Draft Interchange Fee (Amendment) (EU Exit) Regulations 2018

Jonathan Reynolds Excerpts

Tuesday 22nd January 2019 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

Good morning, Mr Hanson; it is a pleasure to see you in the Chair.

Once again, the Minister and I are here to discuss one of the many Treasury statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. As he well knows, on each such occasion my Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation that passes through Delegated Legislation Committees.

The last instrument that we debated before Christmas related to a sprawling piece of EU financial legislation known as the markets in financial instruments directive. Our repeated requests to debate the instrument on the Floor of the House for 90 minutes were denied, even though there was ample parliamentary time. Such decisions diminish the good will between the Government and the Opposition; given the simple fact that every scenario before us requires some degree of legislative co-operation between us, that is of concern.

The prospect of no deal looms large after the chaotic events of the past week and the Government’s refusal to rule it out, so we must recognise that on 29 March, instruments considered by Delegated Legislation Committees may well become what we rely on—especially given the very real risk that the Government are simply running down the clock. Such instruments could represent real and substantive changes to the statute book, so they need proper scrutiny and in-depth analysis.

As the Minister said, interchange fee regulations on credit and debit cards form an important part of consumer protection. I was therefore very concerned to read in paragraph 2.8 of the explanatory memorandum that

“cross border card payments between the UK and the EEA, where the acquirer or card issuer are based in different jurisdictions, would no longer be subject to the caps established under EU or UK law, and the card issuer could receive higher interchange fees. This means, for example, that if a consumer used a UK-issued card to make a purchase from an EEA-based merchant acquirer, then neither the UK IFR or the EU IFR would apply, because the UK would be a third country vis-à-vis the EU.”

Will the Minister confirm my understanding of that paragraph, which is that no provision has been made to prevent cardholders from having to pay higher interchange fees from acquirers if we crash out without a deal? That seems to carry a very high risk of consumer detriment, given the prevalence of using cards to buy goods from across the EEA. As we are all aware, it is not uncommon for large retailers that operate in the UK and across Europe to channel payments across locations in the EEA—that is certainly the case for many large online retailers. Will the Minister therefore state the Government’s intention for the transposition of payment services directive II, which contains vital provisions to prevent surcharging for card usage?

Secondly, the legislation notes that the technical standards for interchange fee regulations will be transferred to the Payment Systems Regulator in the UK, which published a consultation on the matter in December 2018. The PSR is still a relatively new regulator. Can the Minister explain how the PSR will be sufficiently resourced to cope with that new workload?

The interchange fee regulations have been a large and contentious issue at an EU level for a number of years. They have required extensive engagement with stakeholders and the triangulation of competing interests. It is therefore no small matter to move those functions over to the domestic regulator. I shall be grateful if the Minister provides further detail on those points.

--- Later in debate ---

[John Glen]

I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central, for their points. I will do my very best to respond to them all.

First, I will address the overall context of where we are. It would be wholly undesirable for us to have a no-deal outcome, but my job is to deliver 63 statutory instruments to ensure that we have a functioning regime in place. Never has so much effort gone in to achieving something that hopefully we will not need.

I acknowledge the rigour and seriousness with which the Opposition Front Benchers have taken to this task, and I take on the points that are repeated each time. All I can say is that I will seek to maintain good will by giving as full an explanation as possible. Where I can, I will follow up with letters if I do not know all the responses that are sought.

Now I will seek to address the points that have been made, in sequence. The hon. Member for Stalybridge and Hyde mentioned the issue that was raised in the Lords concerning, first of all, the scope of this measure and why we are taking action under this mechanism. This SI reduces the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, and it maintains caps on transactions that involve only UK entities. It is laid under the EU (Withdrawal) Act, which transfers directly applicable EU law to the UK statute book, and it gives the Government the power to amend legislation to fix any provisions. However, it does not allow us to innovate.

Baroness Bowles of Berkhamsted legitimately wanted us to move forward and insert a cap so that we would not be vulnerable in a third-country situation to whatever might come from the EEA, but that is not something that the Government are permitted to do under this legislation. So, the measure is limited just to making those fixes, to restrain the Government from that sort of proactive innovation.

Linked to the point about the payment services directive, I will say that all legislation that is ongoing through the EU will be subject to the in-flight files Bill, which is now going through the House of Lords and will come to the Commons, I believe in February. That will determine the mechanism by which we onshore files that are ongoing.

So, there is a deliberate restraint on innovation during this SI process, which therefore prompts questions. However, what we cannot do in this situation is to assert proactively what sort of third country we want to be to the EU, when the EU has not offered a reciprocal arrangement that would make sense.

[Jonathan Reynolds]

I understand very clearly what the Minister is saying. However, we have sold this process to the public and to our colleagues in the rest of Parliament as a process that continues the status quo. I understand that logically what the Minister is saying is absolutely right; effectively, he is saying that we cannot innovate to provide for the status quo. By transposing this measure, however, we are actually diminishing the position of British consumers, which is of concern.

[John Glen]

I fully recognise that that is a legitimate point to raise, but in addition to this process we have the in-flight files Bill, which determines how we would go about onshoring—or not—provisions of ongoing directives, and we are also working on financial services legislation for the 2019-20 session, which would seek to respond holistically to the challenges that would be presented in a no-deal scenario. We are not passively waiting to be vulnerable, but this is the first stage of a process that we would have to undertake. It would be complex and time-consuming, and there would be a lot of work to be done, but that is where we are.

With respect to the challenge posed by the hon. Member for Glasgow Central about no deal, I really do not want to see a no-deal. There are a lot of observations that a managed no-deal would be okay, but what is not clear to me is how one determines that degree of management. It seems to me to be quite a random set of actions and the consumer detriment in the short term would be considerable.

I have covered the point about why I am using secondary legislation rather than primary legislation, and the constraints under which I have to act. I was asked about the capacity and expertise of the payment systems regulator to deal with these new responsibilities. The payments systems regulator was set up four years ago. It has issued public statements on the actions that it is taking. In the Treasury, we are confident that it will be making adequate preparations and effectively allocating resources ahead of March 2019. It has responsibility for monitoring and enforcing compliance with the new interchange fee regulation and for some regulation of the UK payments systems. We remain confident in its ability to continue to discharge its responsibilities.

The hon. Member for Glasgow Central raised the issue of the de minimis impact assessment. It has been prepared in line with the better regulation guidance, and we consider that the net impact on businesses would be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the payments systems regulator, and that is where that cost comes from. Firms will benefit from the reduction in uncertainty under a no-deal scenario, and without this instrument legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.

The hon. Lady made a number of points related to the Bird & Bird legal paper. I have not seen that. To be fair, I would prefer to reflect on that fully and write to her in detail, so I can address some of the concerns raised around different drafting elements of it. She asked whether the SI capped debit card fees. We are maintaining a domestic cap for debit and credit card transactions. Those are referred to in amendments made to articles 3 and 4 by regulations 6(1) and 7(1). However, their derivation applies only to debit card transactions in the existing law.

I was asked about the broader question of monitoring the interchange fee in future, as a third country in a no-deal situation. Clearly, the Government keep all policy under review, but we would need to look proactively as soon as possible at what would be the appropriate arrangement to come to. As has been made clear in the discussion this morning, if we were a third country the 0.2% and 0.3% cap would not automatically be applied, and that would have serious implications.

[Jonathan Reynolds]

I understand what the Minister is saying about the unworkability of the legislation if this does not go through, but from what he is saying it seems that if this SI were not passed, the British consumer would be in a stronger position than if it were passed. When we think about the circumstances of no deal—immediate tariffs, almost certainly some further depreciation of sterling, higher inflationary pressures—I am not sure that we are in a position to say that passing this legislation is in the best interests of the British consumer.

[John Glen]

We have to remember that this is in a no-deal situation; we would be outside and without the scope of the EU regulations of which we are currently a part. We would have no regulations for maintaining the caps within the UK. All we are doing is domesticising that existing provision as far as we can, within a UK environment. In our engagement with industry and with the PSR, it has been recognised that this is necessary but it is not the final solution. That is why there would need to be further innovation and policy work subsequently, as I have set out.

In conclusion, the SI is needed to ensure that the UK continues to have a functioning legislative and regulatory regime for payment card interchange fees in the event of a no-deal scenario. I have reiterated my belief that that should not be the outcome we secure in the end, but I hope I have dealt with the points raised. I will return to the hon. Member for Glasgow Central on her specific concern about the Bird & Bird note, and I shall make that available to the Committee.