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The UK’s Payment Systems Regulator (PSR) has opened a new consultation on proposed changes to the way that penalties for payment firms are calculated, in an effort to make the process fairer, clearer and more transparent.
In a message to regulated firms, the PSR has asked for consultation feedback to be submitted by April 27, ahead of a final decision on new penalties rules in Q3 later this year.
Following two roundtable discussions with stakeholders in November, the PSR said it has identified five key areas where it is seeking to improve the way it handles penalties for non-compliance.
These include consolidating its three existing penalty statements into one, reconsidering duration in penalties, clarifying the definition of “senior management”, and clarifying the definitions of “reckless” and “deliberate”.
In proposing an amended penalty statement, the PSR said it aims to reinforce the principle that penalties should “disincentivise” compliance failures.
Three statements become one
At present, when adjudicating penalties for non-compliance, the PSR refers to three statements that outline the legal basis for this type of enforcement action.
The three statements are: the Financial Services Banking Reform Act (FSBRA) Penalties Guidance; the PSR’s 2021 Interchange Fee Regulation (IFR) Guidance; and the PSR’s 2017 Guidance on PSD2.
Put simply, each of these statements contains information about laws and regulations that empower the PSR to issue penalties to regulated entities for non-compliance.
In its two roundtables last year, stakeholders told the PSR that having this information spread across three separate statements is inconvenient for compliance personnel — a view shared by the PSR.
“Having considered this feedback, we agree that a single document — one that sets out all the principles we will apply when determining penalties in any context — would be an improvement on the current three.
The PSR’s three current penalty statements cover a combined 160 pages, whereas its proposed consolidated statement is just 20 pages long.
Rethinking duration in cases of non-compliance
Beyond the consolidation of the three penalty statements, the PSR’s other proposed changes relate to how it determines the seriousness of compliance failures and their level of financial penalty.
One significant change is the PSR’s proposed overhaul of duration when calculating penalties.
At present, penalties are calculated based on how much revenue a firm generates from a non-compliant activity during the most recent 12-month period.
This 12-month period ends either on the date of the PSR’s decision notice, or on the cessation of the non-compliant activity, whichever is the earliest.
For example, in December last year, when Barclays was fined for non-compliance with interchange fee rules, the period of non-compliance lasted from December 2015 to December 2018.
However, only the revenue raised between December 2017 and December 2018 (£1.13bn) was taken into account to calculate the penalty.
As noted by the PSR, this incentivises firms to drag out their non-compliant activity, knowing that only the revenue from the final 12 months of the offence will be factored into the penalty.
Similarly, the 12-month rule incentivises firms to not cooperate with the PSR during an active investigation, while at the same time working to reduce the amount of revenue it generates from the non-compliant activity.
Going forward, the PSR has proposed that the full duration of the non-compliant activity be considered when calculating penalties.
“Our new proposed policy will ensure that a firm’s incentive is always to address any compliance failures and cooperate towards resolving cases quickly,” said the PSR.
How much, who and other relevant factors
Alongside changes to duration, the PSR has also proposed changes to how it factors revenue into its penalty calculations.
At present, the PSR’s current penalty statements do not use a percentage scale to indicate the seriousness of an offence or how much revenue a firm should be penalised for it.
In the case against Barclays mentioned above, however, and in a similar interchange fee case against NatWest last year, the PSR used a percentage scale, and stakeholders have since indicated that this approach should be used going forward.
Under the PSR’s proposed model of taking into account all revenue from the non-compliant period, the range of revenue to be deducted would be 0-20 percent, with three bands of seriousness within it: 0-6 percent; 7-13 percent; and 14-20 percent.
The PSR said that stakeholders have welcomed the greater clarity offered by the percentage scale approach.
In the PSR’s current penalty statements, a relevant factor in determining the seriousness of a compliance failure is the extent to which senior management was aware of the non-compliant activity.
However, the PSR admits that the current statements do not define the term “senior management”, and no guidance has been issued to clarify this.
During the PSR’s roundtables last year, stakeholders again indicated “broad support” for making this designation clearer.
In response, the PSR has proposed that in its new penalty statement, a list of “non-exhaustive factors” that may indicate that a person holds a senior management position be included.
These factors would include whether the individual was tasked with making decisions, or part of a group responsible, that impact on the firm’s ability to comply with the relevant obligation.
Alternatively, whether they ought to have been tasked with decision-making responsibilities related to the obligation, either alone or as part of a group.
Finally, under the PSR’s current penalty statements, whether a compliance failure was “deliberate” or “reckless” is a relevant factor in determining the appropriate financial penalty.
However, the PSR said its current penalty statements do not define the terms “deliberate” and “reckless” or distinguish between the two.
In its new penalty statement, the PSR has proposed that another list of non-exhaustive factors be added to give greater clarity to the terms.
For example, the PSR will emphasise the importance of what a firm ought to have known in relation to a compliance obligation, to prevent the use of “wilful ignorance” as a ground for defence.
The PSR has also proposed removing the phrase “extent to which” a compliance failure was reckless or deliberate, and replacing it with a more objective, binary standard.
“We think a compliance failure either is or is not reckless and the current wording obfuscates more than it illuminates,” said the PSR.
