Implementation of PSD II
Credit unions provide vital support to some of the most excluded and hard to reach consumers. Successive governments have supported credit unions to perform this role. It is critical to achieving success in this that credit unions enjoy proportionate regulatory treatment. In delivering this credit unions have been provided with exemptions from various EU directives in order to allow domestic UK authorities to establish a bespoke regulatory framework appropriate to the risks that credit unions present. Such exemptions currently apply, either partially or wholly, in respect of the following directives:
- Capital Requirements Directive IV and Capital Requirements Regulation
- Consumer Credit Directive
- Mortgage Credit Directive
- Payment Accounts Directive
- Payment Services Directive
Credit unions’ core service offering is to provide savings and lending facilities for their members at affordable rates and in a safe and regulated way. However, credit unions also provide a range of other services which includes payments services.
The provision of payment services by credit unions tends to be on the basis of what the Payments Systems Regulator labels non-agency indirect access. This essentially involves credit unions providing certain third party payments via a corporate bank account supported by the credit union’s own internal accounting software in order to distribute and reconcile payments.
However, there is also a growing band of credit unions which are engaged in the provision of more sophisticated payments provision through full agency indirect access to payments channelled through third party bank sponsors. This is most obviously typified by those credit unions which are participating in the Credit Union Expansion Project. At the moment 2 – but following ongoing implementation and adoption by credit unions, ultimately 35 or more – participate as full agency payments providers offering a range of modern payments in much the same way as mainstream payments providers.
A third group of credit unions offer payment services in the form of prepaid debit card services powered by third party processors and sponsor banks. There are a diverse range of products offered in this group.
For all three of these groups we are strongly of the view that the exemption from PSD should be extended to PSD II. Where credit unions are providing non-agency indirect payment services, they generally do so for the very excluded and hard to reach. To impose upon these credit unions the full rigour of PSD II would be to necessitate a whole systems infrastructure upgrade and, in all likelihood, the seeking of full agency access to payment schemes which many credit unions would be unable or unwilling to do. This would therefore likely result in credit unions discontinuing these services which would thereby exacerbate exclusion for vulnerable consumers.
In order to emphasise the likely costs that full agency access would require, the Credit Union Expansion Project has sought to procure industry-strength banking software and agency access through one of the big four highstreet banks for around 35 credit unions. The Department for
Work & Pensions has invested £38 million in this development. Aside from this, credit unions participating will pay an ongoing per member, per month cost as well as per transaction costs. This is without taking account of the internal costs incurred in terms of staff training, reorganisations and systems and processing review which is difficult to quantify. Without the Government investment in this project, it is highly unlikely that this kind of development would have taken place with the level of participation it has had – a smaller group of larger credit unions could perhaps fund this kind of development but on a much more limited scale.
A very rough estimate of the costs of imposing this on the sector, therefore, would be in the order of several million pounds per credit union. More likely, however, would of course be the withdrawal of credit unions from providing these services at all and the much-more difficult to quanify cost of greater exclusion for society.
We also believe that the case for requiring this is weakened further by the fact that for those credit unions providing payments services indirectly as a full agency, participation in schemes and the regulatory obligations of sponsors results in a de facto compliance requirement with the full gamut of their sponsor as sponsors are held to account for all payments routed through their systems.
We therefore strongly support the proposal to exempt credit unions from the PSD II requirements which we believe is a proportionate and balanced approach to the needs of the sector and strikes an appropriate balance to allow flexibility for credit unions to opt in to payments regulation or not depending upon their aspirations and business models.
We would be delighted to provide any further information should you require it.
The full PDF can be downloaded on the right hand side of the page.