Treasury Committee
Oral evidence: Work of the Payment Systems Regulator, HC 711
Tuesday 23 January 2018
Ordered by the House of Commons to be published on 23 January 2018.
Members present: Nicky Morgan (Chair); Rushanara Ali; Charlie Elphicke; Stephen Hammond; Stewart Hosie; John Mann; Alison McGovern; Catherine McKinnell.
Questions 1 - 117
Witnesses
I: Hannah Nixon, Managing Director, Payment Systems Regulator; John Griffith‑Jones, Chairman, Payment Systems Regulator.
Written evidence from witnesses:
Witnesses: Hannah Nixon and John Griffith-Jones.
Q1 Chair: Good morning, everyone. Thank you very much for being here this morning. Just for the purposes of those watching, both here and online, perhaps you could both introduce yourselves.
Hannah Nixon: Hannah Nixon, managing director of the Payment Systems Regulator.
John Griffith-Jones: John Griffith-Jones, chairman of the PSR.
Q2 Chair: Lovely, thank you very much. I want to start—it will not be any surprise—with the issue of the LINK interchange fee proposals, which have attracted a lot of attention, both in Parliament and outside. We have exchanged letters about that as well, Ms Nixon. We have heard significantly differing views on the likely impact of the LINK proposals as they are currently set out. Based on the work that the PSR has done into the ATM market—and that is an awful lot of acronyms in one sentence—perhaps you could tell us what you think your evidence is showing the impact is likely to be.
Hannah Nixon: Yes, of course. Our focus is absolutely on the consumer here. We want to make sure that we all continue to enjoy a widespread network of free-to-use ATMs. We want that to be provided efficiently because this is costing society £1 billion a year at the moment, but when we saw LINK’s consultation document we were very concerned that the impact on consumers had not really been thought through and understood.
That is why we have been really clear with LINK that we want to see a commitment from it to providing and maintaining those geographically remote ATMs. We want to see from it incremental reductions in interchange in other areas of the estate, with very close monitoring to understand what is going on and the ability to take remedial action if needed. We have also been clear that we expect it to continue to fill the gaps in the network and, indeed, put more money on the table to do just that. We have been clear with LINK: if that is not what we see, we will intervene.
Q3 Chair: What powers do you have to intervene?
Hannah Nixon: We have very strong powers. In the first instance, if we were concerned about what we saw, basically we would tell it to stop until the impact on consumers could be understood.
Chair: You are able to insist on a moratorium on proposals.
Hannah Nixon: Indeed, yes.
Q4 Chair: What would happen at the next stage? Could you compel LINK to revisit proposals, to change or to reconsult?
Hannah Nixon: The issue here is that we have a mechanism to ensure that the consumer need is protected. If we felt that LINK had not put in place the mechanisms to address unanticipated impacts on the network, had not really understood the impact of what it was going to do, we would be directing it to do more work to understand just that.
Q5 Chair: The ATM deployers suggest there is going to be irreparable damage to the industry and the number of free-to-use ATMs. Has the PSR been in dialogue with them? Are you convinced by what they are saying?
Hannah Nixon: We have been talking with a whole range of stakeholders, including a number of the independent ATM deployers. Our understanding is that that is unlikely to be the case if we take the incremental approach with close monitoring. We have done our own work to try to understand the impact of changes on interchange in the ATM estates. As you might anticipate, it is a complicated picture. There are a number of variables that impact on the economics of an ATM. Interchange is an important one, but it is just one.
Our analysis has shown that it is impossible to come up with the perfect answer of what the interchange fee is like, which is why we want to see the incremental approach with close monitoring and the ability to react. It also shows, as you might expect, that the remote ATMs come under pressure most quickly, which is why we have been clear with LINK that it needs to commit to doing whatever it takes to ensure those ATMs remain in place.
Q6 Chair: It is interesting you mention the word “remote”. I will come back in a moment to consider remoteness. In its original consultation, LINK noted that the proposals will maintain “the present geographical spread of ATMs, with any reduction in the number of ATMs intended to be in areas where there are currently multiple ATMs very close together”. As you have already alluded to, the research of the PSR that you have asked for made it very clear that geographically remote ATMs may be more heavily affected than urban ones. Clearly there is a mismatch here between what the reports you are commissioning show you, the PSR, and what LINK is saying it wants to happen.
Hannah Nixon: This is why we welcome LINK’s commitment to retaining the existing interchange fee on the remote ATMs, but that does not go far enough. There are a number of issues that impact the economics of an ATM. We want to make sure that LINK is monitoring that in real time and, if it needs to increase the interchange on some of those remote ATMs, that is what we would expect it to do.
Q7 Chair: I had an email yesterday from the mayor of Haslemere, down in Surrey. I do not know if you know Haslemere very well, but I grew up in Surrey. I certainly would not say it was geographically remote, but they are down to one ATM in their town and they say that that absolutely regularly runs out of cash. They have now had to install just £20 notes to try to deal with the demand that people are dealing with. It is not geographically remote. Clearly people want more cash than the cash machine is able to provide. Can you possibly be assured by LINK’s proposals about this one kilometre?
Hannah Nixon: We want to see a network that is demand-led, so the one‑kilometre commitment protects those geographically remote ones. On the ATM that you are citing, we would expect LINK to be looking at that and saying, “Is one enough in that area?” If not, I would expect independent ATM deployers would be interested in providing machines to provide additional capacity.
Q8 Chair: You say you expect LINK to be looking at that. What are you able to do as the PSR to make LINK look at that sort of evidence that is coming in? There is a suspicion that the consultation was not really wide enough. The views of only LINK members and the LINK consumer council were sought in the LINK consultation. Should the consultation have been much wider and involved many more people, including consumers?
Hannah Nixon: We were concerned about the consultation, in particular the lack of assurance that LINK provided that it really understood the impact on the consumer. The consultation was published on its website and I know it has received a number of responses, not just from its members but from the wider stakeholders, including consumer groups. I know it has been engaging with wider stakeholders since, which is encouraging to see. The really important thing here is that we can all have confidence that we will continue to have an ATM network that serves the needs of the UK consumer, and that means having a widespread network of free-to-use ATMs.
Q9 Chair: Given your concerns about the consultation and the consumer objective that the PSR is set up with, at what point do you think you are going to step in? Perhaps I could bring in Mr Griffith-Jones here. What discussions have happened at the PSR board on this issue? At what point will Ms Nixon and the board decide to say, “We do not think this is being run properly. We want to step in, put a moratorium on LINK’s plans and get it to rerun all of the things it is consulting on”?
John Griffith-Jones: The board discussed this prior to the release of the consultation. The board is due to meet tomorrow to discuss the results of the consultation and to get an update following today. Really, I am in exactly the same position as Hannah. We would like LINK to sort out, as it were, the Haslemere issues. If it is idiosyncratic—there will always be someone somewhere who does not have a machine—it is better to let the LINK organisation deal with one-off issues, rather than a heavy-handed regulator trying to run LINK.
If we have a systemic issue, on either the geographical basis or the financial inclusion basis, as far as I am concerned and subject to my board members agreeing, we will intervene. We can intervene in a relatively straightforward way. If I take the banks, which are providing current accounts to people who need to have cash machines in order to access their cash, it is in their interests to ensure that there is a geographic coverage. Moral pressure will probably work pretty well, especially if it is understood that it is backed up by powers that work.
Q10 Chair: Let us return to what the banks’ interests are in a moment. In terms of the board, could you confirm that PSR director Bradley Fried was recused from these discussions, given his executive role at the investment firm Grovepoint Capital, which owns ATM operator Payzone?
John Griffith-Jones: I stand corrected, but I am not sure that it owns ATMs. It is a merchant acquirer and he is recused from discussions about merchant acquiring, yes.
Q11 Chair: On the issue of the banks, you are being very generous about the banks wanting an ATM network, because the suspicion, by many here but many outside as well, is that it is in the banks’ interests for people to stop using cash. The LINK letter to Lord Sharkey and Lord McFall dated 19 January talks about a reform of the current unsustainable pricing to maintain broad free access to cash. “If we don’t do this now, the risk of card issuers removing their cards from LINK will materialise and LINK will rapidly unwind, leaving consumers with dramatically reduced access to free ATMs”. Do you agree? Is that what this is all about: unsustainable pricing and damage to the banks’ bottom line?
Hannah Nixon: Our focus is on the consumer getting that widespread geographic network. That network at the moment costs us as a society £1 billion a year, so we want it to be provided efficiently. If we look at the overall long-term trends on ATMs, we now have more ATMs in the UK than we have ever had. We have had an increase of about 12,000 over the last 12 years.[1] At the same time, the demand for cash withdrawals has been basically flat. It has started to tick down a little.
There is a question about the efficiency of more ATMs in densely or well‑served areas. We support LINK in looking at the efficiency of providing that network, but it needs to do so in a way that gives us all confidence that that widespread network will be maintained and the impact of its changes to fees will be to reduce the numbers in our very densely-served high streets. If that is not the case and there are unanticipated impacts of its interchange fee reduction, it needs to demonstrate to us that it is able to identify that and take remedial action.
Q12 Chair: It would not be fair to say this is a commercial negotiation between the banks and the IADs.
Hannah Nixon: There is a commercial element to this because, at the end of the day, the banks want to provide a service to their consumers. Part of that they provide themselves, and part of that is provided by the independent ATM deployers. We would expect a commercial negotiation here, but the important thing is that banks are clear.
I wrote to them in February of last year and they all confirmed that they were very clear that they wanted to maintain the widespread network of free-to-use ATMs. They wanted that to be done efficiently, but they were committed to retaining it. We also want to make sure there is a clear dialogue between LINK and the banks, so when branches are closing, for example, there is a real discussion about at least putting an ATM in place of that. There are clear incentives for banks to serve their consumers, but also to operate the network efficiently, including where bank branches are closing.
Q13 Chair: There are also clear incentives for banks to make profits. The concern is that this is all about banks’ financial circumstances, rather than serving consumers. Do you think that LINK is a truly independent voice in the current negotiations?
Hannah Nixon: LINK has an independent board, and our role is important here as well. That is why we have been extremely clear with LINK about what we want to see. We have also been extremely clear that we will step in if it does not meet our expectations.
Q14 Chair: LINK previously has requested an exemption from your requirement for it to run a competitive tender process when its current infrastructure contract expires. The PSR denied that request. What is your assessment of the costs and risks to LINK of running a competitive tender, and are you confident that it has the resources to run a tender process?
Hannah Nixon: LINK is now getting on with running that competitive tender process, and it is providing assurance to us that it is taking it seriously and has the resources to manage it. We are monitoring that very closely. It has a reporting requirement from us to provide information on a regular basis. We are monitoring it carefully. We want to see that competitive tender process opening up that sector to competition for the first time. That should drive some cost efficiencies, but most importantly it should assure us that the UK consumer is getting the best deal in terms of the functionality provided and in terms of innovation. We really want to see LINK test the market, run that competitive tender and make sure the UK continues to get a good deal from its ATMs.
Chair: Your intention is to continue to insist on a competitive tender process, even if LINK says the costs of it are going to drive it to the wall.
Hannah Nixon: I have not seen any evidence that the costs of the tender are going to drive it to the wall, but we do want to see it take that tender process seriously. If it turns out, when it is testing the market, that there is no prospect for a better outcome, if the evidence says that, it is fine; we do not want push it to do a tender just for the sake of it. But we are hearing that there are people who are potentially interested in bidding for and providing the LINK infrastructure, so we want LINK to carry on exploring that.
Q15 Chair: LINK previously stated to the Competition and Markets Authority that a tender process would be achievable, which in part led to the CMA’s approval of Mastercard’s takeover of VocaLink. What work did the PSR do to assess the validity of that claim?
Hannah Nixon: We did work and provided input into the CMA’s investigation here. The CMA identified that there were some concerns about the ability for people to switch ATM providers, and hence the requirements that were placed on Mastercard as part of that transaction. As part of that, the banks made very clear that they felt, with those additional steps, that there could be a competitive tender in the infrastructure market. That gives us an additional piece of evidence that says, “Yes, a competitive tender can be successful in this sector”.
Q16 Charlie Elphicke: I want to talk to you about the issue of fraudsters taking advantage of payment systems. Can you confirm this? In 2017, there were, I understand, 19,000 victims of scams, to a total amount of over £100 million. In my calculation, that is over £5,000 per fraud on average. Is that right?
Hannah Nixon: That is the data for push-payment scams in the first six months of last year.
Q17 Charlie Elphicke: What is the annual amount?
Hannah Nixon: It will be roughly double that.
Q18 Charlie Elphicke: What are you doing about it?
Hannah Nixon: This is a really serious issue. Making sure that we and industry are doing everything we can to stamp out this type of crime is a top priority for us. There are four parts to the work that we have done so far. First of all, we have data now, for the first time, and that has meant that banks are focusing on this type of push-payment scam for the first time. Secondly, we have pushed the banks to develop a best practice model on sharing information and data when this type of crime is unfortunately committed, to make sure that they can help the victim and try to resolve the issue as quickly as possible.
Thirdly, we are working, and have been working right from the beginning, with industry on developing new technologies that will help stamp out this type of fraud. Fourthly, where that fails and people unfortunately do fall victim to this type of fraud, we want to put in place a reimbursement mechanism, which will give consumers confidence that, where their banks are not doing everything they can to protect them, they will be reimbursed.
Q19 Charlie Elphicke: I had one constituent who thought he was buying a car and he lost £1,000. He transferred money to what he thought was a legitimate eBay motors account. It turned out to be a scammer. Another constituent lost £3,500 when trying to buy a caravan by the same method. The bank came back and said it had carried out the requisite checks on its part. The main issue seems to be that banks are allowing people to open up accounts under that company name, which then tricks people into transferring. What are you doing about that?
Hannah Nixon: It is always really difficult when you hear about people who have been scammed in this way. One of the technologies that we are pushing the industry to introduce is confirmation of payee. That will make it much more difficult for somebody to open an account in a similar name to somebody else. It will also mean that the consumer will get a prompt to say, “You are about to transfer money to this particular person or this particular business. Is that who you expected it to be?” Both of those things will make that particular situation much less likely to occur. It will not solve the issue completely, but it is part of stamping out this crime.
Q20 Charlie Elphicke: You keep saying you are pushing industry to do this. My understanding is that you have tasked UK Finance, the trade association of the banking sector, with coming up with solutions. Is that not putting the foxes in charge of the chicken coop? What are you doing as the regulator?
Hannah Nixon: As regulator, we are being very clear about what we want to see. We want the industry to work with consumer groups, and a number of consumer groups are actively engaged in this, to come up with an appropriate reimbursement mechanism. In the consultation, we put forward the suggestion that UK Finance takes the lead on this, but corralling in a number of consumer groups as well. We would be monitoring it very closely. Importantly, we have also been clear that, if it cannot or will not deliver, we will step in and put in place a mandated solution.
Q21 Charlie Elphicke: If I buy a car on a credit card, and it turns out that it is all fraudulent and they do not own it, I get automatically repaid on my credit card. If you are the defender of the consumer, why is that not your starting point? Why are you allowing the banks to play this slippery game and evade taking on the responsibility?
Hannah Nixon: The type of fraud we are talking about here is different, in that it is the consumer who is making the payment. They are being tricked into making that payment. They do not realise that they are paying the money over to a fraudster, but they are physically making that payment. We want to make sure that everybody is playing their part in making it as difficult as possible for criminals to perpetrate this kind of scam. We want consumers to be aware of the types of scams they might face, but equally we also want to make sure banks are doing everything they can to protect their consumer. We are clear that, where the banks fail in that, they should be providing reimbursement.
Q22 Charlie Elphicke: You say it is up to consumers and it is all their fault. That is very much going to be the voice and viewpoint of the banks. Let me put to you a counter case. It is the responsibility of the banks to make sure that fraudsters cannot open up accounts in fraudulent names. It is the responsibility of the banks to be able to trace money, because money travelling through the system leaves a trail of breadcrumbs. You could easily track it. You ought to be insisting on the banks reimbursing and getting the money back from whichever bank that money has gone to. Why are you not doing that?
Hannah Nixon: I agree it is the banks’ responsibility to make sure they are doing everything they can to stop fraudsters opening an account or accounts turning into mule accounts. I absolutely agree with that, which is why part of the reimbursement mechanism we envisage will require the banks to be doing those things and demonstrating they are doing those things using the best technologies available to help them in that task. Where they fall short, they would be reimbursing the consumer. The reimbursement mechanism is a backstop. We are trying to reduce this type of crime in the first place, but also to give the consumer confidence that, if they become victim to a push-payment scam, if their bank is at fault, they get their money back.
Q23 Charlie Elphicke: Surely the best way to stop this kind of crime and stamp it out altogether is to make banks responsible, because then they will be fully invested in making sure that consumers are protected because they are the ones who stand to lose. Then you will see this whole fraud just vanish altogether. Why do you not do that?
Hannah Nixon: We want to work with industry and consumer groups on looking at exactly how we get that balance right. There are lots of grey areas. It is difficult territory. I appreciate people want to have a solution in quickly, but the last thing we want to do is put something in that is not fit for purpose and makes it easier for scammers to operate in this space. That is why we need to take the time to get the balance right and we can explore exactly those issues.
Q24 John Mann: You have been going for four years. It is not good enough: “We are going to explore the issues”. You have been going for four years. You have all sorts of people sat on your board and you are just telling us that, “We want to put in a system”. I have had a constituent lose £250,000 twice—one a business and one a house sale—to fake accounts. I have had constituents with probably the same scamster with a caravan: £3,500. The bank refused to compensate: no money back, zero. These are real people. None of these people are on your board, are they? It is the same old faces, isn’t it, Mr Griffith‑Jones? Why have you and your board not got on top of this, come up with something and implemented it in four years? What have you been doing?
John Griffith-Jones: It is fair to say that the attention on this has been much stronger since the Which? super-complaint was issued in September 2016. It is not that nothing was being done, but that brought it firmly to the attention of the board. We have concentrated, I would say, very strongly on it since that time. The issue is that many of the best solutions require technical fixes, not just manual overrides. Technical fixes in a big system take time to implement. I can assure you that we are applying maximum pressure to get the right solutions in, to the extent that they are—
Q25 John Mann: No, you are not. Maximum pressure would be for you to bring in a reimbursement mechanism. If that was there, people would suddenly move very quickly because it would be costing them money. Why have you not done that?
John Griffith-Jones: The issue is that the nature of push-payment fraud is slightly different from others, in the sense that your constituent or a consumer like me is tricked into making the payment themselves. It is not any part of the banking system where the crime is committed. The consequences usually flow through Faster Payments, which is just what it says—faster—and therefore the ability for the money to move down the chain extremely quickly is great. You have a wonderful system for 99.9% of us to use that satisfies the consumer need, but unfortunately it opens the possibility of these terrible scams, which as you say have terrible consequences, being committed.
Q26 John Mann: We know this. Everyone knows this. The banks know this. I am asking you why—perhaps you can answer, Ms Nixon—your organisation in four years has not brought in a reimbursement mechanism. Then you have done your bit, and the people in whose financial interest it is to sort it out will behave in a way that makes it more likely they will move quickly and efficiently. Why have you not done it as opposed to saying, “We are thinking of doing it. We are consulting. We might do”? Why have you not done it in four years?
Hannah Nixon: We have had a very strong focus on reducing financial crime and fraud in the payment systems, right from the beginning. Work has been going on, particularly in our Payment Strategy Forum. We are setting out clear expectations that we want to have that contingent reimbursement mechanism in place.
Q27 John Mann: By when?
Hannah Nixon: We put on the table that we want it in place by September. We are working very hard with the industry and consumer groups to do it as quickly as possible.
Q28 John Mann: If it is not in by September, what will you do?
Hannah Nixon: I understand people want it in place as soon as possible. I really understand that because it is always awful to hear about people being scammed. It has a life-changing effect on them.
Q29 John Mann: What will you do if it is not in by September?
Hannah Nixon: We are working with the industry as quickly as possible. The really important thing here is that the reimbursement mechanism does what we want it to do, which means making it much harder for fraudsters to create this type of crime. If we rush it in now and it is not done in an evidence-based way, we really do risk making things worse for the consumer.
John Mann: Not if you bring in a reimbursement mechanism. That is not helping fraudsters. If we call you back in in October, this should be sorted. That is what you are telling us.
Hannah Nixon: I am saying that we want to have this in place as soon as possible. In our consultation we set out that we thought it should be in place in September. We have just received responses to that consultation. We have had over 30, from consumer groups as well as from the banking sector. As you might expect, there were some concerns about that timetable, including from the consumer groups. We are working through those to understand whether it is a legitimate concern or whether this is just banks trying to play for time. We are clear it needs to be in place as soon as possible.
Q30 John Mann: You are hearing the message that there might not be a great deal of happiness if it is not sorted by September and absolutely so. Can I ask you about request to pay? When is that going to come in?
Hannah Nixon: Request to pay is one of the new functions of the payment system that we want to see, because it particularly gives people more control over their payments.
Q31 John Mann: When is it going to be in?
Hannah Nixon: It is much easier to bring in on a new infrastructure, but we want to make sure that banks can bring in the request to pay function sooner if they choose to. All the standards are being worked up at the moment, and then banks will have the option of offering that to their customer base.
Q32 John Mann: When is it going to be brought in?
Hannah Nixon: Our priority is making sure the financial fraud functionality is in first, so things like confirmation of payee are a higher priority because this is about dealing with the push-payment scams we have just been talking about. Request to pay is important, but it will probably run slightly more slowly than confirmation of payee.
Q33 John Mann: Which year?
Hannah Nixon: The functionality will be there later this year. Banks will then have the option of bringing it to market thereafter. It will definitely be part of the new payments architecture that will be in from 2020.[2]
John Mann: By 2020, not before.
Hannah Nixon: It could be in before, but this is a choice.
John Mann: It need not be.
Hannah Nixon: This is a choice for banks and what they want to offer their consumer.
Q34 John Mann: Will direct debits still remain?
Hannah Nixon: Absolutely.
Q35 John Mann: When will confirmation of payee be brought in?
Hannah Nixon: The standards are being worked up as we speak. They should be in place by mid-year.[3] We want to see banks starting to use that functionality later this year.
Q36 John Mann: Later this year we should expect to see it and you will be taking action if that has not happened.
Hannah Nixon: This plays very much into the reimbursement model we have been discussing. Under the reimbursement model, we would be assuming that banks are using the latest technology to protect their consumers. If confirmation of payee is there but they choose not to use that functionality, that could be evidence that they are not doing everything they can to protect their consumer.
Q37 John Mann: On cheque imaging, some people would suggest that it is not quite the right concentration to have the most sophisticated, best system for something that is on its way out and has been on its way out for quite some time. Not that many people are using cheques. Why is there so much concentration on cheque imaging as a priority, as opposed to all the other options, possibilities and responsibilities you have?
Hannah Nixon: Cheque imaging was an agreement between the banks and Government. It is important from our point of view that consumers retain a choice of payment method. Cheques are declining, but they still are important to sectors of the economy and the community. Cheque imaging is there really to make the processing of cheques much faster, much cheaper and to provide reassurance that people can continue to use cheques as they do today if they want to. They will also have the ability to image the cheque themselves, which saves them from going into their bank to deposit it, if they want to do that. This new system is providing them with that choice and an assurance that that option will remain for them.
Q38 John Mann: I have some more questions, but I will run out of time, so I will be very disciplined and restrict myself just to two quick questions. You subcontracted vast amounts of your expertise out to EY. Why were you not capable of creating the new architecture and systems in-house?
Hannah Nixon: I do not believe that we have contracted Ernst & Young at all. I will check that; I am not aware that we have. We set up the Payment Strategy Forum, which I assume is the work that you are referring to. The Payment Strategy Forum was set up by us to focus on a very specific issue, which was to speed up the pace of innovation where collaboration is needed. We brought together about 20 people, ranging from the end consumer to businesses as user, Government as user, innovators and the incumbent industry. They were tasked by us to come up with the blueprint for the new infrastructure for UK payments, to make sure that we as an economy stay at the forefront in terms of payments. We gave them a tight deadline to do that.
They have come up with what could be a really game‑changing approach to UK payments going forward, giving us much better functionality and opening up the system to more innovation and competition on an ongoing basis. That is now being implemented. We have closed down the forum because it has done its job and we are now overseeing the implementation of the results.
Q39 John Mann: On your own. As a final question, Mr Griffith-Jones, when did your board last have an in-depth discussion about the potential uses of blockchain technology in your work?
John Griffith-Jones: We have had regular briefings on blockchain. We have a periodic update on technological developments, which has included blockchain. I am sorry, I am going to guess, but it is sort of nine months since we had the last serious update, although we had our away day in September where we had a very thorough overview, but we did not have a major session on blockchain.
Q40 John Mann: What was your conclusion?
John Griffith-Jones: On blockchain, there is no doubt that the technology is extremely interesting for all manner of things. You have to separate the technology from bitcoin; the two are often intermingled. Blockchain—I am speaking for the FCA as well as the PSR—definitely has potential as a technical innovation, but it has some way to go before it is mainstream. For example, the new payments system, which is due in 2020-21, we do not currently envisage being run on blockchain. If you were thinking blockchain for the universal system, you are probably another five years down the road from that.
Q41 Chair: Perhaps you could just explain—either of you—very clearly and succinctly: what is the new payments architecture?
Hannah Nixon: The new payments architecture is talking about what you need in terms of central infrastructure to open up as many parts of the sector to competition and innovation as possible. The solution that the forum put forward was to have open international standards, so moving on to the ISO 20022 standard, because at the moment all our payment systems are on different standards. Some of them date back to the 1960s. That means that more people will want to come and play in that space and offer their products, with very clear, strong central governance and a central push-rail that everything else is provided competitively over the top of.
It really opens up the possibility to have lots of new people coming into that market and offering new products and services to consumers. It gives the retail banks much more opportunity to differentiate their product, which should help competition in the retail banking sector. It should also mean that our payment rail is much more easily adaptable to future needs of consumers. Today it is very difficult to innovate on that. A new rail will make the possibility of responding to consumer demand much greater.
Q42 Chair: What difference will that make to consumers?
Hannah Nixon: They will see a wider variety of payment products being offered to them. We have talked about confirmation of payee. We have talked about request to pay. Doubtless there will be other things that people want to innovate and bring to market. That should mean that consumers get a reliable payment system that not only is quick and efficiently run, but also offers them more control over their payments, for example, enables them to transfer more data with their payments and provides them with services that they can choose and adopt as they want to.
Q43 Stewart Hosie: I have a number of questions, but I am just slightly sceptical about some of this. If someone writes a cheque or uses their credit card, debit card, a direct debit or a standing order, they simply want the money to be paid. They do not want to choose the payment system architecture. They want to trust that the banks have validated that the account they are sending it to is a real one and not a scam one. I am sure the competition is helpful for the industry, but I am rather dubious that someone is going to search out the payment system technology before writing the cheque or paying the bill.
Hannah Nixon: I agree.
Q44 Stewart Hosie: I have a number of questions for Mr Griffith-Jones, but, Ms Nixon, can I just ask you one? You said earlier that when banks withdraw they will leave the ATM behind. There should be an ATM when a bank branch closes. In Scotland since 2014, including the ones proposed now, between the Royal Bank, the Bank of Scotland and Clydesdale there have been just shy of 200 branch closures or proposed closures, some of those in very remote areas and some of those in remote areas being the last bank in town. Do you know how many times the ATM was not maintained when the branch shut? It would be helpful for us to get that information, just to confirm whether or not that is the case.
Hannah Nixon: I do not have that data to hand, but we are very clear with LINK that it needs to ensure that it continues to fill existing gaps, but also, where new gaps emerge in the network, that it has a keen eye on that. We expect it to put more money on the table than it does today. We also expect it to have that dialogue with banks when banks are closing, particularly where it is the last branch in town, to make sure that there is an assessment of whether that ATM would be helpful to have in place.
Q45 Stewart Hosie: I wonder if you could find out and write to us. It would be useful to find out how many bank ATMs are maintained or withdrawn when the branch shuts, and how often, when one is left, it ends up not being a free-to-use ATM, as it previously was. It would be useful for us to have. If you can do it for Scotland where there are 200 or so proposed or gone, it is a nice easy package for us to look at.
Hannah Nixon: We can do that. To provide you with some reassurance on the free-to-use versus pay-to-use, increasingly the pay-to-use estate has been moving to free-to-use. It is quite clear that consumers actively avoid pay-to-use and will use free-to-use, and our focus is on making sure that that wide geographic network is free to use. The pay-to-use are additional to that.
Q46 Stewart Hosie: That is helpful. Mr Griffith-Jones, the operators of Bacs, FPS and Cheque & Credit are being merged into one, a move supported by the PSR. At the same time, the firm operating CHAPS has now been taken over by the Bank of England. Do you think it is odd that since creating the PSR, among other things to promote competition, we have seen three of the UK’s most important payment system operators merged into one and another taken into public ownership?
John Griffith-Jones: I do not. I could talk about CHAPS in a moment. On the other three, in the context of having a new payment system and the NPA that we have just been talking about, it made little sense to have three rival organisations running three rails when, basically, the modern technology strongly argued that this should be collaborative and the underlying system should be one on which these various types of payments could run. To echo what you said, we will not sit down and have a major debate at our breakfast table as to which payment system we are going to use. You want to be able to use it without thinking about it.
Q47 Stewart Hosie: Indeed, but for the industry it is important. If it is based on common standards, as described, and it is open source, why not allow the industry to have the competition?
John Griffith-Jones: As I say, all the technical analysis suggested to us that a single rail is the answer and that competition taking place on that rail is the best outcome.
Hannah Nixon: The schemes that have been merged are schemes. There are rulebooks and governance arrangements. By bringing those together and putting them on to open standards, you are streamlining the governance arrangements and reducing the transaction costs for new banks and new payment service providers wanting to come into that market. We are strengthening the body so that it will be in a place to deliver that new infrastructure. It will be an independent board. We are not ruling out that there might be competing infrastructures going forward. That is a choice for the banking community. At the moment, it tells us it is more efficient for the UK to have a single rail. That may change as technology moves on.
Q48 Stewart Hosie: That is helpful. Will the consolidation that was spoken about impact the operator of the Northern Ireland cheque clearing system, or will it also be consolidated into the New Payment System Operator?
Hannah Nixon: As an operator, it will be consolidated into the New Payment System Operator. The infrastructure is part of the new cheque imaging system.
Q49 Stewart Hosie: As an aside, you have explained the rationale behind the consolidation: the single rail approach, as you describe it. Can we, for the avoidance of any doubt, have clarity that this effective merger was not because of an under‑resourcing of the PSR or to make the management of this operation easier for the regulator?
Hannah Nixon: No, not at all. The consolidation was cleared by the CMA. It went through merger clearance. The rationale was absolutely to streamline the governance, reduce the transaction costs for people who want to come into this market and make sure we have a strong body that does as much as possible to promote competition and innovation elsewhere in the system. What is common is basically the standards and the governance.
Q50 Stewart Hosie: That is helpful. There is a worry that, when any single system like this is created, there is a single point of risk, a single point of failure and a single place for fraud. What steps have you taken to mitigate the potential risks of this single rail?
Hannah Nixon: That is a really important issue. We are working very closely with the Bank of England, as you would expect, to make sure the resilience is maintained. I know that the New Payment System Operator is also thinking about those issues, how you transition from the existing system to the new system and what the back-up options are for the new system. That is a clear focus and that will be something that comes out as part of the design process.
Q51 Stewart Hosie: What is the thinking at the moment? It is nice to know that it is thinking about it. Can you give us a little more detail about how you would intend to mitigate the risks involved in this approach?
Hannah Nixon: Certainly, in terms of moving from the existing scheme to the new one, we would expect there to be a period of parallel running and to gradually phase out the existing scheme. With respect to the resilience of the new rail, that is something I know it is thinking about in terms of the tender process. The tender process will not specify what the solution is, but it will be very clear about the outcome it wants to achieve, and I am sure that will be factored into that tendering process.
Q52 Stewart Hosie: Given the regulator is basically driving this direction—it goes back to the question Mr Mann had earlier—in the case of a fraud perpetrated through the system on a consumer, at that point one would presume the regulator would have to take far more responsibility, given the direction of travel that you implemented.
Hannah Nixon: We are very clear that, today and in the future, we are expecting everybody to play their part in reducing financial crime, and that includes the payment systems. The new payment architecture will have more functionality. We know there is new technology being developed for confirmation of payee and to help banks to identify mule accounts. We would expect all that to be used on our payment systems. When it is not, that is exactly when the reimbursement mechanism comes in as the backup to provide assurance to consumers.
Q53 Stewart Hosie: As a final, very quick question, I presume you will be looking in fine detail at the specification for the system to make sure that it is as robust as it can be.
Hannah Nixon: We are monitoring the process very closely and the payment systems operator has a reporting requirement on it to keep us up to date. We speak to it on a regular basis as well. We and the Bank of England will want to make sure any new system is resilient, as well as offering consumers more functionality.
Q54 Stephen Hammond: Good morning and thank you for coming this morning. In your answer to Mr Mann’s question, you spoke about the payments that were associated with the Payment Strategy Forum. If I look at your annual plan and budget, over 20% of your budget is still on external fees to, as you describe them, “specialist services to support our work”. Could you explain exactly what those specialist services are?
Hannah Nixon: We have within the PSR itself a range of expertise, including economists, payment specialists, lawyers, policy people and stakeholder managers. We bring that expertise together to deliver a whole range of projects. On occasion, we need additional specialist input. It would not be cost effective for us to hold that on a standing basis, so we draw in consultancy support as and when needed. Over the period, we have tended to bring more in-house and develop our skills internally much more than to rely on consultants, but it is still a valuable part of making sure we run an efficient organisation.
Q55 Stephen Hammond: You have said that the reason your permanent staff cannot do it is that it is something beyond what they have. Can you give us an example of what that is? Given you have that coterie of skills already in your organisation, it is not entirely clear why you need to spend quite so much on specialist outside advice.
Hannah Nixon: When we need particular skill sets that we do not have internally, we go out externally. A good example would be the Europe Economics work that we commissioned recently to understand the effect on ATM distribution of changes in interchange. That would be a really good example of where we have gone out. That gives us a very rich set of information that we can then use to help inform our policy intervention.
Q56 Stephen Hammond: Your internal economists could not have provided that work.
Hannah Nixon: Sometimes we need to supplement our resource with external resource, either for capacity reasons or because of specialist knowledge.
Q57 Stephen Hammond: I was also looking at the annual report and accounts. You have paid back to member firms or firms that you regulate over £9 million in the last two years, and that results from the fact that you have underspent your budget. Can you tell us why your estimation of your budget has been so poor for the last two years and whether it is a continuing trend?
Hannah Nixon: We have a strong focus on value for money, as you would expect, because at the end of the day our costs come from the consumer purse, so there is always a strong focus on value for money. When we were set up, the estimate was that we would run with a budget of about £15 million. We have been under that. There was uncertainty about exactly how much we would need to spend, particularly in the early days. As we mature as an organisation, our budgeting is getting much better. We are expecting to be pretty much on budget this year, for example. But the onus is on us to operate efficiently and, if we do not need our whole budget, we should be returning it to fee-payers.
Q58 Stephen Hammond: I am not disputing that point. We are all in favour of value for money. I would be keen to know whether your internal audit department has commented on the fact that you were asking for so much and yet not spending it over the last two years. You say you expect to be on budget this year. What processes have been put in place to ensure that happens?
Hannah Nixon: We have monthly budget monitoring, as you would expect.
Q59 Stephen Hammond: If you have monthly budget monitoring, why was it so poor in the previous two years and what have you changed now to get it correct?
Hannah Nixon: We now have a much clearer view of the costs of running the Payment Systems Regulator. If you go back to the beginning, we set up the Payment Strategy Forum, and that was quite a novel approach to bring industry in the widest sense together and hold its feet to the fire on delivery. There were some risks in doing that, and certainly we had dissenters at the beginning. If that had not worked as an approach, we as the PSR would have had to resource up to deliver that ourselves. That would have cost additional money. As it happened, the Payment Strategy Forum has been a huge success. We have not had to spend that money, but in the early days some of this was just unknown.
Q60 Stephen Hammond: If I listen to the beginning of that answer, you now say you have a better estimate of costs. Are you telling the Committee it has taken four years for you to work out the costs of running your business?
Hannah Nixon: We are three years old. We have gradually built the organisation. It is an organisation that has been built from scratch. It has taken some time, as you would expect, to resource up and get the right people in. It has also taken us time to really understand the costs of doing this, how much we can push the industry and how much we will have to step in and do it. There has been some uncertainty about the budget. We have made sure we have had the budget, but where we can we return money to fee-payers. As I say, this year we will be pretty much on budget, so that is evidence that over time we have got better at understanding our costs and budgeting effectively.
John Griffith-Jones: The board takes responsibility for the budget. It is not a failure to control. It is true that in the first year we said, “We need, say, £15 million”. That is just a figure plucked out of the air. That is necessary when you start: “Are we going to have to do any enforcement? How are people going to respond? Will the Payment Strategy Forum work?” The last thing we wanted to be was under-resourced, so we had that attitude.
Q61 Stephen Hammond: I completely understand that point, but we are three years on. If it is not a failure to control, how would you describe it?
John Griffith-Jones: We raised plenty of money.
Stephen Hammond: Then you paid it back. If we are talking about value for money and fairness to your member firms, it is a bit odd that you have to pay back 36% of what you asked them for.
John Griffith-Jones: If you want to describe that as us raising too much in the first year, that is true.
Stephen Hammond: It is not the first year, though, Mr Griffith-Jones. It has been a continuing feature of your operation.
John Griffith-Jones: The major number was the first year. It was a much lesser number the second year. This year, we will be—
Q62 Stephen Hammond: Hold on. In absolute accuracy, it was £5 million.
John Griffith-Jones: It was £5 million the first year.
Q63 Stephen Hammond: It was £4.3 million the next, which is not a material difference. It was, in 2017-18, £4.3 million; in 2016-17 it was £5 million.
John Griffith-Jones: Can I come back to you?
Q64 Stephen Hammond: You can come back to me, but that is what your annual report says. If your annual report is wrong, that is fine, but otherwise that is what it says.
John Griffith-Jones: The annual report is not wrong. I can assure you that, in this year that is due to finish, the number is much closer to the budget. I have every confidence that next year and, indeed, future years will be within a much closer parameter than the start-up estimates.
Q65 Stephen Hammond: You require member firms to publish board minutes, or your guidance states that they should do so, within eight weeks. Is that right?
Hannah Nixon: Yes, there is a direction on all the operators to publish minutes in a timely manner.
Q66 Stephen Hammond: Of your last 10 board meetings, how many has the PSR published within that time?
John Griffith-Jones: I cannot answer that question. I cannot answer it because I do not have the facts to hand. We meet every other month and we approve the board minutes at our subsequent meeting, so I suspect the answer is not many, but not because we are delinquent in that matter.
Stephen Hammond: You have only met that standard, by my calculation, for two out of the last 10 board meetings.
John Griffith-Jones: As I say, it is because we approve the minutes at the subsequent meeting, which falls just outside—
Q67 Stephen Hammond: Your member firms might say the same thing. Do you not think you have an obligation to show them leadership?
Hannah Nixon: It depends on the frequency of the meeting. The key thing here is that there is transparency in the governance arrangements of the payment system operators. That is why we want to see the minutes put into the public domain in a timely manner.
Q68 Stephen Hammond: I am not disputing that minutes should be in the public domain in a timely manner. In fact, it is a credit to you that you have that as guidance for the companies you regulate. I am just asking whether it is a good idea for your own board minutes to follow that practice.
Hannah Nixon: The guidance depends on the frequency of the board meeting.
Q69 Stephen Hammond: Your board minutes—I think it was the July meeting—said that you were planning an external board effectiveness review, which was planned for the summer. Did that take place and can you tell us a bit about it?
John Griffith-Jones: It took place. It was done during autumn. The board is seeing the final copy tomorrow. Subject to my board, we are intending to publish it in the next month or so. When we were releasing our board minutes was probably our plan, but following your comments we will take a look at that.
Q70 Chair: On the relationship between the PSR and the FCA, Mr Griffith‑Jones, you chair both bodies. What else is there in terms of mutual appointments between the PSR and the FCA? Are you the main link, Mr Griffith-Jones?
John Griffith-Jones: I am a main link, but certainly not the only one. Can I just explain that simply?
Chair: Please do.
John Griffith-Jones: There are three huge synergistic overlaps between the two organisations. The first one is the need for our regulation to be consistent. It is quite a crowded space and if the PSR said, “Do this”, and the FCA said, “Do that”, the industry would very quickly latch on to an excuse for not doing anything, so the co-ordination needs to be very tight.
Secondly, the firms we are dealing with have a huge overlap, particularly the banks. If we are issuing instructions to them, we need to understand if we are telling them to do ring-fencing as well as to do requests for payments. We just have to have an overall understanding of what the regulator is asking for. Thirdly, by structuring it the way we have, we have a significant synergy and back office savings. As you are aware, we both sit in the same building and we share.
All this leads to the need for co‑ordination on the one hand. The reality is on a day-to-day basis, as far as I am aware—and Hannah can confirm this—her people work on PSR matters, so the things we have been discussing today. The staff are pretty dedicated to those. There is not a lot of lending and borrowing staff on the core functions, but there is the ability to lend and borrow in a stressed moment. That all works pretty well, at least in my view. As I am sure you are aware, the Treasury designed it this way. We agreed this was as good a way of doing it as any.
Of nine people on the board, five are also on the FCA board and four are not. Hannah and one of her colleagues are executives who are on the board, and there are two non-executives who come externally. This all works very satisfactorily at the moment. I do not say it has to be like that forever. It has been particularly helpful in the setting up of the PSR. I do not know how it looks from outside.
Q71 Chair: That is certainly something that the board might want to consider. Could you envisage a situation, Ms Nixon, where you might need to challenge the FCA or pursue a different path? Although there are, as you say, overlaps in terms of institutions you are regulating, and I fully appreciate the desire for no more regulation than is absolutely necessary, there may be times that as the PSR you have a different outlook or a different need to get the banks to do something than the FCA does. Is that something you are able to challenge?
Hannah Nixon: The legislation envisages that situation, because it talks about situations when the PSR might want to do something that makes it difficult for either the Bank of England or the FCA. In those situations, both the Bank and the FCA are able to veto PSR action if it gets in the way of delivering their responsibilities. That says to me that we need to work very closely with the Bank and the FCA to understand their concerns, so we do not unknowingly get into that situation. We would not want to do anything on the payment systems that threatened stability, for example, or caused consumer protection issues.
It is really important that we have those good working relationships at all levels of the organisations. The legislation absolutely recognises that issue. In the board, people are very clear that when they are on the PSR board they are looking at the objectives of the PSR, and similarly on the FCA side on the FCA board.
Chair: We mentioned staff, so that leads neatly into Alison.
Q72 Alison McGovern: We also mentioned the connection with the FCA. You are going to be relocating to Stratford with the FCA quite soon. What do your staff think of this?
Hannah Nixon: The PSR is very positive about the move to Stratford. Pretty much everybody who joined the PSR joined knowing that we were going to move to Stratford. People see it as a really good opportunity. It is a fantastic building that will really help us work more flexibly and more effectively as an organisation, so there is a degree of excitement.
Q73 Alison McGovern: Where do your staff live in the main, at the present time?
Hannah Nixon: We are obviously very south-east concentrated. We have done a map to understand where people live. As I say, most people, if not everybody, joined the PSR knowing we were going to Stratford, so a number of people live on that side of London, as you might expect. I cannot be precise.
Q74 Alison McGovern: Will many of them be moving out of London or the south-east?
Hannah Nixon: Not that I am aware, no.
Q75 Alison McGovern: What do you see as the main benefit of moving to Stratford?
Hannah Nixon: It will give us a new building that helps us work much more flexibly. That is certainly what we want to get out of it.
Q76 Alison McGovern: In what way? What do you mean by flexible? What is the thing about the building?
Hannah Nixon: There are two parts to it.
Alison McGovern: Is there a better coffee shop?
Hannah Nixon: First, the IT will be much better in the new building, and that will enable us to work remotely more effectively. Secondly, the whole layout of the building is much more fluid. It is set up for people to group into a place to discuss that particular project, to have a bit of quiet time over here, to work remotely, or to conference call someone in who is working remotely. The whole set-up is designed to enable that greater fluidity and flexibility.
Q77 Alison McGovern: You have a challenge, because your 2017 staff survey results said that only a third of your staff said, “I want to work here for a long time”. What do you think is the root cause underneath those figures?
Hannah Nixon: I was not particularly surprised to see that number. We are a small organisation. We benefit hugely from the fact that we have been able to attract high-calibre people at all levels in the organisation who really want to be part of what the PSR is doing. The staff survey also showed that people really believe in the mission of the PSR and want to be part of that. The fact that we are a start-up attracts a lot of people too.
We are a small organisation. We have a very keen focus on developing our staff, but the reality is that a lot of people will want to move on and do other things. Where people are going on and doing other things, that is actually a success for us, as long as we are able to keep attracting people in. I want to make sure we are able to attract and retain the right people, but I am not looking for or expecting people to want to stay here for their entire career.
Q78 Alison McGovern: It is interesting that you say people believe in the mission of the PSR, but less than half of the staff responded favourably in the values and ethics section of the survey. In terms of those underlying values, that is either not being communicated or, for whatever reason, staff did not feel themselves that they wanted to respond positively. What do you put that down to?
Hannah Nixon: That was a reflection of where we were a year ago, when the survey was done. We are moving from start-up into more of a steady state. We have been very focused in the first few years of our set‑up on getting staff in and really delivering for the consumer. It is fair to say that there had been less focus on some of the internal processes that you would expect to see in a more mature organisation.
That staff survey was really helpful in helping us decide where to focus our internal management attention. We have done a lot of work internally on workshops with staff around the values that you mention. We have done a lot of work in terms of being clear about career paths and development opportunities in the PSR. We have also involved staff a lot more in thinking about the long-term strategic direction of the organisation. That was a moment in time reflecting, as I say, the move from start-up to steady state. It has helped us focus on some of those internal issues.
Q79 Alison McGovern: Have you got staff morale on your organisational risk register?
Hannah Nixon: Not explicitly in that way. Clearly, we need to be able to continue to attract and retain talented and capable staff. We are fortunate to be in a good position on that at the moment.
Q80 Alison McGovern: In terms of internal communications, but also communicating what you are about, what is the split, roughly, of responsibilities in the policy, legal and communications functions?
Hannah Nixon: In terms of communicating?
Alison McGovern: Yes. What is the balance of staff?
Hannah Nixon: The biggest area is policy, and legal and communications are roughly equal, but probably slightly more than half the size of the policy team
Q81 Alison McGovern: About how many people do communications?
Hannah Nixon: Communications spans our stakeholder engagement, internal communications and external communications. From memory, in that team there are probably around a dozen people. It is of that order.
Q82 Alison McGovern: Finally, have you published your gender pay statistics yet?
Hannah Nixon: We have not published them because, as a small organisation, we fall below the 250 threshold. As you know, the data gets skewed quite substantially when you get to small numbers, and we are 73 people at the moment. We have run those statistics, though, and our gender pay gap at the moment is 9%.
Q83 Rushanara Ali: My focus will be on the priorities for 2018. One of the issues is related to internal costs. I just wanted to flag up the issue around expenditure for the launch of your annual plan. I wondered if you could say a bit about the rationale for spending £60,000 towards the event to launch it.
Hannah Nixon: The whole philosophy of the PSR is to be very externally focused. We are dealing with extremely complicated issues. It is really important we get those right. We always want to reach out and include the full range of stakeholders, from the end consumers all the way through to the industry. A lot of effort goes into that.
The annual plan launch was a key part of that. It was about engaging with a whole range of stakeholders to set out what we were planning to do for the year, get their views and start talking about some of the work that we were embarking on. That is really important in making sure that we understand the concerns and are targeting the right issues.
Q84 Rushanara Ali: Just to wrap this particular point up, what proportion of that went into reaching out to consumers, in light of the issues that were discussed earlier on about their concerns versus other stakeholders?
Hannah Nixon: The proportion at the time of the event?
Rushanara Ali: Of that expenditure in terms of outreach and events.
Hannah Nixon: I would have to get the precise numbers, but the bulk of that money presumably was on the venue hire and so on. We wanted to make sure that we had a good spread of voices. We are quite lucky, in that we have a lot of consumer groups that want to actively engage with us. We are always looking to reach out to others, so they have a lot of representation at our meetings.
We also held, as I recall, a number of panel sessions where we wanted to explicitly put the consumer voice next to perhaps an industry voice. That is quite powerful, in terms of moving the debate forward.
Q85 Rushanara Ali: It just seems like quite a traditional way of engaging with stakeholders. I just wondered if you could say a bit about what you do through other, more cost-effective mechanisms, to reach your stakeholders, including using technology.
Hannah Nixon: As I say, we are very outward-focused. The annual plan event is just one example of that for outreach. We are always looking for new ways to reach out to our stakeholders. We do everything from that annual plan event through to regional visits—we want to understand the issues that affect different parts of the UK—our consultation papers, our Twitter account and our stakeholder survey. We are trying to provide as many routes in for people to engage with us as possible. Some people want to engage on lots of issues. Some people have only the interest or resource in a few areas.
Q86 Rushanara Ali: You will understand that sort of figure, including a £20,000 venue hire figure, does not necessarily look very good, in terms of how money is allocated to these things. I recognise that venues can be very expensive, but it is just to flag a concern around that. It is worth thinking about the cost effectiveness of how you reach the kind of audiences that we are talking about, our constituents and the organisations working with them.
Hannah Nixon: Yes. We are very focused on that. We are always looking for new ideas on reaching out.
Q87 Rushanara Ali: I am just going to move you on to your annual plan and the focus on consumer protection, which is obviously welcome as a new area of focus. You mentioned some of the ways you will work to achieve this already. How are you ensuring that it is joined up with the FCA? Mr Griffith-Jones, perhaps you can say a bit more about that. I know you have touched on some of these issues already, but are there any additional points, rather than repeating what has already been said?
John Griffith-Jones: There is a potential overlap, and this is core territory to the FCA as a conduct regulator. We are keen not to duplicate. I can give you a specific example on the push-payment scams, where the responsibility for the system rests with the PSR, and the responsibility for the behaviour of the receiving bank in that chain is largely an FCA matter. In order to do an effective piece of work, both organisations have to get involved. There has to be a grown-up discussion around which programme and who does what, which, in that case, there was.
If you follow my train, the PSR is essentially an economic regulator. It has discovered, with experience, that we need to have more of a consumer focus than perhaps we had originally anticipated, but without duplicating what the FCA does.
Q88 Rushanara Ali: You have neatly entered into my next question. Is it appropriate for an economic regulator to work on consumer protection?
John Griffith-Jones: It is essential. What we have just been cross‑examined on shows you that it is essential that we have a very good understanding. With some things, like geographical location of ATMs, putting them in financial inclusion areas, you end up in that space. Do I think we should? Definitely. Do I have to put my FCA hat on and say, “Hang on a second; who is doing what here”? I do.
Q89 Rushanara Ali: You are the epitome of joined-up working, in the light of the roles that you play, so we are counting on you to deal with some of the particular consumer protection issues.
Earlier on there was all this discussion about why you were not able to anticipate and address more rapidly some of the issues around fraud. What are the emerging trends that you are seeing? If we asked you a few years ago, you might have said, “We should have prioritised consumer protection right from the outset”, or whatever. Can you see other emerging trends which you could start to pre-emptively put in place mechanisms to address, so we do not find ourselves in a situation where, four years down the line from your existence, MPs are rightly exercised about, in this case, the push fraud kinds of issues? Are there any like that you have already seen?
Hannah Nixon: This is such a fast-moving sector, partly because of the work we are doing to open the whole thing up, but also partly because consumer expectations and technology are changing. It is really important that, as a regulator, we stay at the forefront of understanding what is happening. That is why the three themes that we identified last year are really important. On understanding changing competitive dynamics, we know there is new technology coming into the sector. We know there are new business models entering the sector. We need to understand what that means for the consumer. As you say, are there issues that we should be identifying now?
Q90 Rushanara Ali: Can you think of any that you have a hunch on? Sometimes you can spot patterns, and you have this oversight. You have a lot of information and oversight that comes in, whereas we get individual issues coming from our constituents. Seeing that overarching pattern takes more time for us.
Hannah Nixon: Data is a good example of that. Data is not just something that is relevant to payments or financial services. There is increasingly more data being attached to payments, which should bring big benefits. It also brings questions around whether the consumer really understands what data it is releasing and how it is being used. Over the last year in particular, we have been doing a lot of work to understand that, where the responsibilities and issues are being dealt with, because there are a number of other regulators involved in this space.
Then the question is: “Is there something additional that the PSR should be doing or not?” We need to make sure that we understand that, that the consumer, importantly, understands that, and that appropriate mechanisms are being put in place to protect them.
Q91 Rushanara Ali: Are you confident you have the right mix of team members within the organisation who are tech-savvy and have the expertise to understand how data management, data sharing and technology are evolving and accelerating, in order to keep up with these sorts of issues as a regulator? The parallel might be banking regulation in the past. Regulators are often criticised for not having enough capacity or being ahead of the curve, whereas the industry was finding new ways of circumventing regulation or problems.
Hannah Nixon: Right now, we have the right resource. We keep that under review constantly.
Q92 Rushanara Ali: In terms of expertise?
Hannah Nixon: Yes, in terms of expertise. It is important that we are able to supplement that with external expertise. This is where it is really important for us to maximise the value of our independent panel, for example. It is also why we have this very proactive external facing approach. We need to make sure we understand what is going on in the sector. We will not be able to do that by just relying on our internal staff. We need to supplement the skills that we have with making sure we are getting the latest intelligence.
Q93 Rushanara Ali: I know you are working with consumer groups, and you referred to the Consumers’ Association and so on. Are there other ways in which you are getting direct input, in terms of the experiences of consumers that you can capture very easily? Is there a casework approach to these things beyond what we might send you to flag up concerns?
Hannah Nixon: We do a consumer survey every year.[4] The most recent one picked up 1,000 individual consumers. It also had some focus groups. On the push-payment scams we have been talking about, we looked at a number of case studies. We have been out to some of the consumer-facing call centres to understand the casework there. We are doing these regional visits to make sure we understand the particular issues in different parts of the UK. It is a range of approaches. I do not think there is just a single approach that is going to work here.
Q94 Rushanara Ali: My next question is to both of you. Are you confident you have the appropriate statutory powers to support the consumer protection side of the work that you are prioritising? If not, what other powers do you need?
Hannah Nixon: Broadly speaking, at the moment we do. There are a couple of things that we have already highlighted where it would be helpful to supplement our powers. That is something that we are looking at. As we continue with the work on looking at changing competitive dynamics and data in particular, if there are areas where we think it would be helpful to supplement those powers, clearly we will say so.
John Griffith-Jones: On your previous question, while I agree we are as proactive as we can be, the reality is that there are people out there who are trying to steal money, and they will go for the weakest link. I do not believe that, if we sort out push-payment fraud, that will be the end of fraud. There will be something else. It is important for us to maintain a mindset of permanent dissatisfaction with our system, rather than congratulating ourselves on dealing with the latest issue. I fear there will always be people who will be looking to make money. On the powers thing, I defer to Hannah’s answer.
Q95 Rushanara Ali: I am going to turn to bitcoin. Do you think it is a payment system? I know it is not in your list, but should it be?
Hannah Nixon: We are constantly thinking about whether new payment systems are emerging in the UK that need to be designated to us. Bitcoin and cryptocurrency generally is not a payment system in the UK. At the moment, we do not see the need for it to be designated to us. Obviously that could change at some point in time, at which point we will be asking Treasury to designate it, but I do not see that at the moment.
The more interesting part of that technology for us is the blockchain, as we discussed. That could be a potential technology behind payment systems in the UK going forward. We do not know.
Q96 Rushanara Ali: You touched on data earlier, so I wanted to come back on that. One of your priorities for 2018 is to undertake work on payment data. Could you say a bit more about this area of work, some of the opportunities and how you will use that to achieve your objectives?
Hannah Nixon: Enabling payment systems to carry more data opens up lots more opportunities to give better services to consumers, whether it is attaching invoices to payments or whatever it is. It also opens up risks. We want to make sure we get the benefits while we are mitigating the risks.
We also know that there are a number of other regulators that operate in this area, including the Information Commissioner’s Office. We need to make sure that we are joined up and all understand the respective roles and responsibilities. Then we can think about where the PSR needs to act additionally. That is work that we are completing at the moment.
Q97 Rushanara Ali: You are also looking at the benefits and risks of open banking.
Hannah Nixon: Yes, absolutely.
Q98 Rushanara Ali: It would be good to get more written information on that. I am conscious that I am running out of time. I have one final question, which is the extent to which Brexit has an impact on your work and the payments sector more generally.
Hannah Nixon: As you would expect, we are working with Treasury to onshore the European legislation that applies to payments. There are three broad areas. The biggest one is the interchange fee regulation, but there are also some parts of the PSRs and the PAD. We are working with it to do that. It is a reasonably self‑contained task for the PSR.
In terms of the impact on the payments sector more widely, the biggest issue would be around the authorisations process, which is obviously dealt with by the FCA.
John Griffith-Jones: There is a huge body of work, which no doubt you will ask Andrew and me about when we appear shortly, and I probably should wait until then. As Hannah says, by comparison, in terms of the volume and complexity of the issues, while they need to be sorted, we are eminently capable of sorting them. The IFR, interchange fee regulation, is possibly the most interesting in how it affects British citizens spending money in Europe and Europeans on holiday in England. At the moment we are treated as one and clearly, subject to whatever is agreed, that may no longer be the case.
Q99 Charlie Elphicke: What is the average salary in the organisation?
Hannah Nixon: I would need to get back to you with that information. I do not have it to hand.
Q100 Charlie Elphicke: Will you write to the Committee with that?
Hannah Nixon: I can do that.
Q101 Catherine McKinnell: I wanted to ask a few questions about contactless payments and mobile contactless payments. You have been carrying out some engagement work on mobile contactless payments in particular, and your annual report said that you would update on this in autumn 2017. Did you update, and, if not, can you update us now on any conclusions that you have drawn from that?
Hannah Nixon: This is really a good example of the type of work we are doing on the changing competitive dynamics. Contactless mobile payments, for example, are a new technology and a new business model. We wanted to make sure we understood how that was working, what the impacts are on the consumers, in terms of benefits and whether there is something else that we need to be thinking about. We are working to conclude that work at the moment. We are going to put out a document reasonably shortly.
Q102 Catherine McKinnell: It is ongoing.
Hannah Nixon: It is ongoing, but it is nearing conclusion.
Q103 Catherine McKinnell: You are not able to give us any previews today.
Hannah Nixon: Not at the moment, but we will be putting something out very shortly.
Q104 Catherine McKinnell: John, you also wrote to the Committee last year on the work being undertaken on contactless card fraud. Can you provide an update on that?
John Griffith-Jones: I probably can. That seems to be moving in a reasonably satisfactory manner. The actual level of fraud is around about £7 million a year, or it was in 2016. We do not have the 2017 figures. That is on £27 billion, up nearly three times from the previous year. There has been a huge explosion in the use of contactless cards. £7 million is a lot of money, but, as a score, it is under control.
I wrote to the Committee about the additional measures, and, in particular, putting more of the transactions online rather than offline. The main loophole was that it caught up with them, but the cards were used before the fraudster was caught. If you do it online, once the card has been cancelled it gets rejected.
Visa has introduced a greater percentage online. I am sorry I do not have the number, but it is much more. The banks have also looked at this. Broadly speaking, the more online transactions there are, the less fraud is possible. We think we are moving satisfactorily in that direction.
Q105 Catherine McKinnell: Fraudsters are still able to use cards even once a card has been cancelled where it is an offline transaction. That is around 20%, potentially.
John Griffith-Jones: That was the weakness in the system and that is what has been turned off.
Q106 Catherine McKinnell: It has not been turned off entirely yet, though.
John Griffith-Jones: I am sorry; I wish I could answer that. Can I get back to you?
Chair: Yes, please write to us.
John Griffith-Jones: I do not believe it has been turned off technically, but the solution has been not to allow it.
Q107 Catherine McKinnell: It has been identified and needs to be rolled out.
John Griffith-Jones: Yes. What is clear, which is important from the consumer’s perspective, is that the banks are absolutely on the line for any fraudulent use of the card. This was always clear, and I think I said so too; I wrote to Rachel Reeves, if I remember rightly, at the time. There was a problem initially that they were not identifying these payments and leaving it to the consumer to do. We have made it very clear that that is not acceptable.
Q108 Catherine McKinnell: Banks have to proactively identify any payments that have taken place after the card has been cancelled.
John Griffith-Jones: That is the intention, yes.
Q109 Catherine McKinnell: It is not reliant on the consumer checking their statements and contacting the bank.
John Griffith-Jones: It should never have been and should not be now. I cannot tell you there is not an instance, but the onus is on the bank.
Q110 Catherine McKinnell: That is reassuring. More generally, what is your assessment of the card market in the UK? Do you think it is functioning effectively? I know Rushanara touched on Brexit and the impact of Brexit. More generally, do you think there will be any wider implications from Brexit, apart from the immediate regulatory shift that needs to happen?
John Griffith-Jones: The card is an enormously useful piece of plastic. The numbers on contactless, particularly in London, with using it on the Tube and London transport, show it is transformational. I cannot see it going anywhere other than greater usage, at least in the immediate future. The real question is what comes after that, as to why you need a card. Can you use your eyeball, your phone?
We are, and ought to remain, technology neutral here. We are a regulator, not an exponent of any one particular technology. As long as we keep up to speed with whatever is most convenient for consumers, combined with resilience, we shall be in a good place. If we start backing winners, I fear we will probably back the wrong winner or extend beyond the proper role of the regulator. I should probably defer to my chief executive.
Q111 Catherine McKinnell: The Payment Strategy Forum did not do any work on the payment card. Is there a particular reason for that? Was there nothing to discuss?
Hannah Nixon: The Payment Strategy Forum was set up to play a very important but narrow role, which was to speed up the pace of innovation in the interbank systems. We keep a very close eye on the cards market. It is important that it operates effectively and efficiently for consumers. We did a call for evidence right in the beginning of the PSR’s setup.
We have had the implementation of the interchange fee regulation, which is a big piece of regulation in the cards market. We have implemented that. We are now in the monitoring stages. We have been very clear that we want to understand the effects of that regulation before we are suggesting any additional regulation or tweaks to that regulation.
There are also interesting questions in relation to open banking and PSD2. One of the effects of that could be to start to blur the line between the card and the interbank markets. There is a lot going on there, which we are keeping a very keen eye on to make sure that we can get the best benefits for the consumer. At the moment we need to understand the impact of very recent regulation before we go further.
Q112 Catherine McKinnell: One final issue I wanted to touch on is the surcharge. I know the ban on card surcharges recently came into effect. Have you undertaken work to assess the impact on the consumer of that change? Obviously there are widespread concerns that it will simply shift that cost on to the consumer. I know there have been reported cases of outlets simply putting a blanket charge on all payments, so you cannot accuse it of being a card surcharge. It is simply a customer charge. What impact have you looked into?
Hannah Nixon: This is EU legislation that is directly applicable in the UK. It has just come in, as you said. We are monitoring to understand the effects of that. We have heard about some benefits. We have also heard similar stories to the one that you referred to, about potentially some unintended consequences. We need to monitor the effects of that, and then we will be in a position to advise Treasury as to whether any changes to that legislation are required.
Q113 Catherine McKinnell: You will update us in due course.
Hannah Nixon: Indeed.
Q114 Chair: Finally, I want to return to where we started: cash as a payment system. In the 12 months prior to April 2017, 76% of purchases in 50,000 UK convenience stores were still made using cash. I think every year more cash is in circulation. The most recent announcement was that cash in circulation increased by 10% over the prior 12-month period. I do not want to speak for all my colleagues, but I certainly know as a Member of Parliament there are constituency events that I attend where, rightly, no one is interested in me paying in anything other than cash for my raffle tickets, my cakes at the fete, my jars of strawberry jam and everything else.
We have talked a lot about new technologies. Returning to cash, who in the regulatory system has the job of promoting cash as a payment option?
Hannah Nixon: We are very clear that cash plays a really important role in the UK economy today. More than 40% of transactions are carried out in cash. Our role is to be neutral on the payment system and which payment system people use. We want to make sure that people have choice. If somebody wants to pay using cash, that is fine. If they want to use a cheque, that is also fine. If they want to use a contactless mobile payment they have that option too. We want to make sure that there is choice. Cash is clearly an important part of that mix today, so we need to make sure that consumers continue to have easy access to cash.
Q115 Chair: Mr Griffith-Jones, we talked before in answer to other questions about the consumer focus that the PSR is perhaps developing. You mentioned the words “financial inclusion”. Does the PSR board properly understand the value of cash to society, particularly to vulnerable groups? For some people, taking cash out and sticking to a budget is only possible if they use cash to do it. Is that something the board is fully aware of?
John Griffith-Jones: We are, and we always have been. Echoing Hannah’s earlier assurances, we will absolutely make sure that the geographical reach is maintained and the financial inclusion programme is at least maintained and preferably enhanced. We are all facing the fact that the number of withdrawals may decline. I am not saying whether it will or will not. If it does, that will put economic pressure into the machine system. We need to make sure there is money set aside explicitly to cover both of those issues.
Q116 Chair: Has the PSR done any modelling of how cash acts as a competitor to other elements of the payment systems?
Hannah Nixon: Not explicitly. We are neutral on payment systems, as I say. We want to make sure that there is broad choice. We would be concerned if there was any threat to the easy availability and access to cash. That is exactly why we are focused on the ATM issue, but we are not here to promote any particular payment system.
Q117 Chair: One of the points put to me before this session was that, if some so-called unviable cash machines close, that has an impact on the logistics. It may have an impact on the logistics of supplying what will be considered to be viable cash machines. In terms of looking at the LINK analysis, potentially the work that you are doing, is that another relevant factor?
Hannah Nixon: It is another factor. That is why we say that, while we welcome LINK’s commitment to maintain interchange on remote ATMs, we do not think it is good enough. We have been clear that it needs to commit to retaining that geographic footprint, whatever it takes. That may mean higher interchange on those machines.
Chair: I will draw to a conclusion. We are very grateful to you both for giving evidence this morning. I want to stress again the real importance that the Committee attaches to the whole free-to-use ATMs issue. Committee members have received representations from our own constituents, other Members of Parliament on behalf of constituents, and a lot of other people outside. This session has captured the imagination of the public and those who rely on free‑to‑use ATMs.
Any significant reduction in free access to cash would be an unacceptable outcome. Responsibility for that lies principally with the PSR. This is the Committee’s view. It is the PSR’s first major test. As we have already set out, there are concerns around LINK’s consultation process and analysis. We think that a moratorium will be needed if those concerns do not disperse. More widely, all those with a role to play in resolving this issue, be that LINK, the banks, the ATM deployers or the regulator, should have no doubt that this Committee will take a very dim view if they fail to work constructively together to sort this issue out.
You have also agreed to write to the Committee on a number of other points. I have noted down how many bank ATMs are left behind when bank branches close, or how many paid-for ATMs are then installed in their place. You are going to write to us about the average salary within the PSR, and this issue about contactless fraud that was being pursued. That is it on my list. We are very grateful to you both for giving evidence this morning. We shall watch what happens with the LINK issue very carefully. We will call you and others back if things develop in a way that is harmful, particularly to consumers and those who rely on free‑to‑access ATMs. Thank you so much for your time this morning.
[1] Clarification from witness: “We have had an increase of about 21,000 free ATMs since 2006”
[2] Clarification from witness: The new payments architecture will be in place from 2021.
[3] Clarification from witness: Confirmation of payee will be in place by Q3 this year.
[4] Clarification from witness: this should say “We have done a customer survey.”