UK Prepaid Card Cartel Fined £33m, But Is It The End Of The Story?

January 19, 2022
The UK Payment Systems Regulator has imposed a £33m fine on five companies, including Mastercard, for operating a market-sharing cartel for prepaid cards. However, the regulator’s decision may just be the starting point of potential penalties faced by these companies for their wrongdoing.

The UK Payment Systems Regulator (PSR) has imposed a £33m fine on five companies, including Mastercard, for operating a market-sharing cartel for prepaid cards. However, the regulator’s decision may just be the starting point of potential penalties faced by these companies for their wrongdoing.

In its first-ever antitrust infringement decision, the PSR found that Mastercard, allpay, Advanced Payment Solutions (APS), Prepaid Financial Services (PFS) and Sulion agreed not to compete or poach each other’s customers in the UK prepaid cards market.

The prepaid cards were used by local authorities to distribute welfare payments to vulnerable members of society, such as the homeless, victims of domestic violence and asylum seekers.

The regulator imposed a £33m total fine on the five companies, with the vast majority (more than £31.5m) imposed on Mastercard alone.

“This investigation and the significant fines we have imposed send a clear message that the PSR has zero tolerance for cartel behaviour. We will intervene and enforce the law strictly to ensure there is effective competition in payments markets,” said PSR managing director Chris Hemsley.

In its infringement decision, the PSR found that the companies operated two market-sharing cartels.

As part of the first cartel, the companies agreed not to target or poach each other’s public sector customers that were either already in contract or were being provided services through a pilot programme. At the beginning of the cartel, they also colluded to exclusively allocate potential new public sector customer contacts obtained from the network’s promotional events.

This cartel, which lasted from 2012 to 2018, involved all investigated companies: Mastercard, issuers allpay, APS and PFS, and Sulion, whose mandate was to promote the use of prepaid cards in the public sector.

In the second cartel, lasting between 2014 and 2016, APS and PFS made a separate agreement not to target each other’s public sector customers when a contract was up for renewal, including through a public tender.

All parties admitted to breaking the law and settled the case with the PSR.

Class action on the horizon for Mastercard?

The case arguably involves some significant financial penalties and reputational damages, but the consequences of the cartel behaviour may not stop there.

The UK has introduced the possibility to initiate opt-out class actions for breaches of competition law by the Consumer Rights Act 2015. Under the opt-out mechanism, consumers are automatically eligible for compensation should the class action succeed unless they choose otherwise.

Although the practice is relatively new in the UK, it is gaining traction.

The first such case of its kind already involves Mastercard. This class-action lawsuit relies on a European Commission decision finding that the card giant’s interchange fees were set unlawfully high.

That case is moving ahead at the Competition Appeal Tribunal (CAT), following, in August 2021, the court ruling former Ombudsman Walter Merricks CBE can represent the class of 46m claimants. Merricks is seeking £14bn in damages from Mastercard.

After the publication of the PSR’s provisional findings against the prepaid card cartelists in April, UK law firm Freeths said “local authorities should consider the extent to which they may have suffered financial loss as a consequence of this alleged anti-competitive conduct”.

“Freeths are reviewing with local authorities the potential for follow-on damages claims to recover losses,” it added.

Should the law firm decide to pursue a class action following on the PSR findings, the case may carry on for years, not only damaging the companies' reputations but also involving further expenses.

Other potential consequences

Hemsley noted that this case is “particularly serious” because the illegal cartel behaviour affected “some of the most vulnerable in society”.

He also stressed that the regulator has “zero tolerance for cartel behaviour” and that “collusion in payments is absolutely unacceptable”.

While the PSR was using its power to crack down on the companies, there are further legal tools that allow UK authorities to hold individuals actively involved in a cartel accountable.

To begin with, the UK’s main antitrust watchdog, the Competition and Markets Authority (CMA), has been particularly active in pursuing directors for disqualification orders where they are overseeing misconduct, Jonathan Ford, counsel at Linklaters, told VIXIO.

The CMA and the PSR have the power to disqualify directors for up to 15 years, either by the director accepting a legally binding commitment or by a court order. Throughout this period, disqualified directors cannot serve as a director of any company registered in the UK or an overseas company that has connections with the UK, nor can they be involved in forming, marketing or running a company.

“This is potentially an area to watch if there were directors with oversight of the relevant activities,” Ford said.

In addition to the director disqualification process, the Financial Conduct Authority (FCA) has the power to investigate certain regulated companies under the Senior Managers and Certification Regime (SM&CR).

However, in the present case, “there isn’t really an avenue for the regulators (FCA or PSR) to take enforcement action against individuals”, Simon Treacy, senior associate at Linklaters, told VIXIO.

The members of the cartel are different types of institutions but none of them are subject to the current SM&CR, he explained.

“This will change in the future but for now, in relation to this cartel, the PSR is restricted to taking regulatory enforcement action against the institutions rather than individuals working for those institutions,” Treacy added.

The SM&CR was originally applicable to banks, building societies, credit unions and certain investment firms. Although the FCA extended the regime to apply to “solo-regulated” firms from December 2019, payment and e-money firms still stay outside its scope.

In July 2021, HM Treasury set out plans to impose SM&CR on payment system operators, and the FCA also stated it “sees value” in further extending the SM&CR to payment and e-money firms.

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