Demos warns new financial regulator over ‘expensive and risky’ red tape

The setting up of a Government-backed financial regulator could lead to ‘potentially expensive and risky’ red tape according to a stark warning from a financial think tank report.

Next April will see a new regulator being introduced to oversee the UK payments system, which is responsible for every card purchase, payment or bank transaction. Last year the system processed approximately 7 billion transactions, worth over £75 trillion.

The Treasury has tasked the regulator with promoting greater competition in the retail banking sector, as well as ensuring that payment systems operate in the interests of its users.

However, a report published today by Demos Finance, the financial research unit at the think tank Demos, warns against ‘putting the cart before the horse’ and embarking on a raft of costly regulations that currently lack any evidence they will succeed.

The report argues that reform of the payment system shouldn’t be seen as a proxy for dealing with broader competition issues in the UK banking sector – noting that previous reforms such as the implementation of 7-day switching had little impact on the number of customers changing their current account.

It urges the Government to seek greater evidence of the precise barriers to competition in banking, as well what is currently preventing new entrants into the market, such as challenger banks, from being able to access the system.

The report also recommends:

– Examining other innovating uses for the payment infrastructure – for example, transmitting additional data such as tax information – to improve government efficiency and reduce the burden on employers

– The government, as the biggest user of the payment system, should offer a clearer view of their future plans to ensure the infrastructure is best prepared to handle potential changes, such as Universal Credit

– Investigating how payment infrastructures could speed up the roll-out of ‘basic bank accounts’ to improve financial inclusion among Britain’s 2 million unbanked

Duncan O’Leary, Research Director of Demos, said:

“The banking system needs more competition but the debate now needs to turn to ‘how’ rather than ‘whether’.

The regulator needs to build an evidence base to show whether proposed changes to the payments system would make the difference.

“Many people used to blame low levels of competition in banking on difficulties in switching. Since then, seven-day switching has been introduced – and yet the number of people who change their accounts remains pretty minimal.

“Without a thorough investigation into the role payments actually play in bank competition, we risk putting the cart before the horse.”

David Yates, Chief Executive Officer from VocaLink said:

“Payment systems touch every one of us in our daily lives, and we welcome the introduction of the new payments regulator to foster greater innovation and competition in the market.

This report is a valuable contribution to understanding how payments work.  It addresses the key issues with clarity and presents concrete proposals for change.  We wholeheartedly support the report’s plea for evidence-based decision making and we believe that this research is an important step in that direction.”



Figures on the total amount processed by the payment system cited by the Financial Conduct Authority:

The report, Payment Power, is published by Demos on 13 June 2014.

This research was supported by VocaLink.