The Operation of the Interchange Standards: Conclusions Paper 9. Transition Arrangements

9.1 Issues for consultation and proposed options

The Consultation Paper identified that if the Board were to determine variations to the Standards, they would be implemented before the end of the 2018/19 financial year, and the varied Standards would commence from 1 July 2019. The paper noted that as a result, some period of transition from the previous regime to the new arrangements would be needed.

The Consultation Paper set out two possible approaches to transition.

Flexible transition

This approach provides issuers with flexibility in terms of their compliance basis and certification for the financial year 2018/19,^[33] and was the Bank's proposed approach to transition. Under this approach an issuer may elect to comply for 2018/19 based on the revised Standard(s) (which stakeholder feedback has indicated is more in line with how financial accounts are prepared), or it may comply for 2018/19 with the current Standard(s) and make the transition to the new regime for the 2019/20 financial year.

More specifically, the Bank proposes that the varied Standards would be effective from 1 July 2019. Issuers would, by that date, make an election as to whether their compliance for 2018/19 would be based on the previous or the revised Standard(s), and would notify relevant schemes of this election so that scheme reporting of compliance is provided on the same basis. While this means that schemes will potentially need to prepare certifications relating to different issuers on different bases, it ensures that the certifications that schemes and issuers provide are done consistently. This approach reflects the fact that the substantive obligation – not to receive net compensation – is placed upon issuers.

Fixed transition

The alternate approach was to retain the obligation to report under the old Standard(s) for 2018/19, and for all participants to move to the new arrangements for 2019/20.

9.2 Stakeholder views

Issuers were generally supportive of the proposed flexible transitional arrangements (versus the alternative); a majority indicated that they were likely to elect to move to adopt the varied Standard for the 2018/19 reporting period, on the basis that the move to accruals would reduce their compliance burden. Conversely, most schemes objected to the flexible transition proposal as it gives rise to the potential for schemes to have to report in respect to both the current and varied Standards for the 2018/19 reporting period, as some of a scheme's issuers may choose to transition later than others.

Some stakeholders noted that it would take time and resources to identify which of their services are core, and hence determine their Issuer Payments under the varied Standards. In these cases, respondents generally expected their time and resource costs to be material in the year they transitioned to the varied Standard and then relatively small thereafter. One scheme provided a preliminary estimate that it would take a few months to identify the Core Services it provides to its issuers and the fees associated with them. However, this estimate was based on the Core Services definition that included the ‘provided globally’ test, which would have required the scheme to look across all services it provides to issuers globally. This element of the definition has been removed. Another scheme estimated that it would take it around half a month to identify Core Services and the fees attributable to them, make Fair Value assessments (where necessary to determine Issuer Receipts) and apportion benefits that relate to more than one reporting period. This estimate was based on a definition of Core Service that included an element requiring schemes and issuers to consider whether some services could have only been provided by the scheme for technical or operation reasons. This element of the definition has also been removed, making the definition less complex and easier to implement. A small number of entities suggested that it was possible that some schemes and/or issuers may need to re-negotiate contracts to ensure they comply with the varied Standard.

Some stakeholders indicated that they would prefer an early fixed transition (that is, for the Bank to require all schemes and issuers to comply with the varied Standards this reporting period), rather than having flexible arrangements. However, others reiterated their concerns about the time and resources required to transition to a varied Standard.

9.3 Assessment and Conclusion

The Bank has decided to adopt the flexible transition approach it proposed in the Consultation Paper. The Bank carefully considered the views of stakeholders, and determined that (compared with the fixed transition alternative) the flexibility benefits this approach affords issuers outweighs the potentially larger (though temporary) cost to schemes. In making this decision, the Bank noted that the substantive obligation – not to receive net compensation – is placed upon issuers, and that many issuers wanted to comply with the varied Standard in 2018/19.

The Bank decided not to adopt an early fixed transition approach (that is, requiring compliance with the varied Standards in the 2018/19 reporting period), despite it receiving some support from some stakeholders. The proposed commencement date for the variations to the Standards is 1 July 2019. While the Bank expects to make and publish the instrument of variation around the beginning of June, ahead of that commencement date, adopting an early fixed transition approach would have involved retrospectively imposing the changes and the Bank does not believe that it is appropriate to do so. While schemes and issuers would have the final version of the variations a month before the end of the 2018/19 reporting period, the Bank was not satisfied that it would be fair and reasonable to require compliance with the varied Standard in 2018/19.

The Bank expects that the time and resources required to transition to the varied Standards will be lower than stakeholders initially estimated, as revisions the definition of Core Service will make identification of these services easier (relative to the versions of the definition proposed in the Consultation Paper and in April). The Bank also notes that if a scheme-issuer arrangement is such that re-negotiation may be required to ensure compliance with the varied Standards, then the issuer can elect to transition in the 2019/20 reporting period to allow itself more time to make the necessary changes.

Endnote

That is, for the reporting period ending 30 June 2019. [33]