Considered in Grand Committee
My Lords, the Treasury has been undertaking a programme of legislation to ensure that the UK continues to have a functioning legislative and regulatory regime for financial services in the event that the UK leaves the EU without a deal or an implementation period. This statutory instrument will fix deficiencies in UK law relating to interchange fees applicable to card payments, as well as in rules for card schemes, issuers, acquirers and merchants.
The approach taken in this legislation aligns with that of other statutory instruments being laid under the European Union (Withdrawal) Act. While fundamentals of current financial services legislation will remain the same, amendments are required to ensure that it continues to function effectively. Every time someone makes a payment using their debit or credit card, interchange fees are paid from a merchant’s payment service provider—for example, their bank, which is referred to hereafter as an “acquirer”, to a card user’s payment service provider, referred to hereafter as the “issuer”.
Interchange fees are typically set by card schemes, for example Mastercard and Visa. The EU interchange fee regulation of 2015 introduced two main policy interventions. First, it imposes caps on the interchange fees where both the acquirer and the card issuer are located within the EEA. The caps do not apply where either the acquirer or the card issuer are located outside the EEA. The caps limit these interchange fees to 0.2% of the total value of the transaction for consumer debit cards, including prepaid cards and 0.3% for consumer credit cards. It allows member states to set lower caps for domestic debit and credit transactions where both acquirer and issuer are in that country. Secondly, the EU interchange fee regulation sets rules on cards schemes, issuers, acquirers and merchants; these include requiring the separation of card schemes and processing entities, for example WorldPay.
Under a no-deal scenario, the UK would be outside the EEA; the scope of the EU interchange fee regulation would therefore no longer include the UK. As a result, the interchange fees set by card schemes would no longer be capped for payments that involve a UK acquirer and an EEA card issuer.
Higher interchange fees could in turn be passed on to UK businesses and consumers directly or indirectly. Without a change in scope of the UK legislation, caps would still apply to card payments involving an EEA acquirer and a UK card issuer. This would result in asymmetrical obligations on UK businesses.
This statutory instrument will make amendments to retained EU law related to the EU interchange fee regulation 2015 to ensure that it continues to operate effectively in the UK. First, it will reduce the scope of the EU interchange fee regulation in the UK from the EEA to the UK; the result is that the interchange fee caps will continue to apply to card payments where both the merchant’s acquirer and the card issuer are located in the UK. Card payments where either the merchant’s acquirer or the card issuer are located outside the UK but within the EEA will no longer be subject to the interchange fee caps. This statutory instrument mirrors the EU interchange fee regulation with regard to setting the level of the cap for domestic card transactions. It allows the Treasury to set lower caps on UK consumer debit and credit card transactions by making regulations exercisable by statutory instrument, subject to the negative procedure.
The statutory instrument also transfers powers from the European Commission to the Payment Systems Regulator to make regulatory technical standards regarding the requirements for separation of card schemes and their processing entities. This is in keeping with the Treasury’s general approach of delegating responsibility for technical standards to the appropriate UK regulator. The Treasury has engaged with the Payment Systems Regulator and industry in drafting the SI.
In November, the Treasury also published the instrument in the draft, along with an explanatory policy note to maximise transparency to Parliament and to the industry. The Secondary Legislation Scrutiny Committee requested further information on the costs that might result to businesses and consumers. As explained, and as is included in the updated Explanatory Memorandum that was relaid on 19 December, the most significant impact in this area is that interchange fee caps will no longer apply where either the merchant’s acquirer or the card issuer are located outside the UK but within the EEA. Any adjustment to interchange fees thereafter would be a commercial decision. Such impacts would be as a result of the UK leaving the EU, rather than as a result of an approach taken in this SI. The direct costs as a result of this SI are minimal.
In summary, therefore, this SI is necessary to ensure that the UK’s legislation and regulatory regime remains effective in the event that the UK leaves the EU without a deal or an implementation period. This will be to the benefit of UK businesses and consumers. I hope noble Lords will agree, and join me in supporting these regulations, which I commend to the Committee.
I thank the Minister for his introduction. It is said that if you drown, your past life floats before your eyes. I feel a bit like that every time we meet to discuss these onshoring of SIs. Not only are we drowning in them, but there is rather a lot of my past life wrapped up in them. I got a double dose yesterday. It occurs to me that if I were to pick this up for the first time, as is the case for other noble Lords, I could not rely on the Explanatory Memorandum to help me out with the complete background and context of why there was such legislation in the first place. We know what the EU did and what it does in imposing the cap, but why it is done or why it was done is relevant to remarks that I will make on how the onshoring has been done.
Placing a cap on card payment interchange fees was a hotly contested debate at the time, not for great party-political differences, but by the payment service providers, who did not want a cap on their profits or to have to be transparent about the breakdown of costs. I recall that it was incredibly difficult to get a true handle on what was or was not reasonable as a cap, because the lobbying was so confusing and lacking in transparent facts. If I further recall correctly, the UK Government were quite sensitive to the lobbying and were not among the most hawkish when it came to fixing the cap. In Parliament we harboured rather greater suspicions about the credit card companies. What was known was that EU consumers paid billions in interchange fees, because the costs, of course, are passed on to the goods. It was €9 billion in 2011. There had been competition investigations by national competition authorities and the Commission, which took proceedings against Mastercard and Visa.
The key problem was that cardholders, who are generally unaware of interchange fees, or at least their size, are encouraged to use cards that generated higher fees; at the same time the card companies competed to attract issuing banks by offering them the higher interchange fees. Those mechanisms operate to drive fees up rather than drive them down. As a consequence, that caused the disappearance of some of the cheaper cards, and the UK was among the countries that suffered—so did the Netherlands, Austria, Finland and Ireland.
On the receiving end of the fees, the merchants and consumers had no power of redress on the competitive balance, even though the cost of the interchange fees was ultimately borne by them. So market intervention was needed, and that, in the end, resulted in the agreement of these caps. The measure was copied by other countries because there are benefits to that regulation, even in an individual territory.
There was an added cross-border dimension in the EU because it enabled banks from other countries that offered lower fees to come in and compete. Prior to the legislation, card schemes were able to apply rules to prevent retailers using better-priced schemes from other countries. The difference could be significant. Interchange fees varied from 0.1% to 1.5% in 2014, prior to the cap. The UK was neither one of the worst nor one of the best. From the largest providers, debit card rates were of the order of 0.24%, and credit card rates were 0.9%. The new caps of 0.2% and 0.3% were clearly an improvement, and applied to cross-border transactions within the EEA as well as domestic ones, as has been explained.
I fully understand the logic of how the onshoring has been done, in that the UK and EEA will be third countries to one another, and the Explanatory Memorandum makes it clear that cross-border transactions with the EEA will no longer be capped. That comes from the third-country provisions of the regulation and presumably how the UK will be treated by the EU. I have no doubt that, where relieved from an obligation, credit card companies will seize the opportunity of making more profit.
In particular, I draw attention to paragraph 12.4 of the Explanatory Memorandum:
“It is technically possible that, in this instrument, the UK could mandate interchange fee caps that apply to the interchange fees that UK card issuers would be permitted to charge to international transactions. However, this would place asymmetrical obligations on UK businesses vis-à-vis third countries, whereas the current situation provides symmetry with EEA countries. The default onshoring approach to fixing deficiencies relating to the scope, is therefore to reduce the scope of the regulations to UK-only, rather than extending the scope worldwide”.
There might well have been other ways of dealing with it. I have seen a lot of these onshoring SIs now, not just from the Treasury and other departments, and sometimes symmetry is aimed at—sometimes not. Sometimes the EEA is put in the third-country box and sometimes not. Sometimes a continuing, although asymmetrical, arrangement is used. We have examples of that in the next batch of SIs on funds. We have already had it with regard to occupational pension funds.
I greatly regret the choice that the Treasury has made. It has given in to saying we will let card issuers make more profit. What is the justification beyond defaulting to symmetry? If I go on holiday and use my UK cards, will I find that merchants start to add on surcharges? Will I find that my UK cards might not be accepted? Was there really the need to aim for symmetry? If the fees on the cards are increased, those are the kinds of consequences that we saw before we had PSD1 and PSD2, the payment services directives. I cannot find a reason why the credit card companies should be protected rather than the UK consumer. Those companies are being given a windfall.
Of paragraphs 12.2 and 12.5—I think they were added in addition due to the Secondary Legislation Scrutiny Committee—the former says:
“Businesses may potentially face more significant costs as a result of the scope of the regulations”,
but that is going to rely on,
“commercial decisions taken by card schemes”.
Paragraph 12.5 addresses the effect on the consumer—it is all going to result from,
“the commercial decisions of businesses to adjust interchange fees, as opposed to the onshoring approach taken in this instrument”.
But the onshoring approach could have been taken as one to protect the consumer rather than to give the credit card companies their head. Would it not have been better to try to maintain the current state and, then, if for some reason it was not working, to give the Treasury the power to make a change?
I would like a little more information from the Minister about what efforts were made to see whether costs for the UK end could be properly pinned down. Just because the EU end can become a rip-off does not mean that the same practice should be condoned at the UK end. I do not count it as a competitive disadvantage to not be able to rip off customers. After Brexit, the issuers in the UK will no longer be in direct competition with the issuers in the EU. To say that they are at a competitive disadvantage—I think that is what “asymmetric obligations” is meant to imply—does not hold. All that is being allowed is a potential rip off, and what is the logic of that?
Finally, I turn to the cap itself. I know that the Treasury has not so far availed itself of the discretion to reduce the cap below the maximum set in the EU regulation—nor, I think, has it done the 5 cent debit card limit—but it is good to see those possibilities being onshored. Currently, the UK is stuck at 0.3% for credit card fees, although 19 EEA countries have reduced that to 0.2%. Is providing HMT with that power a precursor to using it? Would the Treasury perhaps consider using it as compensation for allowing cross-border holiday rip-offs to commence? I do not consider paragraph 12.4, or the accompanying explanations in the other paragraphs I have quoted, a good enough justification for what has been proposed. I can see the headline: “Government abandons consumers to credit card rip-offs on holiday”.
This is badly done. If we had the opportunity to amend it, I would suggest that we did. On most of the things done by the Treasury, the jump has been made the right way. I regret to say that, on this, the jump has been made the wrong way. The asymmetrical approach would have been much fairer to the consumer.
My Lords, last night, the House expressly rejected no deal in its vote. That is also Labour Party policy. These orders should not be necessary, but when the Government put instruments in front of us, our role is to ensure effective scrutiny of all SIs and to expose any serious concerns. We believe that this is consistent with our role as a revising and scrutinising Chamber. Having said that, and having listened to the splendid seminar on credit cards by the noble Baroness, Lady Bowles, which leaves me better informed, if not necessarily wiser, I have very few comments to make on this particular SI.
I start by expressing my sheer irritation with the failure to provide timely impact assessments. It seems utterly absurd. Paragraph 12.5 of the Explanatory Memorandum states:
“A full Impact Assessment will be published alongside the Explanatory Memorandum on the legislation .gov.uk website, when an opinion from the Regulatory Policy Committee has been received”.
That might have been snuck out in the past two or three days, but there is no reason to have an impact assessment if it arrives only after all the legislative procedures have been completed. We should have a thorough explanation from the Treasury as to why that is happening.
Once again, having said that, the Treasury produced guidance on these SIs—at paragraphs 7.1 to 7.9, I think—which are, word for word, the same in all Treasury no-deal Explanatory Memorandums. Therefore, I have had to read them in increasing detail. My favourite sentence is at paragraph 7.4:
“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. The scope of the power is drafted to reflect this purpose”.
As an amateur in this field, all I can do is try to test the SIs against that promise. It seems to me that the test is whether they are necessary and whether they obeyed the constraints of new policy. An interesting new area has been introduced by the noble Baroness: was there a better solution that still stopped within the test? I am persuaded that they are necessary; indeed, the Economic Secretary to the Treasury, as is required, signed a statement to that effect. I suppose that if they were left unmade, the credit card companies could rip the public off even more than where we are. I do not think that they introduce new policy, but the theme that runs through many of these SIs concerns symmetry and asymmetry. The noble Baroness has suggested that a better solution for the UK customer would have been an asymmetric solution. I will be very interested in the Minister’s response to that.
I note that the order comes into force on exit day. What I really want to know is how will the order be repealed if there is a deal. Can the Minister assure us that it is a genuine no-deal-scenario instrument and that it will be removed from the statute book if there is a deal? That seems the fundamental proof that it is a no-deal instrument.
My only other comment is that, because a no-deal solution is such a dreadful idea, virtually all these statutes create a situation in which the consumer is less well off; this is no different. As has been pointed out, consumers in the UK trading with a UK bank and suppliers will continue to enjoy protection, but there will be no protection overseas. I find it very sad that the Government believe that the chances of that happening are sufficient to require these SIs. I hope that we do not go down this road, because each of these little increments of loss of protection, particularly for consumers, is highly undesirable.
My Lords, I thank the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, for their scrutiny of these SIs and I shall seek to address the points they made. First, in relation to the noble Lord’s point on the impact assessment, in line with the better regulation guidance the Treasury considers that the net impact on a business will be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the Payment Systems Regulator. Firms will benefit from the reduction in uncertainty under a no-deal scenario. Without this instrument the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.
I will come to that point in a minute. There is a group of impact assessments before the Regulatory Reform Committee, the body within BEIS that reviews these. It is currently considering them and will publish an impact assessment on a wider group of SIs, including this one. If that is not the case, I shall certainly come back to the noble Lord. However, that is why it sounds as though there are two answers when in fact there is one.
My Lords, I missed the whole of the statement of the noble Lord, Lord Bates. I thought the beginning of the debate was at 3.30—which it was—and I arrived at 3.32. If the noble Lord, Lord Bates, takes the view that I should not intervene, I would quite understand. However, I am interested in this and I wonder if he would allow me to do so. Or perhaps the noble Lord, Lord Young, as the guardian of the procedure, will allow it. If he says no, I will accept that. I leave it to the noble Lord. I throw myself at the mercy of the Whips. Please say no if you do not want me to intervene.
This specific SI, to which the noble and learned Lord refers, does not have a direct impact assessment of its own because it fails to reach the de minimis threshold of £5 million. Remember, we are seeking to transpose what already exists into UK law, and the costs of doing this are meant to be de minimis. A wider group of assessments is currently going through the regulatory reform process, which will look at the impact of these SIs as a group. This is one of potentially 45 affirmatives and 14 negatives which are coming through. That work will be helpful in satisfying noble Lords on this.
The noble Lord, Lord Tunnicliffe, asked whether the SI will be repealed if there is a deal—which, I underscore, we hope there will be. In the event of an implementation period—which will be delivered through separate legislation; the EU withdrawal agreement Bill—this legislation would not come into effect in March 2019 and would be delayed until the end of that period. It could be amended to reflect an eventual deal on the future relationship or a no-deal scenario at the end of the implementation period.
The Government re-laid the Explanatory Memorandum to include additional information requested by the Lords’ Secondary Legislation Scrutiny Committee on impacts. Therefore we do not consider it necessary to publish the de minimis impact assessment at this stage.
I am trying to follow this, but is the Minister saying that all of these no-deal regulations assume that there is a deal and will therefore be repealed by the EU withdrawal implementation Bill—which is a requirement under the European Union (Withdrawal) Act at the moment—to implement a deal, or is he saying something different?
I am saying that the SIs we are dealing with derive their power from the EU withdrawal Act—in Section 8(1), as we have been through many times before. They are necessary because that Act, in whose passing the noble and learned Lord was an active participant, contains a repeal of the European Communities Act 1972. It will therefore be necessary to have something to supplement that. In the event of a deal it is anticipated that there will be an EU withdrawal agreement Bill, which would pass through both Houses, and within which provisions would be made to address the continuation of these arrangements into an implementation period. The noble and learned Lord is looking at me—
I am bewildered by this for the following reason. I understand that these regulations are required because if there is no deal, there is no implementation period. If there was an implementation period, everything would continue as before. Separately from that point, Section 13 of the EU withdrawal Act requires another Act of Parliament after a deal is approved by the Commons to give effect to the deal, whatever it is. I do not want to be too pressing but I am not getting clarity from the Minister about what the Government envisage—assuming we do a deal—in that Bill, which is required by the EU withdrawal Act. Will they simply repeal all these no-deal regulations? This instrument is a good example of the reason it matters. If it continues in force when there is a deal with a two-year implementation period, two regimes will on the face of it apply to the capping of the charges that can be put on consumer credit transactions via debit and credit cards. I may have misunderstood this but it is quite important that we know how the Government will prevent there being two regimes in practice.
I do not think the noble and learned Lord has misunderstood it. He makes a fair point as to how this will operate. The clarification I offered in my previous comments is that the withdrawal agreement Bill, which we are talking about, will delay the need to implement the provisions and allow them to be amended or repealed. It effectively gives a choice as to how these SIs would be handled. This instrument would not be required or in force during the implementation period. In that event, current EU law would continue to apply. I think it was on that point that the noble and learned Lord sought an on-the-record response.
The noble Baroness, Lady Bowles, gave a helpful analysis of the situation with regard to why we did not cap interchange fees for UK card issuers. At the moment, the interchange fee regulations maintain symmetry for payment service providers. If HM Treasury applied the interchange fee caps vis-à-vis the EEA without corresponding commitments from the EEA, that would constitute a policy change. The noble Lord, Lord Tunnicliffe, has been consistently assiduous throughout our engagements on these matters in ensuring that there should not be—
I am not quite sure that I buy that line. I can use the examples of the regulations we are about to debate, or the ones on occupational pensions. There, funds contain UK assets and EEA assets. When they are onshored, the symmetrical position and the one that we might expect the EEA to take is to narrow down the fund content: just to the UK for the UK and the continuing EEA for the EEA. That was what was done for occupational pensions, but then the point was made that that requires a lot of divesting of assets for funds—it is far better to have diversity—and that is generally not good for investors or for pensions. The occupational pensions regulations were changed so that the diversity of assets could remain. That is the proposal with the regulations we are about to debate on the subgroup of funds—the venture capital and social entrepreneurship regulations.
At the same time, third countries are still treated differently, so there is not a uniform choice that we go it alone or go down the third country route. There are occasions when this midway has been chosen to continue to stick within the greater EEA area. The noble Lord, Lord Bates, was here yesterday when we discussed this regarding parallel imports. He might have been thinking about what would be coming later, but this choice between symmetry and asymmetry, and the fact that we now have divided up into three potential territories—UK only, UK plus EEA and third country—exists. There are precedents. I am afraid that I do not think that the arguments the officials have presented the noble Lord with stand up to scrutiny.
I certainly recall every word of the four glorious hours we spent waiting to debate these instruments in Grand Committee yesterday. I also remember the eloquence of the noble Baroness’s exposition on patents, drawn from her experience as, I believe, a patent attorney in Europe.
I can only repeat that what we are doing here might not be satisfactory to the noble Baroness. She has highlighted—it is to the benefit of the Committee that she has done so—that there is a choice here. She is making the argument that there is a choice. Our view, in consultation with the industry and the Payment Systems Regulator, is that the way we have presented this best reflects the way we have onshored this approach, remaining consistent with the commitments and undertakings given in Section 8 of the withdrawal Act. I will certainly take back to my friend the Economic Secretary to the Treasury the point the noble Baroness has made. If she will allow me, I will write to her with some more details as to why that policy choice was taken. It is a choice that is there and the one used in the statutory instrument. I commend it to the Committee.