Regulation of the retail payments system: Proposed policy approvals
The Ministry of Business, Innovation and Employment (MBIE) has published details of additional policy proposals for the regulation of the retail payments system.
A link to the cabinet paper is available online.
This follows the Minister of Commerce and Consumer Affairs, Hon Dr David Clark’s, announcement in May to introduce a Retail Payments Systems Bill (the Bill) with the aim of reducing merchant service fees.
Who needs to read it? Why?
This is relevant to all parties involved in the retail payments system including banks, merchants, non-bank merchant acquirers and card schemes.
What does it cover?
Merchant service fees are fees paid by merchants to their acquirer (usually their bank) when their customers make credit or debit card payments.
The cabinet paper notes “New Zealand merchants continue to pay more than their Australian counterparts for accepting credit cards and online debit cards”, partly due to the lack of efficient competition in aspects of the retail payments system.
The overall objective of the proposed new regime is to ensure the retail payments system delivers long-term benefits to merchants and consumers through efficient retail payment networks and competition in the supply of retail payment services.
The Commerce Commission will be the regulator of the regime.
At this stage, some of the key features of the proposed regime are summarised as follows:
The regime will operate under a designation model
- The new regime will capture “designated” retail payment networks (RPNs). The aim is to allow the regime to distinguish between certain subsets of the retail payments system by identifying different retail payment networks. The designation will capture all participants operating in a RPN, which, in the course of business, enables the transfer of funds within the RPN. All payment instruments within each RPN will also be captured. For example, the Mastercard/Visa credit RPNs will include not just physical cards but also any payment instrument including tokenised credentials such as virtual cards, including methods like Apple Pay and Google Pay. “Participants” in an RPN will be defined to include payment service providers, infrastructure providers and network operators which are integral to the operation of the RPN.
- The Minister of Commerce and Consumer Affairs can recommend designation of a RPN to the Governor General, on recommendation from the Commerce Commission. However, the criteria for making a designation is proposed to be a “high threshold”. When making a recommendation, the Commerce Commission must consider specified matters (including whether any other regulatory requirements apply). It must also consult affected parties and publish its rationale for designation.
Mastercard and Visa will be initially designated as retail payment networks
- The Bill will include an initial designation of the Mastercard and Visa debit and credit RPNs, and set out initial pricing standards for those RPNs.
- The initial pricing standards include interchange fee caps (cap per transaction) – with the cap for contactless debit cards proposed to be 5 cents per transaction. Card issuers (e.g. banks) would also be prohibited from receiving net compensation from the Visa/Mastercard schemes.
- The initial pricing standards will not apply to cards that are internationally issued, for commercial use, or prepaid.
The Commerce Commission will have broad powers to regulate the regime, which include the ability to:
- impose requirements regarding pricing limits and principles,
- issue standards which impose requirements on participants in designated RPNs. These include requirements for information disclosure, pricing methodology, and access (to parts of the RPN for new entrants);
- in respect of a designated RPN, direct network operators to set/implement/amend network rules and direct participants to comply with network rules; and
- issue standards which will apply to merchants detailing what payment surcharging is prohibited for the purposes of the Fair Trading Act 1986 (which may differ depending on the retail payment network and the type of merchant).
There will also be a range of powers for the monitoring and enforcement of the regime
- The Commerce Commission can monitor and publish reports on the retail payments system. To support this, it can require participants to produce information. It will also be able to enter into enforceable undertakings with participants of the retail payments system.
- In performing its functions, it will also be able to draw on its powers under the Commerce Act 1986 (including the making of determinations, demanding information, and the offence for obstruction).
- There will be pecuniary penalties for a contravention of requirements. The maximum penalties vary depending on the types of offences. E.g. maximum penalty for a breach of a pricing standard is NZD500,000 for an individual and NZD5 million for a body corporate.
- Courts may make orders e.g. to grant injunctions, require compliance, compensation and damages.
The payments industry is dynamic and fast evolving, with a range of new products and services being developed. While much of the detail of the regime remains to be developed, it will be important that the new regulatory requirements do not inhibit innovation. The designation model may, however, be of assistance in allowing the Commerce Commission to respond appropriately to market changes over time.
Because the regime is designed to capture all “participants” in an RPN, payment service providers and other payments participants should continue to monitor closely developments in this area. While the initial impetus for reform in this area was the level of merchant service fees, the potential impacts are wider.
It is also worth noting that the Retail Payments System will not introduce a single, unified regime for regulation of payments services and providers. The Anti-Money Laundering and Countering the Financing of Terrorism Act 2009 will continue to be relevant, as will aspects of the Financial Markets Conduct Act 2013 (FMCA).
For banks, the introduction of the Conduct of Financial Institutions provisions to the FMCA will add an additional layer of regulation, with consumer and small business payments products and services likely to be within scope of that new regime.
The Government will also be establishing a framework for consumer data rights which may catalyse further innovation and change in the payments sector. Banks (and other data holders) will also be required to give certain data they hold about consumers to trusted third parties, and carry out actions on behalf of the consumer – with the consumer’s consent. A Bill implementing the consumer data right will be introduced to Parliament in 2022.
Finally, the Financial Markets Infrastructure Act was enacted in May this year and will be implemented over an 18 month timeframe. The Reserve Bank of New Zealand and the Financial Markets Authority (FMA) will shortly close consultation on two papers covering:
- the framework for identifying which financial markets infrastructures (including payments systems) are ‘systemically important’; and
- the design of standards under the new regime for designated financial markets infrastructures.
The draft Retail Payments System Bill is yet to be introduced. Timing of this has not been published, although the announcement of 12 May 2021 indicated “a view to the full regulatory regime coming into effect next year.”
If you have any questions in relation to retail payments systems or payments regulation more broadly, or are considering how these changes affect your business, please contact one of our experts.
Co-authored by Lana Ou, a Solicitor in our Financial Services team.