28 March 2017
EU Payment Services Directive II Consultation
Banking and Credit Team
1 Horse Guards Road
EU Payment Services Directive II Consultation
1. UKCTA is a trade association promoting the interests of fixed-line telecommunications companies competing against BT, as well as each other, in the residential and business markets. Its role is to develop and promote the interests of its members to Ofcom and the Government. Details of membership of UKCTA can be found at www.ukcta.org.uk. UKCTA members supply a range of telecommunications products and services to a large volume of consumer and business customers.
2. UKCTA welcomes the opportunity to respond to HM Treasury’s consultation on the implementation of the Payment Services Directive II.
3. The focus of our response is on Article 3(L), which addresses the exclusion from scope of “payment transactions by a provider of electronic communications networks (ECN) or services provided in addition to electronic communications services for a subscriber to the network or service.”
4. A proportionate and permissive application of the exemption is very important to the communications industry. First, the exclusion recognises that the ECN is adding value along the way. In the case of a digital download, or providing access to an information or entertainment service behind a premium rate telephone number, for example, the ECN is delivering the service too; it is not just effecting settlement. Secondly, it means that the sector can have regulatory certainty and is regulated just by Ofcom and the Phonepaid Services Authority (PSA). Because of the interconnectedness of electronic communications networks, it also avoids the need for the many potential parties in the delivery and settlement chain from having to become an authorised payment institution. Such an outcome would be very damaging for the sector with all kinds of unforeseen and unintended consequences.
5. Fixed line communications providers have a 30% share of the UK Premium Rate Services (PRS) market annual revenues1 amounting to £204 million. When the PSD regime first came into being, industry revenues were in excess of £1 billion. While the fall in revenue is not all attributable to the PSD regulation, the restrictions in the PSD (e.g. the prohibition on claiming the exemption of supplying physical goods) has prevented the industry from exploring new services to refresh the product offering.
6. PSD II does now offer new possibilities, such as e-ticketing. However, the new limited exemption introduces a new complexity – the requirement to restrict individual transactions to €50 per transaction and the cumulative spend on ‘phone-paid’ value added services to €300 per month. In response to Q4 below, UKCTA will set out this point in more detail.
7. In outline, UKCTA urges the Treasury to find a way of implementing the PSDII requirements in a proportionate manner that takes account of the already significant communications sector specific and general consumer protection regulations, and to ensure that the focus is on individual consumer protection rather than on enterprise customers.
Question 1: Do you agree with the government’s proposed approach to implementation of the PSDII? Bearing in mind the maximum harmonising nature of the PSDII, do you think the structure of the regulatory regime will allow the UK’s competent authorities to enforce the regulations in a fair and equal way towards all payment service providers?
8. The communications sector is highly and effectively regulated. UKCTA believes that a straight copy out of the Directive could result in a very disproportionate outcome that would not be helpful to consumers or industry. Common sense dictates that the enforcement authorities must be given scope to exercise some discretion over the way in which this Directive is implemented, particularly as it relates to third party voice services carried over telecommunications networks. We further believe that there is scope within Article 37(3) for Member States to apply a common sense approach by limiting the nature of the notification, the annual audit and underlying opinion that must be sent to the Financial Conduct Authority (FCA) testifying that the activity complies with the limits set out in Article 3(L). We would encourage a practical approach in this regard which limits the costs incurred by operators on an annual basis (e.g. head of internal audit permitted to sign off on the notification).
Question 2: A consultation stage impact assessment of the proposed changes will be published before the end of the consultation. Do you have any comments on the impact of the PSDII set out in the impact assessment?
9. Members of UKCTA believe that the compliance costs entailed in this requirement will greatly exceed any likely benefit in terms of consumer protection.
10. PSD II has for the first time introduced financial limits into Article 3L (Negative scope) – €50 per transaction and €300 cumulative spend per subscriber per month. The latter presents the communications industry with particular difficulties and we strongly urge the Government to find some way of implementing this in a way that will be in the interests of both consumers and providers.
11. Calculating the cumulative spend for third party services charged to the telecommunications bill in any one month involves aggregating a subscriber’s moment by moment spend across many revenue lines for which a payment to a third party will be made. The content and services, which often sit across different billing platforms and form subsets of a subscriber’s normal communications. Building a monitoring platform to track and enforce a €300 spending cap in real-time will cost millions of pounds for each communications provider– a sum that would be materially disproportionate to the level of business that exists today and may foreclose some of the opportunities that PSD II presents (such as ticketing for road and transport), in a market which is already comprehensively regulated by the PSA (formerly PhonepayPlus) with measures in place to protect vulnerable consumers.
12. The current (and declining) premium voice revenues are £120m per annum2. It will be far too costly in relation to the margin generated for the whole voice carrying network in the UK to get licensed by the FCA (because even if an operator is not initiating a call, any interconnecting operator is likely to carry such a call and thus come into funds through the settlement process). For example, the estimate of the margin made by all UK Electronic Communication Networks (fixed and Mobile) on users exceeding €300 per month is £0.5m. In relation to fixed line providers, a telephony circuit can carry an unlimited number of individuals with a service provided under a fixed single number. In such a case, it is not possible to identify an ‘individual subscriber’ to ensure that individual does not breach the cap. To place a cap on the entire circuit is disproportionate and will cause consumer detriment. It is really not practical or desirable for the greater part of the UK telecommunications industry to become an API just to satisfy this requirement. There is a strong likelihood that many would just discontinue such services rather than go through the cost of complying. This will cause unnecessary harm to charities and other businesses which rely on payment services.
13. In any event, we do not agree that the requirements to impose caps when using the ECN/ECS exclusion of the PSD II should apply to Business-to-Business (B2B) communications providers. The use of the term “subscriber” implies that an organisation as a whole is considered to be one subscriber, and therefore subject to the 50€ and 300€ caps – this is both problematic and impractical. Firstly, an organisation may consist of 10 end-users or 10,000 end-users, and yet be treated as one subscriber – the caps would therefore not make sense and would be extremely hard to monitor and comply with. Furthermore, there is no clear need for large business customers to be subject to these caps as there is no clear evidence of harm to large businesses nor desire from such business customers for this protection. It would simply add costs to their services unnecessarily due to IT implementation.
14. The focus of the Directive is clearly aimed at protecting individual domestic consumers rather than large businesses, and we believe that this is reflected in the Directive’s use of “individual subscriber” at Art3(l) in this context. In this sense, we strongly request that a carve out of the caps requirement under the ECN/ECS exclusion from the implementation of the Directive for B2B communications providers.
15. The provision of Directory Enquiries (DQ) is a further problem (annual revenues £82.7m and falling). In the UK, DQs are provided by third parties, mostly independent of the ECNs. It is a regulatory obligation (under the Universal Service Obligation) to provide access in a manner that is not unduly discriminatory. Even if the subscriber has reached the €300 cap, DQ must be offered.
Question 4: If you intend to make use of the electronic communications networks and services exemption, how do you intend to track the €50 and €300 spending limit?
16. Fixed network providers employ a variety of processes to monitor and control expenditure on phone paid services. This is done not only for commercial reasons but also to ensure compliance with the PSA Code of Practice. This means that the regulatory objectives of the PSD II (to ensure that phone paid services do not develop in to a general payment instrument and to protect consumers) are already met by alternative means:
a) It can be comprehensively demonstrated that the payment mechanisms for third party services charged to the telecommunications bill, also known as premium rate services (PRS) is incapable of developing into a general payment intermediation service through other restrictions placed into Article 3l.
17. Revenues generated by consumer access to PRS over fixed telecoms networks is relatively small (£474 million out of £2.1billion fixed voice revenue). PRS is very far from being or becoming a general payment service in the UK:
a) PSD2 exemptions for telecom based charges are restricted to ‘digital goods and services, voice based services, tickets and donations’.
b) The range of goods and services so procured do not include physical goods and tend to fall within a very narrow scope of a consumer’s overall expenditure (e.g. directory enquiries, charitable donations, gaming).
c) The number of merchants registered with the PSA to supply services through PRS is approximately 3,000 – a very small number on the overall consumer market.
d) Payment and settlement between consumer and merchant takes place within the communications industry’s wholesale billing and settlement processes, not through the wider banking settlement arrangements.
e) PRS in the UK is emphatically not now or in prospect a general payment service. We would welcome clarification in the Payment Service Regulation guidance that the manner in which premium rate services are provided and billed in the UK would not constitute a payment transaction. When a customer calls a Premium Rate number in the UK, typically 09XX, that customer’s communications provider will charge them at the relevant service charge and add on an access charge. The customer’s communication provider is then invoiced by the other operator which routed the call for the full amount of the service charge. This Operator then makes an out payment to the company that operates the service behind the number, the service provider. We fail to see how this can be considered a payment transaction and believe that it is merely payment for a service to a third party.
b) Consumers using ‘PRS services receive a high level of protection:
18. Subscribers who are using PRS services are afforded a high level of protection in the UK market:
a) Protection through a dedicated, independent regulator
i. The PRS industry in the UK is regulated by the PSA, a dedicated regulator charged to ensure that subscribers have an easily accessible, independent, properly funded regulator.
ii. In the event that, a subscriber does feel the need to complain about a service, he/she has access to a free, accessible and responsive regulator, who will pursue and fine merchants that have failed to provide a service that fulfils consumer protection standards detailed within the PSA Code and other relevant regulations.
iii. When a subscriber complains to the PSA, the average value of billing giving rise to a complaint is £32, sometimes aggregated over several months. The PSA is able to deal with the complaint and adjudicate on any appropriate remedy for the customer.
b) Protection through continuous service monitoring
i. Given that the consumer communications market is already highly regulated in the UK communications providers already have extensive compliance programmes in place to ensure the highest levels of consumer protection.
c) Protection via call barring
i. Added consumer protection is offered to fixed line customers through automatic barring of calls to PRS numbers services.
Question 5: Is the approach on cascading useful to intermediaries given the limits on the exemption and the potential need for authorisation or registration for other services provided? What types of business models would benefit?
19. The ability to cascade will be essential to the effective operation of the market for phone-paid value added services. While some intermediaries may obtain Authorisations, the market will work much more efficiently and effectively if intermediaries can also benefit from the digital exclusion. For example, it is not always practical to meet the ‘know your customer’ for low volume, low value transactions, particularly when the end user customer is using a prepaid account which is not verified (as many are not).
20. UKCTA’s understanding is that intermediaries will also be able to benefit from the exemption, provided that they can furnish an audit report confirming that payment transactions for goods and services covered by the exemption have been processed, and that no individual transaction has exceeded €50 and no one customer has exceeded €300 in any one month.
21. There are some further points of clarification that will be very helpful for providers and enforcing regulators:
a) First, the audit report for an intermediary should only cover payment transactions passing through that intermediary. Thus, if a customer of ECN provider A spends €200 with intermediary X and €200 with intermediary Y, both intermediaries should be able to submit a satisfactory audit report. The ECN provider A is the only entity that, in practice, can take responsibility for the customer’s total expenditure in the month. There are a number of practical reasons for this approach:
i. It is the primary responsibility of ECN A to monitor the expenditure of their customer.
ii. Intermediaries can only be expected to monitor control transactions passing through their own system.
iii. It will avoid the need for the auditors of the intermediaries having to make extensive enquiries with the auditors of the ECNs (a huge amount of paperwork and cost, if every intermediary has to make enquiries of every network).
iv. In the event of a breach by ECN A, the enforcing authority will have the conversation with ECN A and presumably will not be holding the respective intermediaries to account also (providing no breaches have occurred within an intermediary).
b) Secondly, it is important to clarify that expenditure allowance originating from accounts with multiple end users can be shared across the account. Thus, a corporate with 10 end users may have a cumulative monthly allowance of €3,000. This is the only practical way of addressing this point.
c) Thirdly, it also be very helpful to make it absolutely clear that intermediaries acquiring payment transactions that are subject to the exclusion are NOT acquiring payment transactions (i.e. are not acting as payment acquirers), as set out Part 1, 1(d) and thus do not have to seek authorisation by virtue of this activity.
22. UKCTA would be very happy to meet with Treasury to address any questions you might have in relation to this submission.
2 PSA – 2016 Annual Market Review, Page 8