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Wednesday, 24 November 2010

Call for Self-regulation of Limited Network Payment Schemes

The UK Treasury is calling for self-regulation to ring-fence funds relating to stored value in “limited network” programmes, citing examples such as store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems. The call is part of the Treasury’s consultation on the second E-money Directive which imposes similar obligations on the operators of 'general purpose' stored value programmes. While limited networks will remain exempt from E-money and payment services regulation, the Treasury will consider “whether further [regulatory] action is warranted” if what it sees as adequate self-regulation does not emerge. Consultation ends on 30 November.

Potential reasons cited by the Treasury for segregating limited network funds from operators' own corporate funds include:
  • Apparent uncertainty as to the scope of the limited network exemption;
  • A large number of consumers/businesses rely on limited network programmes and may suffer if programmes fail;
  • A limited network failure may harm the reputation of other limited network programmes as well as regulated e-money providers; and
  • Limited networks enjoy a cost advantage over regulated general purpose stored value programmes, partly through not needing to ring-fence funds equivalent to the outstanding stored value.
Whether each of these is really a problem is very much debatable. Guidance can clarify what is considered in or out of the regulatory scope, and the existence of 'grey areas' at the perimeter is no argument for definitively expanding the scope by requiring self-regulation. Of course, not all customers or businesses rely on all limited network programmes, or even the programmes of the same type. Similarly, the failure of one programme does not necessarily reflect on them all. That's clear from the collapse of retailers that entirely rely on pre-payment Farepak (Christmas hampers) and WrapIt (wedding gifts) which have provided the genesis for concern in this area generally, though neither was a stored value programme. Finally, why shouldn't there be cost advantages to running a programme whereby value can only be spent within a limited network, rather than one where stored value can be spent anywhere? The latter is always going to be much larger in scale and purpose, and entail far more operational risk.

While the evidence of detriment is less than clear, positive reasons not to introduce requirements to safeguard customer funds in limited network schemes include:
  • The potential for additional requirements to be imposed in the course of the proposed self-regulatory exercise that needlessly increase the cost of operating the network;
  • No one operating a dodgy scheme would sign-up for stringent self-regulation;
  • It may be far more costly and onerous to ring-fence funds in certain types of limited network programmes than others, so some operators may be unfairly discriminated against by not signing-up on legitimate economic grounds; and
  • Increased costs associated with self-regulation may result in fewer limited network payment programmes for customers to choose from and higher retail prices for customers overall.
A proportionate alternative might be to focus on improving the management of operational risk in businesses that rely entirely on pre-payment for specific items, as Farepak and Wrapit did. A nice, long chat with their auditors might also be in order...

Image from Newbusiness.co.uk
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