate interchange fees that are applied to debit and credit card transactions within the EU and would cap the level of interchange fee that could be applied to a card transaction. The measure would deal with the following matters: a cap on interchange fees, separation between scheme and processing, co-badging, an honour all cards rule and steering of consumers.

8.7 The Commission has published a Report, document (c), also at the same time, on how the PSD has been applied by different Member States and which identifies the main issues that have arisen. The Report also touches on interchange fees. The Commission suggests that a number of changes could be envisaged to the PSD to enhance its effect and to clarify a number of its aspects. It also highlights the need to accommodate technological business development within the payments industry. Although the presentation of the draft Directive and the draft Regulation together with Commission's impact assessment for the proposed legislation do not refer directly to the Report they do cite the two external reviews on which the Report is based.

8.8 When we considered these documents, in October 2013, we noted that at that stage the Government had little to say about what precise improvements it would need to seek to both the draft Directive and the draft Regulation in order to make them wholly acceptable. So we asked to have, before we considered these matters again and before Council working group negotiation had progressed very far, more information about the points at issue. As for the Commission Report we asked to hear as to what issues it raises that are not being, but should in the view of the Government be, addressed in the proposed legislation. Meanwhile all three documents remained under scrutiny.[38]

The Minister's letter of 19 January 2014

8.9 The Financial Secretary to the Treasury (Sajid Javid) now tells us that the Government intends to pursue two overarching objectives during negotiations on the PSD II. He says first, that:

·  the Government will seek to ensure that the Directive avoids imposing any unnecessary burdens on the UK financial services industry — for example, ensuring Third Party Payment Services providers (TPPs) remain within the scope of PSD II, so that consumers are adequately protected, while making sure the liability of each body involved in a payment transaction is fair and proportionate; and

·  the Government has already received support for this position from a number of countries which have TPPs active in their market.

8.10 The Minister says secondly that:

·  the Government aims to maximise protection for consumers, whilst ensuring they can benefit fully from technological advancement in the payments market;

·  it welcomes the inclusion of digital payments within the scope of the Directive, though efforts are ongoing to determine whether the small payment exemption, currently proposed, is sufficient to ensure the continued growth of important types of digital transaction, particularly SMS-based charitable donations; and

·  this includes consideration of whether the small payment exemption is too low.

8.11 Turning to the regulation of interchange fees, the Minister says that:

·  the Government supports an EU-wide cap as the best way to address the issue of excessive interchange fees;

·  a cap would mean significant benefits for businesses by providing the legal clarity needed for effective business planning and by delivering significant savings, which could be passed onto consumers;

·  an EU-wide cap would also make it easier for SMEs planning a move into another Member State as they would have a clear understanding of the rules around interchange fees;

·  the proposal has received strong support from the British Retail Consortium and the Prime Minister's EU Business Taskforce, which estimated savings to UK businesses of £1 billion;

·  the Government remains watchful, however, of unintended impacts of the proposals that could conflict with that objective and that might have negative impacts on small businesses and consumers; and

·  the Commission has not yet provided enough evidence to support its proposed cap levels and the Government is pushing it to provide a more substantial evidence base.

8.12 Responding to our question as to whether there are any issues the Commission's Report raises that are not being, but should in the view of the Government be, addressed in the proposed legislation, the Minister says that:

·  the Report does not raise any issues that are not being addressed to the Government's satisfaction in the proposed legislation;

·  the major issue that has arisen since the first PSD was transposed has been the increased use of new innovative payment methods, such as mobile phones and TPPs;

·  this has led to improved choice for consumers while at the same time increasing the risk to consumers and the need for adequate protection such as a right to refund for unauthorised payments;

·  the Government believes that the proposed legislation is trying to address this issue by increasing the scope of the Directive to include more digital payments and TPPs; and

·  this would ensure that the Directive is more technologically neutral and ensure that consumers using these more innovative payment methods are protected.

Representations

8.13 Since we last reported on these documents we have received three representations from interested parties in relation to the draft Regulation on interchange fees.[39] MasterCard drew our attention to a Europe Economics report it had commissioned, which suggested that interchange regulation in the UK has the potential to impede recovery in bank lending, pose financing problems for small businesses and the self-employed, increase uncertainty in monetary policy, result in problems for implementation of Universal Credit and wider financial inclusion efforts, result in adverse consequences for research and development and innovation and have negative consequences for the UK's e-commerce industry. In addition to critical comments on the draft Regulation and the Commission's case for it, the company suggested to us a number of alternative ways to meet the Commission's objectives.

8.14 The UK Cards Association asserted that the adverse impact of the draft Regulation on consumers would be that consumers would pay more, they would be driven to high cost credit, they would save nothing, they would subsidise retailers and there would be less competition and choice. As for the adverse impact on retailers the association said that there would be less secure transactions, increased fees and a boost to big retailers, not SMEs.

8.15 A joint statement by Christians against Poverty, the Centre for Responsible Credit, the Money Advice Trust, The Money Charity, MoneySavingExpert.com and Toynbee Hall said that, whilst these consumer bodies support the Commission's wish to protect consumer interests, they are concerned that the proposals would in fact have the opposite effect. They drew attention to evidence that capping of interchange fees in the US, Spain and Australia had not led retailers to pass on their consequent savings to consumers, rather consumers had seen increased costs. They said that the Commission has produced no evidence that retailers would pass on their savings from fee capping to cardholders and consumers.

Conclusion

8.16 We note that at this stage the Minister has little to say about what precise improvements the Government will need to seek to both the draft Directive and the draft Regulation in order to make them wholly acceptable. So before we consider these matters again we should like to have, before Council working group negotiation has progressed very far, more information about the points at issue.

8.17 We should also like to hear from the Minister what the Government's view is of the comments made to us by MasterCard, the UK Card Association and the group of consumer bodies.

8.18 Meanwhile these two documents remain under scrutiny.

8.19 However, in view of the Minister's assurance about action on issues in the Commission Report we now clear it.





37   See (33628) 5491/12: HC 428-l (2010-12), chapter 5 (8 February 2012) and HC 86-ii (2012-13), chapter 24 (16 May 2012). Back

38   See headnote. Back

39   These can be seen on our website at http://www.parliament.uk/business/committees/committees-a-z/commons-select/european-scrutiny-committee/submissions-to-the-committee1/. Back


 
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