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This publication is available at https://www.gov.uk/government/publications/draft-interchange-fee-amendment-eu-exit-regulations-2018/interchange-fee-amendment-eu-exit-regulations-2018-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives ministers powers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
When a customer uses a credit or debit card to pay for a good or a service from a business, the payment service provider that issues the card to the customer (the card issuer) receives an interchange fee from the payment service provider of the merchant (known as the merchant’s acquirer). Interchange fees are typically set by the card schemes.
The EU Interchange Fee Regulation (IFR) came into force on 8 June 2015, and through two main policy interventions introduced a harmonised EU regime for interchange fees.
Firstly, the EU IFR imposes caps on the interchange fees that can be set. These are set at 0.2% of the total value of the transaction for consumer debit cards (including prepaid cards) and 0.3% for credit cards. Commercial cards (used for business expenses) and cash withdrawals using debit or credit cards are excluded from the caps.
These caps apply to any transaction where both the merchant’s acquirer and the card issuer are located within the EEA. The caps do nots not apply where either the merchant’s acquirer or the card issuer are located in a third country (i.e. outside of the EEA).
The EU IFR allows member states to set lower caps for domestic debit and credit card transactions (i.e. those where both the acquirer and the card issuer are located within the member state). It also allows member states to apply a fixed interchange fee of no more than 5 eurocents per debit card transaction, or the equivalent in the member state’s currency.
Secondly, the EU IFR imposes a number of rules on card schemes, card issuers, acquirers and merchants, including:
requiring the separation of the card schemes (which set the rules for that particular card network) and the processing entities (which undertake the processing of the transactions within this card network) in terms of accounting, organisation and decision-making processes
allowing merchants to decide what kind of cards they want to accept by preventing card schemes and acquirers from requiring merchants to accept all category of cards. So, for example, a merchant could decide to only accept debit cards and not credit cards. The EU IFR also allows merchants to encourage customers to use a particular form of payment – e.g. encouraging cash payments, or setting a minimum transaction size for card payments
limiting “blending”, the practice by acquirers of charging merchants a single price for all card transactions even though they have different underlying costs
3.2 Deficiencies this SI remedies
This SI will make amendments to retained EU law related to the Interchange Fee Regulation to ensure that it continues to operate effectively in the UK once the UK has left the EU.
Once the UK leaves the EU, the scope of the EU IFR will no longer include the UK, and scheme operators would be able to set higher interchange fees for cross border transactions. EEA card issuers may therefore receive more interchange fees from transactions that involve a UK acquirer, and similarly UK card issuers may receive higher interchange fees from transactions that involve EEA acquirers.
Similarly, this SI reduces the scope the IFR applied in UK legislation from the EEA to the UK. The result of this is that transactions which take place solely within the UK (where both the acquirer and the card issuer are located in the UK) would continue to be covered by the IFR, but cross-border card payments between the UK and the EU or EEA will no longer be within scope of the onshored UK IFR or the EU IFR.
The practical impact of this is that payments made within the UK (with a UK-based merchant acquirer, and a UK-based card issuer) will continue to have caps on interchange fees. However, payments where either the acquirer or the card issuer is based outside of the UK, including in the EEA, would no longer be subject to the caps and the card issuer may receive interchange fees in excess of the caps.
Regulations 6 and 7 of the SI amend Articles 3 and 4 of the EU IFR to allow HM Treasury to set lower caps on UK debit and credit card transactions respectively, as well as to set a maximum cap for UK debit card transactions. This mirrors the current position in the EU IFR, but the Treasury may only introduce changes of this kind by making regulations exercisable by statutory instrument, subject to the negative procedure.
Regulation 9 of the SI transfers the function for making regulatory technical standards regarding the requirements for separation of card schemes and processing entities (Article 7 of the EU IFR) from the European Commission to the Payment Systems Regulator (PSR). This is in keeping with HM Treasury’s general approach of delegating responsibility for technical standards to the appropriate UK regulator. In this case, the PSR is the appropriate regulator because it has responsibility for monitoring and enforcing compliance with the EU IFR in the UK and for regulation of the UK payment systems industry, and therefore has the appropriate technical expertise to take responsibility for these technical standards.
3.3 Relevant Rulebook and Binding Technical Standard changes
This SI delegates responsibility to the Payments Systems Regulator for fixing deficiencies in regulatory technical standards made under the IFR. The PSR will be consulting on its proposed changes to the regulatory technical standards to address these deficiencies.
This SI affects payments system operators, payment service providers (including banks and building societies), and the businesses and individuals who rely on card payment systems.
The reduction in the scope of the IFR could lead to higher costs for merchants participating in UK-EEA cross-border transactions, since these transactions will no longer be subject to the interchange fee caps. Higher interchange fees could be passed on to consumers, either directly or indirectly.
The PSR intends to consult on amendments to their IFR guidance to reflect consequential changes made through this SI.
This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK government’s statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary provisions covering Gibraltar will be included in future SIs.
HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes. As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position.
4. Next steps
HM Treasury plans to lay this instrument before Parliament before exit.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.