The PSR's consultation on expanding VRPs
Background
The PSR is proposing to extend the scope of VRPs to additional low-risk use cases, as initially committed to in the JROC's roadmap for the next phase of UK open banking published in April 2023. VRPs allow customers to securely link authorised payment providers to their bank accounts through open banking so that they can enable the initiation of recurring payments on the basis of an initial explicit customer consent.
The Competition and Markets Authority (CMA) mandated the CMA9 (ie the nine largest banks and building societies in Great Britain and Northern Ireland based on the volume of personal and business current accounts) to implement VRPs for same-person accounts (sweeping VRP) in July 2021. This followed the Open Banking Implementation Entity's recommendation to mandate VRPs as the mechanism for implementing sweeping under item A10 of the revised roadmap (May 2020) for the Retail Banking Market Investigation Order 2017 remedies. The current proposal seeks to expand VRPs to payments between accounts with different names (non-sweeping VRP).
Potential use cases for Phase 1
The initial phase, termed 'Phase 1,' is informed by the February 2023 Strategic Working Group report and the VRP Working Group blueprint (see further 'The VRP Working Group's blueprint' below).
The proposal suggests enabling VRPs for payments to regulated financial services, regulated utilities, and local and central government, which are considered low-risk use cases.
Regarding the functional requirements for expanding VRPs, the consultation proposes that existing functional capabilities that support sweeping transfers over the Faster Payments System (FPS) can support the initial rollout of VRPs in relation to the three identified use cases. However, the Working Group identified several enhancements to existing capabilities that would be required to support the three initial use cases, as well as other enhancements that would be important in future to further use cases.
On consumer protection and disputes, the consultation proposes that while functional requirements can support consumer protection, a clear dispute mechanism is needed.
In its response to the VRPs blueprint, the JROC recommended the establishment of a Functional Implementation Group (led by Pay.UK and Open Banking Limited (OBL)) and a Dispute Resolution Implementation Group (led by Pay.UK) to work on the above two elements.
Multilateral agreement, commercial model and pricing principles proposals
For Phase 1, the PSR outlines the need for a multilateral agreement (MLA) binding account servicing payment service providers (ASPSPs) and payment initiation service providers (PISPs) and specifying required functionality, pricing arrangements, dispute resolution, and liability arrangements.
On the Phase 1 commercial model, the PSR proposes leveraging regulatory powers to set parameters for a central price for VRPs based on a cost recovery model that enables sending firms to cover relevant incremental costs. The PSR has identified three potential cost centres for the Phase 1 use cases: account providers’ own costs, Pay.UK/FPS costs and OBL costs. It doesn’t expect to see very significant own account provider costs. For Pay.UK/FPS, there would be an incremental increase in costs so the proposal is to remove the FPS charges for ASPSPs, and then set to zero the charge that those ASPSPs can charge PISPs. However, for higher risk and more complex use cases, the PSR accepts that a different pricing approach may be needed. There are several questions around the proposed commercial model in the consultation. As was made clear at a PSR webinar on the consultation on 15 January 2024, the PSR is particularly keen to hear from stakeholders on these questions.
The pricing principles for commercial frameworks for premium APIs (referred to above) were published in a joint PSR/FCA (JROC) paper in June 2023. The PSR is now also looking for further views on these principles.
Participation in Phase 1
The proposal suggests mandating the participation of the CMA9 in the MLA because the PSR thinks there needs to be a sufficiently large number of customers to support Phase 1, and incentives are needed to scale VRPs.
Again, the PSR is seeking views on this approach - including in relation to any unintended consequences.
The VRP Working Group's blueprint
Included in the JROC's April 2023 recommendations for the next phase of open banking in the UK was a recommendation to “draft a delivery plan and framework to enable a phased roll out of non-sweeping VRP”. To assist in creating this, the JROC established the industry-led VRP Working Group in June 2023. For more on the establishment of the Working Group, take a look at this Engage article: 'UK Open Banking: JROC sets out next steps to take recommendations forward'.
The Working Group has now produced a blueprint which summarises the issues identified, and suggests measures to tackle them, both in the short term (that is, prior to the VRP pilot, which will see the cVRP launched in a phased way, confined to certain types of businesses initially – see above 'Potential use cases for Phase 1') and over the longer term, to enable the scalability of VRP. The Working Group encountered a range of views on how to bring cVRPs to market on a commercial basis and provides an overview of these. The Working Group recommends payments to regulated utilities, regulated financial services and central and local government as the first step in creating wider uses for VRP and open banking payments.
While only just having been made publicly available, the blueprint had been provided to the JROC in October 2023, and the JROC has provided a response which "largely" endorses the blueprint. The PSR's consultation paper, discussed above, will play a major role in launching the first phase of rolling out non-sweeping VRPs by Q3 2024. Additionally, the JROC recommends the establishment of two implementation groups to address specific elements of the Phase 1 rollout (see further 'Potential use cases for Phase 1, above):
- A Functional Implementation Group: co-chaired by OBL and Pay.UK, to deliver recommended changes to functional capabilities; and
- A Dispute Resolution Implementation Group: chaired by Pay.UK, to develop and implement a dispute resolution mechanism.
JROC's update on the next phase of open banking in the UK
On 19 December 2023, the JROC released an update outlining the progress that has been made since April 2023, when the JROC first released their recommendations for the next phase of open banking in the UK (see our Engage article on the recommendations: 'Open Banking: JROC recommendations on next phase aim to keep UK ahead of the pack').
The update highlights the key next steps in the roadmap:
- The JROC is reviewing the Future Entity Working Group's recommendations (submitted in November 2023) and commits to publishing its decisions on the recommended structure, governance, and funding model in early 2024.
- The JROC has also responded to the blueprint from the VRP Working Group, urging Pay.UK and OBL to lead implementation groups for necessary enhancements and dispute mechanisms preceding the non-sweeping VRP delivery in 2024 (as mentioned above).
- Progress has been achieved across the roadmap's five identified themes, completing Phase 1 of the roadmap, with Phase 2 set to commence in Q1 2024 and Phase 3 scheduled to start within the next two years.
The update also refers to the fact that as part of the April 2023 recommendations the government set out its intention to legislate to create a long-term regulatory framework for open banking and detailed the principles that will underpin that framework. These included the creation of a smart data scheme using powers to be provided by the Data Protection and Digital Information Bill (DPDI Bill) (currently progressing through Parliament). The PSR highlights that the government has subsequently amended the DPDI Bill to ensure compatibility with its vision for open banking and to deliver the principles set out in the April 2023 recommendations. The government will set out further details in relation to the proposed smart data scheme for open banking in due course. In addition, in its 2023 Autumn Statement the government committed to unlocking the full potential of open banking-enabled payments and confirmed it will seek to legislate in 2024 to support this.
Next steps
The PSR's consultation on VRP will close on 2 February 2024. Its aim is to extend VRPs via the Phase 1 rollout by Q3 2024. In order to achieve that, it plans the following steps.
During Q1 2024, the PSR will:
- consider responses to the consultation in developing its policy proposals on the commercial model for VRPs in Phase 1; and
- publish an updated set of pricing principles if the evidence submitted suggests a need to update them.
In Q2 2024, the PSR plans to publish a further consultation with a policy proposal on the commercial model for VRPs in Phase 1. It will also publish its cost-benefit analysis and Equality Impact Assessment for its policy proposals on the commercial model for VRPs in Phase 1.
Additionally, HM Treasury's Future of Payments Review report, published in November 2023, placed particular importance on the need to leverage open banking to improve the person-to-person bank transfer payments journey. JROC's December 2023 progress update highlighted how the report's conclusions stressed the key role that open banking can play in financial services (see our Engage article: 'UK Future of Payments Review Report calls for National Payments Vision and Strategy'). It is likely that we will continue to see a strong focus on expanding UK open banking.
Authored by James Black, Virginia Montgomery and Lewis Campbell.
