RTGS – CHAPS Tariff Consultation Response

Foreword

In April 2022, we consulted on a set of proposals for a revised RTGS – CHAPS tariff framework. The Consultation was conducted in the light of the changing payments landscape, new players in the industry and the Bank of England’s transformational programme to renew the Real-Time Gross Settlement (RTGS) service.

As the provider of central bank money, the ultimate sterling settlement asset, RTGS is central to not only the UK payments industry but is also fundamental to both monetary and financial stability. RTGS settles over £750 billion on average every working day, with peaks reaching over £1 trillion in Autumn 2022.

A renewed service is being developed which will deliver significant improvements, enabling higher resilience, broader access, wider interoperability, improved user functionality and strengthened end-to-end risk management. We are on track to implement enhanced ISO 20022 messaging standards in June this year, moving to a common global language which will enable greater harmonisation. We will then introduce a new modern, flexible and efficient RTGS core settlement engine in 2024. It will provide a strong platform on which to introduce further enhancements, a number of which we have recently consulted on and our response document was published on 13 February 2023. The renewed RTGS will offer increased functionality and facilitate easier access for new, and new types of, participants to join. These changes will offer opportunities for the industry to provide improved and cost-effective services to customers.

The changes in the payments industry coupled with the introduction of the renewed RTGS, make this an appropriate time to launch a new tariff framework. We received 33 formal responses to our April 2022 Consultation and additional views through subsequent informal engagement. Responses were supportive of the aims of the Consultation and the principles adopted. The feedback has been valuable in confirming, and in some cases refining, our approach. I am very grateful to all involved for their active engagement and their considered responses.

The new framework will be introduced once the new core settlement engine is introduced in 2024. In Summer 2023, we plan to share more detail on expected costs for the first years of the new service with current tariff payers.

Victoria Cleland, Executive Director for Payments

Executive summary

Background to the RTGS – CHAPS Tariff Consultation response

The Bank’s Real-Time Gross Settlement (RTGS) infrastructure is critical for the UK economy. The Bank is in the process of renewing the RTGS service, with a move to enhanced ISO 20022 for CHAPS payments in June 2023, followed by the introduction of the new core settlement engine in Summer 2024.  

In our blueprint,^{footnote [1]} we set out our vision for the renewed RTGS service – one which is fit for the future, resilient and accessible, offers wider interoperability, improved user functionality and strengthened end-to-end risk management of CHAPS, the UK’s high-value payment system. The changes in the payments landscape and the significant enhancements underway for the RTGS service make this an appropriate time to review our tariff framework, and to ensure it remains suitable in an evolving payments landscape.

We operate the RTGS and CHAPS services on a full cost recovery basis over a few years, via the RTGS and CHAPS tariffs. In April 2022, we consulted the industry on a proposed new framework for the RTGS and CHAPS tariffs (the Consultation) that will be implemented from the launch of the new core settlement engine in Summer 2024. We were keen to hear from a diverse range of firms on the proposals, including how these aligned with our tariff principles, and whether they created incentives to change behaviours in ways which may run counter to our policy aims and objectives.

This Consultation response document summarises our decisions, taking into consideration industry feedback, and sets out the structures we will use to recover the costs of the investment in, and the running of, the renewed RTGS service. Any further comments or queries on our approach can be supplied via the following email address: RTGSTariffConsultation@bankofengland.co.uk.

Given the continuing evolution of the payments landscape, we will undertake regular reviews to ensure the RTGS and CHAPS tariff frameworks remain appropriate. Any substantive changes to the way in which RTGS or CHAPS are used would likely trigger a review, with the framework reassessed against the tariff principles and any material proposed changes subject to consultation and an appropriate notice period. We do not currently envisage any material changes to the framework before 2028.

Tariff principles

Our April 2022 Consultation included a set of guiding principles that had been discussed and supported by our external Strategic Advisory Forum and Senior Sponsors Body, and which were used during our assessment of potential tariff models. While each of these principles is important, we note that there are sometimes trade-offs to be made between them at times: for example, fully proportionate tariffs are rarely simple. We think our selected tariff approaches make a reasonable trade-off between the principles.

The guiding principles are set out below, with details in Annex 2:

Key decisions and next steps

Industry welcomed the opportunity to provide input into the design of the future RTGS – CHAPS tariff framework. They expressed support for a revised approach that was proportionate, simple, and predictable, while supporting competition and access, and the Bank’s mission.

Respondents acknowledged the benefits that RTGS and CHAPS provide and recognised the need to review the tariff framework. The feedback has given us a good sense of industry’s views across our proposals including the allocation of shared RTGS costs and the CHAPS fee structure.

Having taken industry’s feedback into account, we have decided on the following approach:

Exclusions

This response document and the consultation document relate solely to how the Bank of England will recover the costs it incurs in building and running the renewed RTGS and CHAPS services. It does not cover:

• fees that users of RTGS and CHAPS pay to third parties such as SWIFT;
• internal costs that users of RTGS and CHAPS may incur as a result of access to RTGS or participation in a payment system;
• costs associated with interest paid on positive or negative account balances; and
• costs associated with functionality considered in the roadmap for the renewed RTGS beyond 2024. The responses to this can be found in the consultation response document.

Section 1: Key messages from industry feedback

Overall, the majority of respondents to the Consultation were broadly supportive of the key proposals, highlighting that they are consistent with our tariff principles (see Annex 1 for details of respondents and a summary of responses). A number of respondents specifically acknowledged that there will always be a trade-off between principles, regardless of the ultimate approach, and supported the balance that we had struck.

The main area of challenge was the CHAPS fee structure, in particular responses around both the proposed tiered fixed fee and the introduction of a value-based usage charge. We have therefore undertaken further analysis on this element, and the section below covering the CHAPS fee structure sets out our revised approach.

In other areas, the feedback was broadly supportive, and we are therefore now confirming our plan to proceed with the proposals. Where appropriate, we have made some amendments to the detail, and will continue to take feedback on board as we determine the exact implementation approach.

We greatly appreciate the time respondents have taken to respond to the Consultation and thank them for valuable input into the revised RTGS and CHAPS tariff framework.

Section 2: Cost recovery

As set out in our blueprint, we intend to recover the costs of the renewed RTGS from the payment industry in full through the tariff; we will commence the recovery after delivery of the core settlement engine planned for Summer 2024. For simplicity, this response document continues to use the initial estimates for annual cost recovery shared in the April Consultation to illustrate our decisions on fee structures.

We intend to share more granularity on costs with tariff payers in Summer 2023, in addition to setting out what we anticipate the actual fee levels to be for the first year.

Given frequent changes in payment system usage, along with potential changes to our running cost, we anticipate reviewing fee levels on an annual basis, as we do now. While we aim to break even over a four-year period, we may need to adjust fees on an annual basis to ensure this is achieved. We would not, however, expect to change the overall fee structures, as set out here, as frequently. As a default, we will review the RTGS – CHAPS tariff framework approximately every three years, although any substantive changes to the way in which RTGS or CHAPS are used would likely trigger a review. We will review all elements against the tariff principles and will consult the industry about any proposed material changes. We therefore do not currently envisage any material changes to the tariff framework before 2028.

Cost recovery period

We consulted on a range of recovery periods to provide optionality around how quickly industry repays the build costs for the renewed RTGS service (14 years, 20 years or 25 years).

The useful economic life of the renewed RTGS system was determined to be 14 years. However, the majority of respondents welcomed a longer recovery period. Having received helpful feedback from the April Consultation, our decision is that we will recover costs over a 20-year cost recovery period. We believe this provides the best compromise of the proposed recovery periods.

The Bank acknowledges the arguments made by respondents for both a shorter and a longer recovery period. A longer recovery period would lower the annual costs for participants, but it introduces uncertainty to both industry and the Bank: it would increase the risk that build costs were not fully recovered if the renewed RTGS service needed to be replaced ahead of the end of that period, with a possible material increase in fees needed to repay outstanding costs in an accelerated period, moving away from the agreed recovery period and approach. A shorter recovery period, although better for certainty and lowering the risk that the approach needs to change in the future, requires higher initial annual cost recovery and therefore higher fees.

The Bank does not consider easing the transition to the new cost-recovery level or further delaying the increase to be appropriate approaches. We have already delayed the impact on industry by recovering build costs only after go-live and spreading them over a substantial recovery period. Any further capping of fees in the short term would result in a greater increase in fees later, potentially placing a higher proportion of the costs onto future, rather than current, users.

Section 3: RTGS cost allocation

We consulted on the way the costs of RTGS are shared between the payment systems that settle in RTGS.

Our approach to RTGS cost allocation

Allocation of shared RTGS costs

We consulted on using gross values processed as an allocation key for shared RTGS costs, introducing five tranches of gross value: very small, small, medium, large and very large. This proposal received strong support from industry. Therefore, we plan to proceed with this proposal, including the proposed tranches and the allocation multiplier.

As noted in the Consultation, the costs allocated will increase with each tranche, reflecting the increasing benefit of financial risk reduction from settlement in central bank money.

• Payment systems will be placed into the relevant tranche according to their annual gross value processed.
• All payment systems in a tranche will have the same allocation of costs, with this increasing for the higher-value tranches. The base allocation for each tranche is a multiple of 3.5 of the tranche below.
• Exact cost allocation to each system will depend on the total number of payment systems settling in RTGS and the spread across tranches. This is a result of the cost-recovery approach – costs per payment system will reduce if the largely fixed costs can be spread across more payment systems.

While this does mean an increase in the share of costs allocated to a number of payment systems compared to now, we consider that this is consistent with our tariff principles and better reflects the scale of the values settled for, and therefore the benefits received by, those systems.

Our approach is designed to be responsive, so that:

• If a payment system moves to a higher-value tranche it will be allocated more costs; the costs allocated to other payment systems in all tranches will go down.
• If a payment system moves to a lower-value tranche, the costs it is allocated will reduce; the costs allocated to other payment systems in all tranches will increase. The materiality of this increase will depend on which tranche has been exited – higher-value tranches will have a larger impact.

We expect movement between tranches to be infrequent and largely foreseeable to the Bank and the affected PSO and impacted participants themselves.

Payment systems might move between tranches for a number of reasons:

• Significant migration of payments between payment systems.
• Consolidation or splitting of existing payment systems, for example, similar to the consolidation of Cheque and Credit, and the Northern Irish Cheque Clearing system into the Image Clearing System.
• A change in payment values in one system.
• A change to tranche boundaries as a result of a three-yearly tranche boundaries review.

We will engage with the PSOs each year to consider the likelihood and impact of any cost allocation changes as a result of moving between tranches, or the number of payment systems using RTGS.

Additional settlement services

In the Consultation, we proposed a method of increasing the cost allocation for use of additional settlement services, for example, pre-funding and multiple settlements. The additional allocation would be a percentage increase added to the base cost allocation for the tranche applicable to the respective payment system.

The additional allocation will only apply to payment systems in the three lowest-value tranches (Tranches 3, 4 and 5). Payment systems in the highest-value tranches (Tranches 1 and 2) process a very high value of payments and the settlement arrangements are likely to be bespoke: the cost allocation to payments systems in these tranches is sufficiently high, without any additional allocation, to cover the nature of the service provided.

Recognising the benefit that settlement participants gain from using the additional settlement services, and the costs we incur to provide them, we intend to proceed with the proposed additional allocation. The majority of respondents to the Consultation supported this as a proportionate approach and fair to implement. This approach will differentiate cost allocation between those payment systems that do, and those that do not, use additional settlement services. It will also ensure that the scale of the additional cost allocation links back to the gross value processed by the payment system (reflecting the scale of benefit received from the additional service).

Prefunding

We will proceed with the proposed 20% increase to the allocation for prefunding – that is, a payment system using prefunding would be allocated 120% of the basic allocation rate for its tranche.

The increase in cost allocation for those payment systems using prefunding reflects the benefits gained from financial risk reduction that it delivers and the operational costs to the Bank of running the prefunding process. In setting the additional allocation, we have considered the costs associated with alternative default arrangements (such as use of a PSOs own funds) and the efficiency of this approach (for example, avoiding the need to sell securities or raise funds elsewhere; prefunding balances are remunerated at base rate; and most prefunding balances are considered liquid in terms of prudential treatment).

Multiple settlement cycles

We will offer one settlement cycle as standard. For multiple settlements, we will apply an increase to the basic cost allocation. As for prefunding, this increase would be added to the base tranche allocation.

The increase in the basic cost allocation for those payment systems using multiple settlement cycles is to reflect the additional benefits and our associated costs. For example, we monitor whether those settlements complete successfully, increasing our costs. And some settlement participants – especially those that typically receive funds – may benefit from the more frequent release of funds.

For example, a payment system with prefunding and seven settlements per day would be allocated 140% of the base allocation for the relevant tranche – 100% for basic settlement plus 20% for prefunding plus 20% for seven settlements.

Payment System Operators design the settlement fee structure for their payment systems

We consulted on the proposal that PSOs should determine their own fee structures for allocating their share of RTGS costs to the settlement participants in their system.

We consider that PSOs are in a better position than the Bank to determine an appropriate fee structure based on the service they offer, having a view of the overall cost base to settlement participants, of which the RTGS settlement costs will form only a small part.

We acknowledge respondents’ concerns around potential complexity and inconsistency in individual PSOs’ cost allocation approaches. However, when operators set access and participation requirements, which may include the setting of fee structures, PSOs should have regard to the Payment Systems Regulator’s (PSR) access regime, specifically Regulation 103 Payment Services Regulations 2017, Sections 56 and 57 FSBRA and General Direction 2, and the relevant powers of the PSR. These provisions seek to ensure that a PSOs requirements and approach for supplying and governing access and participation to regulated payment systems are proportionate, objective and non-discriminatory (POND), and provide recourse to the PSR where they do not. This means that participants will be able to influence the approach taken by PSOs, thereby giving them power to avoid any undesirable outcomes. It should be noted that PSOs have the option to maintain the current fee structures with their settlement participants, should that be the preferred option.

Given this, the Bank does not think it is appropriate or necessary to intervene or issue guidance on how PSOs set up their fee structure, as some respondents have suggested. We will, however, set clear operational requirements for PSOs on how they inform us of fee information, by participant, to facilitate us collecting these. These operational requirements have not yet been set and we are not inviting feedback on them at this time.

The Bank will continue to collect the fees directly from the settlement participants but will do so as instructed by PSOs.

Section 4: CHAPS fee structure

We currently recover around 6% of CHAPS costs through fixed fees, with the remaining 94% from the volume-based per-item fee. Many of the costs of providing the CHAPS service (scheme and settlement) are associated with providing a highly resilient service – including availability, data integrity and security – given the very high values processed. The majority of our costs are therefore not sensitive to volumes of payments processed.

In our Consultation, we proposed that a higher proportion of CHAPS cost recovery should come from fixed fees, better reflecting where costs arise. We proposed to recover 20%–40% of CHAPS costs though fixed fees. We also proposed to determine CHAPS usage fees by both volume (per-item charge per CHAPS debit) and value (charge of a small percentage of the total value of debits).

In line with our third tariff principle, an increase in the proportion of fixed fees would provide more stability and predictability in costs for DPs when managing their budgets, and for CHAPS in income flows. Introducing a value-based charge would add some additional complexity to the fee structure, however, this would better reflect the benefits that DPs gain from CHAPS and settlement in central bank money, increasing proportionality. This approach would also better reflect the way we will allocate shared RTGS costs in future, which links CHAPS costs to the total value of payments processed.

While there was some industry support for the increase in the fixed fee element, there were a number of concerns about the proposed implementation, including the proposed distribution of fixed fees across DPs in the tiered approach – particularly between CHAPS Categories 1 and 2.^{footnote [3]} These centred on the notable step-up (or ‘cliff edge’) in fixed fees between these categories, resulting in potential behavioural changes. Responses varied with regards to the severity and nature of DP behavioural impacts, with a few focusing on the possibility that some Category 2 DPs might resist onboarding new clients if it risked moving them into Category 1.

Feedback also included concerns about the impact of a value-based usage charge, with both potential behavioural impacts and complexities in on-charging to end-users cited. Some respondents were, however, supportive that reflecting value of use – as well as volume – would make the tariff more proportionate.

Having reflected on the feedback, our view remains that the contribution of fixed fees should increase, and a material portion of the tariff must relate to value of usage, as this more accurately reflects the benefits that DPs gain from CHAPS. We have, however, adjusted our detailed approach in light of the feedback received.

The new fee structure will have a CHAPS Participation Fee (CPF) determined by each DPs usage values over a previous 12-month period (the ‘historic values’ approach), and a usage fee in the form of a per-debit payment (volume based). The total cost-recovery requirement for the CPF will be 50% of overall CHAPS costs and will be allocated to DPs depending on their share of values sent over the 12-month period preceding the point at which the tariff is set, with a de minimis applied for the smallest DPs.

Having engaged with the industry in relation to our new approach, we consider it strikes the right balance between the first and second tariff principles (Proportionate and Simple and Efficient): fairly reflecting the benefits of CHAPS participation without overly increasing the complexity of the tariff. Value charging based on the previous 12 month period avoids additional complexity and removes any uncertainty associated with setting, and administering, a value-based usage fee and simplifying the tariff. These were key issues voiced by industry.

See Annex 3 for illustrative modelling of indicative fees under our planned approach. The modelling uses the same illustrative costs as used in the Consultation and, again, the 2019 CHAPS usage data.

CHAPS Participation Fee

We have developed a revised approach to the fixed-fee component: the CPF. We will use ‘historic values’ to determine the split of the total CPF across DPs. Each DPs CPF will be calculated by applying to the total CPF its share of total payment values sent over the 12-month period preceding the point at which the tariff is set.

The historic values approach differs from the tiered approach outlined in the Consultation. It is value based and does not rely on CHAPS Categories. The relative merits of the historic values approach include the mitigation of proportionality concerns stemming from the ‘cliff edge’ between Category 1 and 2 DPs under the tiered approach (along with the smaller ‘cliff edges’ between other categories and for the smallest DPs joining Category 3). The historic values approach also removes concerns about whether a banking group with more than one DP could benefit from lower fixed fees by spreading business across a number of DPs. Furthermore, under the historic values approach there would be no requirement for FMIs to receive different treatment.

Considering other tariff principles, compared to the tiering approach, the historic values approach does not provide relative incentives or disincentives for DPs to change their behaviour, and both are equally supportive of the Bank’s mission. We recognise that the historic values based CPF introduces a potential reduction in predictability as value shares by DP may change from year to year. However, such changes have historically been either non-material or predictable, so both the change and the potential lag in feeding through to fees charged, should be manageable.

Given the advantage of the historic values approach in removing some of the concerns associated with placing a high weight on the fixed fee element, we have opted for a fee structure with a 50% CPF weighting. A higher fixed-fee weighting might be more challenging for DPs to translate into their pricing structures, especially if they solely use per-item fees in their customer tariffs. However, we believe that a higher proportion of CHAPS cost recovery should come from fixed fees, better reflecting where costs arise and providing more stability and predictability in costs for DPs, and in income for CHAPS. Greater predictability also results from the general stability seen in CHAPS values from year to year.

We now need to consider how to apply the historic values approach to new participants onboarding to CHAPS with no previous usage history. We will need to identify an appropriate ‘entry’ level fee for those new DPs. For example, for those upgrading from indirect to direct participation, consideration may be given to their historical payment values. There is also a need to consider an appropriate de minimis CPF level for those DPs with a very low total value of usage: we will need to ensure we cover the marginal costs to the Bank of such DPs operating in CHAPS. We will provide further details of these areas, including indicative levels, in our Summer 2023 tariff communication with tariff payers.

Given that the new approach was not covered in the Consultation, if any organisations have substantive concerns on the new approach, please contact us to set them out, using the email address: RTGSTariffConsultation@bankofengland.co.uk.

Usage fee

In addition to the historic values based CPF, the CHAPS fee structure will include a usage fee component based solely on volume. Value charging could be introduced as part of the usage fee at a later date, following the tariff review process approximately every 3 years. The volume-based usage fee will be set to generate income to cover 50% of the CHAPS costs, based – as now – on our forecast of volumes for the year.

Initial fees and frequency of change

In the Consultation, we outlined a proposal to reduce CHAPS initial fixed fees for the first full year for new CHAPS DPs joining in Category 3. The majority of respondents were supportive of this proposal, agreeing that it aligns with the fourth tariff principle; support competition and access. Moreover, several DPs noted that the reduced initial burden of becoming a CHAPS participant could encourage new DPs, thereby providing consumers with more choice, and more access points for RTGS connectivity. One respondent proposed an alternative approach whereby all participants, irrespective of category, would see a reduction in fees in their first full year.

Given the move to the historic values approach to CPF, this proposal is less important to removing a potential barrier to entry, which the tiered approach may have imposed. We will consider it as part of the implementation issues (for example, de minimis level, determining CPF for those with no payment history) associated with the historic values approach. Further details will be shared in our Summer 2023 information to tariff payers.

As per the RTGS tariff structure, we will review the appropriateness of the CHAPS fee structure, including the proposed weightings on the CPF and usage elements, against the tariff principles as appropriate, although we do not currently envisage changing the structure before 2028.

To support stability and predictability, we considered in the Consultation to give industry notice of any fee changes and asked what their minimum notice period would be to enable them to reflect any new CHAPS fees or changes to tariff approach within their respective pricing structures. The overwhelming majority of respondents indicated a preference for eight months’ notice, citing participants’ own internal governance, senior leadership approval and the need for further regulatory communication. A significant number of respondents highlighted the importance of timing of the communication to allow them to prepare and budget for any increase in costs. We acknowledge these points and will endeavour to provide a longer notice period to reflect any new CHAPS fee level, or other changes, within the pricing structure. We will continue to undertake an annual review of the CHAPS, and other, fee levels and will endeavour to provide exact figures for CHAPS fees with eight months’ notice before implementation.

Section 5: Other proposals

Invoicing processes

Annual participation fees, for participants across all PSOs, are currently charged annually at the start of the tariff year (currently 1 April). Per-item fees, for CHAPS and CREST settlement only, are currently charged quarterly in arrears. In the Consultation, we sought feedback on the proposal to change the tariff year to align with the calendar year. The majority of responses were in favour of this. The general response was that moving the charging period to a calendar basis would bring the tariff into line with the charges paid for access to other payment services. Moreover, it would allow most CHAPS DPs to plan and manage annual CHAPS costs in line with their own annual budget. While not all participants budget on a calendar-year basis, those participants who do not, did not seem to oppose aligning the tariff year with the calendar year. Given the overwhelming support for the proposal, we will implement this approach and in our Summer 2023 communication with tariff payers we will set out in more detail what the new annual timetable will look like.

Ahead of the introduction of the new tariff, we will also explore other implementation questions, including, and not limited to, a potential for quarterly CPF invoicing for CHAPS DPs. Further details will be outlined in our Summer 2023 communication.

Additional charges

Fees for onboarding and account lifecycle changes

In the Consultation, we proposed to charge for onboarding and other structural changes to accounts (for example, mergers, restructuring etc).

We will start to charge separately for these activities, reflecting the time and cost it takes to manage such changes. These charges would target cost recovery to avoid being an unwarranted barrier to entry. Any income received from these charges will be considered additional income over and above targeted cost recovery for specific payment systems, which will allow future core fees to be reduced for all users.

As noted in the Consultation, the charge would be applied when participants make a material change in how they use their account which involves some change to its set up in RTGS. This includes becoming a settlement participant in an additional payment system, or changing ownership, or certain payment related details (for example, Business Identifier Codes (BIC)), of the RTGS account.

The level of these fees will be set when sufficient cost granularity exists. We anticipate that fees will be higher where the account relates to a CHAPS DP, as this will cover the Bank’s costs as both the operator of CHAPS and the provider of the RTGS settlement service.

The proposed onboarding fee will be levied in two parts. The first 50% will be charged to new participants / payment systems at the point that an onboarding slot is allocated to them, and the remaining fee will be charged only after successful completion. The fee levels will be outlined in our Summer 2023 communication with tariff payers.

Authorised transfers (ATs or pull payments) and Party-to-Party transfers (PTPs)

We consulted on a proposal to charge the receiver of an ‘authorised transfer’ (which has initiated the transfer) at the full prevailing CHAPS per-item rates and value-based rates. This proposed functionality will not be available when the new core settlement engine is launched in Summer 2024 and is therefore not covered in detail in this response document. We will consult tariff payers on a suitable fee structure ahead of launching ATs functionality.

For PTPs, we propose to charge the payer (initiator) the prevailing CHAPS per-item rates and reserve the right to review this approach. The fee levels will be set out in our Summer 2023 communication to tariff payers.

Section 6: Other considerations

Public sector equality duty

We are required under the Equality Act 2010 to consider how policies or decisions affect people who are protected under the Equality Act. The Bank has consulted on whether the Consultation proposals give rise to any equality implications. The Bank has assessed industry responses and concludes that no equality issues were raised.

Annexes

• Annex 1: Detailed consultation feedback summary

  Chart A1.1: Consultation respondents by organisation type

  

  We received 33 completed survey responses from a diverse range of organisations, including CHAPS DPs, CREST Settlement Banks, Settlement Participants in other payment systems that settle in RTGS, PSOs, and other industry bodies, representing both participants and end-users. In Summer 2022, we provided two open Q&A sessions and engaged with the industry through a series of bilateral meetings to understand views in greater detail.

  Question 1:

  1. What are your views on the relative merits of the proposed cost recovery periods? What are the key factors driving your response?

  Consultation responses:

  • Respondents’ views were mixed, but with more support for the 20 and 25 year options as those would lower annual costs.
  • Some respondents’ rationale for a 20-year recovery period was that it strikes a balance between the immediate increase in cost and the uncertainty that comes with the longer recovery period.
  • Respondents who favoured the 14-year recovery period had a preference to pay the costs as soon as possible, reflecting concerns about the lifespan of the new RTGS system and the further enhancements that might require cost recovery in the medium to long term.
  • A few respondents suggested stepping up fees over time as an alternative to a specific recovery period so that the full impact of cost is not felt straight away.
  • There was also a suggestion that charges should not be increased until 2025, to allow CHAPS DPs time to upgrade and enjoy the benefits of ISO 20022 before higher fees come into effect.

  Questions 2 and 3:

  2. Do you agree that Payment System Operators (PSOs) should determine their own fee structures for allocating their share of RTGS costs to settlement participants? What are the key factors driving your response?

  3. Do you see any areas are of concern with PSOs determining their own fee structures?

  Consultation responses:

  • Most respondents were supportive of these proposals, providing the model does not become overly complicated and remains easy to administer.
  • Several respondents expressed concerns that multiple models from PSOs may make the fee structures difficult to understand and may result in PSOs implementing different cost allocation approaches across payment systems, affecting competition and disadvantaging end-users.
  • A smaller number of respondents suggested that there should be central oversight and guidelines rolled out by the Bank to ensure that there is a uniformity of approach, if not outcome.

  Questions 4, 5 and 6:

  4. How well do you think the proposals for RTGS cost allocation meet the tariff principles?

  5. Are there any elements of the approach that incentivise behaviours that conflict with the tariff principles?

  6. Do you agree with the proposed approach of allocating costs to payment systems in line with gross value processed? What are the key factors driving your response?

  Consultation responses:

  • There was general agreement with our proposal on the allocation of shared RTGS costs. Most respondents agreed that the RTGS cost allocation is in line with the tariff principles. A small number of respondents, however, commented on the potential knock-on adverse impact on firms processing high-value payments.
  • A couple of respondents raised concerns about the value-based tranches methodology and challenged the impact on cost allocation of transitioning between tranches.
  • Some respondents specifically, noted a significant increase in cost for the CREST Settlement Banks.

  Questions 7 and 8:

  7. Do you agree with the proposal to apply an increase to the basic cost allocation for those payment systems in tranches 3–5 which opt to use additional settlement services? What are the key factors driving your response?

  8. Are the proposed levels of charges for additional settlement services likely to affect decisions on whether or not to use the services?

  Industry responses:

  • There was general support for this proposal. A large majority of respondents agreed, considering the proposal proportionate.
  • However, a small number of respondents argued that the additional cost may deter the use of these additional settlement services.
  • Two respondents suggested that it would be better to have a ‘package’-based approach whereby a PSO can opt into a bundle of additional services for a set allocation.

  Questions 9, 10, 11 and 12:

  9. How well do you think the proposals for the CHAPS fee structure meet the tariff principles?

  10. Are there any elements of this approach that incentivises behaviours that conflict with the tariff principles?

  11. Do you agree that the Bank should recover a larger share of its CHAPS settlement costs through fixed fees (we currently recover 6% via fixed fees)? What are the key factors driving your response?

  12. Would you prefer the proportion of fixed fee to be closer to our lower-end option of 20% or our upper-end option of 40%?

  Consultation responses:

  • Respondents largely supported a move towards recovering a larger share of CHAPS costs through fixed fees than at present. A clear majority favoured a fixed-fee weighting at the lower end of our range (ie, 20% rather than 40%).
  • A number of responses specifically raised concerns that the higher-end fixed-fee weighting might result in a barrier for new entrants or small players.

  Question 13:

  13. Do you agree with the introduction of a tiered fixed fee? What are the key factors driving your response?

  Consultation responses:

  • While respondents overwhelmingly endorsed the introduction of a tiered fixed-fee structure, as opposed to a flat fixed-fee approach, some raised concerns regarding the distribution of fixed fees across CHAPS DPs – particularly between Categories 1 and 2.
  • These centred on the notable step-up (or ‘cliff edge’) in fixed fees between these categories, resulting in potential behavioural changes.
  • Responses varied with regard to the severity and nature of DP behavioural impacts, and mostly focused on the possibility that some Category 2 DPs might resist onboarding new clients if it risked moving them into Category 1.
  • Some responses queried whether, under the tiering approach, banking groups might be incentivised to spread their business across several DPs, thereby circumventing the high fixed fees associated with higher categories.
  • A small number of respondents suggested different treatment for DPs dependent on their individual business profile. For example, some FMIs claimed that they would be disproportionately impacted as their usage is typically low volume and high value, and the tiering approach would result in higher costs for their respective participants.
  • Another common theme was a concern that higher fixed fees would unfairly impact small or emerging participants, thereby creating a barrier to entry. Moreover, for small prospective CHAPS DPs, high fixed fees could negatively impact innovation and competition.

  Question 14:

  14. Do you agree with the introduction of a value-based charge? What are the key factors driving your response?

  Consultation responses:

  • A significant number of respondents questioned the introduction of a value-based usage fee, with many noting concerns about how they could practically pass these fees on to customers and that it could result in adverse behavioural effects.
  • CHAPS DPs with lower volumes and high values, on average, raised concerns that a value component would introduce pricing complexity, thus resulting in more volatility for all DPs and increased uncertainty for end-users. Some of the largest DPs, especially some that provide access to CHAPS for a number of Indirect Participants (IDs), raised concerns that a value-based usage charge would unduly penalise large-value transactions.
  • Some DPs principally use CHAPS to defund or fund their reserves account in RTGS. Such transactions, they note, by virtue of their high value, are likely to attract significant usage fees, even though they represent minimal risk to the resiliency of CHAPS.

  Question 15:

  In the consultation document, we proposed three potential ratios for the contribution of volume and value usage fees (75:25, 50:50, or 25:75, volume:value).

  15. With proposed fees now reflecting both volume and value of usage, what are your views on the relative merits of the following volume/value ratios?

  i. Is there a strong case for a ratio that we have not included above? (Please elaborate.)
  ii. Please indicate your order of preference for each of the ratios proposed in the previous question (75:25 volume:value, 50:50 volume:value, 25:75 volume:value ratios).

  Consultation responses:

  • Respondents stated a preference for the 75:25 split, arguing that this aligns better with the tariff principles and would result in the most proportionate and least complex approach.
  • Respondents noted that as the weighting of the ratio moves towards value, the more complex the process becomes for reflecting this in their billing structure for their clients.
  • Around a third of responses listed either the 50:50 or 25:75 split as their first preference. Respondents in favour of the equal split argued that it was the simplest approach and the most proportionate for all participants involved.
  • The 25:75 approach was the least favoured option, with a small minority of respondents listing it as their preferred tariff structure.

  Question 16:

  16. Do you agree with the proposal to offer reduced initial fees in the first full year of joining to new CHAPS participants joining in Category 3? What are the key factors driving your response?

  Consultation response:

  • Most respondents were supportive of this approach, agreeing the reduced upfront fees would encourage new DPs, provide customers with more choice, and create more access points for RTGS connectivity.

  Question 17:

  17. What is the minimum notice that you would need to reflect any new CHAPS fee level within your pricing structure?

  Consultation responses:

  • The majority of respondents indicated a preference for 8 months’ notice.
  • Respondents also noted their need to provide circa 60 days’ notice of an increase in CHAPS pricing to their clients.
  • There were six responses in favour of a four to six-month minimum notice period. These respondents noted the client notice period, claiming that they would require a minimum of six months to complete contractual changes and client notifications.

  Question 18:

  18. Do you agree with the proposal to introduce an onboarding fee? What are the key factors driving your response?

  Consultation responses:

  • The majority of respondents were supportive of this proposal, as it would help keep costs lower for existing participants.
  • There were some dissenting responses from a small number of respondents noting that this would add a barrier to entry and may discourage new participation. Some respondents sought more details about the onboarding fee and questioned how it will impact the overall cost recovery.

  Question 19:

  19. Do you agree that the proposed charges for alternative forms of real-time transfers appropriately reflect the value received by the user of these services? What are the key factors driving your response?

  Consultation response:

  • Most respondents agreed with this proposal on the basis that it is fair, reasonable, and reflective of the service to the user.

  Question 20:

  20. Do you have a preference (for example, for budget planning purposes) for the Bank’s tariff year to run on a calendar year basis, for example, 1 January to 31 December as opposed to 1 April to 31 March each year currently?

  Consultation responses:

  • A majority of responses were in favour of changing the Bank’s tariff year to run on a calendar year basis.
  • Several respondents argued that this change would bring the tariff into line with the charges paid for access to other payment services.

• Annex 2: Tariff principles

  Principle 1: Proportionate

  The allocation and recovery of our costs across schemes and participants needs to be proportional. As most RTGS and CHAPS costs are fixed, there are a number of ways of defining ‘proportionality’, for example, volume and value of usage or underlying settled values; economic benefit from participation; scale of participant etc. This principle can be met in many different ways; however, any proposal which does not demonstrably meet this principle should be ruled out.

  Principle 2: Simple and efficient

  The tariff should be transparent, and easy to administer and understand making simplicity important. It is important to ensure that participants/schemes (and their customers, as well as potential future participants/schemes) can readily understand the allocation/fee structure and incentives presented. Complexity should only be introduced if it makes a material difference to outcomes.

  Principle 3: Stable and predictable

  The tariff approach should not be subject to frequent changes: it needs to be sustainable and predictable (over the next few years) for participants/schemes so that they can incorporate these into their own business plans or contracts with customers and predict the impact on costs of any changes to their plans.

  Principle 4: Supports competition and access

  The tariff should support the RTGS vision of broader access/reduced cost of access, in order to encourage greater competition.

  Principle 5: Supports the Bank’s mission and RTGS/CHAPS policy objectives

  The Bank does not intend to use tariffs as the primary means to incentivise particular behaviours by participants or schemes; we will continue to use Policy Statements, Rules and/or highlighting best practice. But the tariff structure must be supportive of the behaviours that we want to see and may be used to guide behaviour if we believe that policy/best practice may not be sufficient to achieve our policy aims and objectives. There should be no perverse incentives (for example, tariffs that incentivise behaviours that run counter to best practice or the Bank’s policy objectives).

• Annex 3: Further detail on CHAPS fee modelling

  To illustrate the impact of the new fee structure on different types of CHAPS DPs, we have modelled fee levels that would be needed to generate the required annual cost recovery and have calculated total annual fees incurred by each type of DP. Given the unusual patterns of CHAPS usage in 2020 and 2021 due to the Covid-19 pandemic, we have based our modelling on 2019 CHAPS usage data, as we did in the Consultation, to allow for clear comparison. We have also used the same illustrative costs as used in the Consultation.

  Model DPs

  We have used a set of model DPs to look at the impact of changes. Table A3.A shows how the model DPs are set up.

  Table A3.A: Model DPs with illustrative figures

  Model	Percentage of total CHAPS volumes sent	Percentage of total CHAPS values sent	2019 modelled volumes sent (thousands)	2019 modelled values sent (£ millions)
  Category 1 DP	18%	18%	8,749	13,921,155
  Category 2 Retail DP	5%	2.50%	2,430	1,933,494
  Category 2 Custody/Wholesale DP	2%	3.50%	972	2,706,891
  Category 3 DP	0.30%	0.15%	146	116,010
  FMI DP	0.02%	0.80%	10	618,718

  2019 baseline for total fees paid: £30,000 annual fee plus £0.319 per debit volume fee

  Table A3.B: 2019 baseline for total fees paid in 2019 by Model DP

  (£ thousands)
  	Annual fixed fee	Total per item fees	Total 2019 fees	Percentage of overall 2019 CHAPS cost recovery
  Category 1 DP	30	2,791	2,821	17.1%
  Category 2 Retail DP	30	775	805	4.9%
  Category 2 Custody/Wholesale DP	30	310	340	2.1%
  Category 3 DP	30	47	77	0.5%
  FMI DP	30	3	33	0.2%

  Fees if we kept the current fee structure and needed to recover costs of £37 million per annum

  Fees modelled:

  Annual fixed fee: £30,000

  Per-debit volume fee: £0.738

  Table A3.C: Existing tariff model with £37 million per annum cost recovery

  (£ thousands)
  	Annual fixed fee	Total per item fees	Total fees	Percentage of overall CHAPS cost recovery
  Category 1 DP	30	6,460	6,490	17.5%
  Category 2 Retail DP	30	1,795	1,825	4.9%
  Category 2 Custody/Wholesale DP	30	718	748	2.0%
  Category 3 DP	30	108	138	0.4%
  FMI DP	30	7	37	0.1%

  Table A3.D: Change compared to 2019

  	Increase in fees (£ thousands)	Percentage increase	Change in per cent of total (percentage points)
  Category 1 DP	3,669	130%	0.4
  Category 2 Retail DP	1,019	127%	0
  Category 2 Custody/Wholesale DP	408	120%	0
  Category 3 DP	61	80%	-0.1
  FMI DP	4	12%	-0.1

  Fees using our new fee structure and recovering costs of £37 million per annum:

  Key figures

  Total CHAPS volume for 2019: 48,603,731

  Total cost recovery: £37,000,000

  Total CPF contribution (50%): £18,500,000
  

  Usage

  Volume fee:

  Volume fee (50%) (£/transaction): £0.38

  CHAPS Participation Fee (CPF)

  Formula for calculating fee per 1% of total values sent (CPF):

  CHAPS Participation Fee (CPF) = x * (a of b)

  CHAPS Participation Fee (CPF) = 1% * (50% of £37 million)

  CHAPS Participation Fee (CPF) = 1% * £18.5 million

  CHAPS Participation Fee (CPF) = £185,000

  Where:
  x = A DP’s total value sent from the previous year expressed as a percentage of CHAPS total values.
  a = The percentage of the total CHAPS cost recovery recovered by the CPF.
  b = The total cost recovery target

  Table A3.E: Impact on model DPs

  (£ thousands)
  Model DP	Selected Fee structure				Comparison to 2019		Comparison to current model
  	CPF	Usage fee	Total fees for DP	Percentage of total CHAPS cost recovery	Change in fees	Percentage change	Change in fees	Percentage change	Change in per cent of total (percentage points)
  Category 1 DP	3,330	3,330	6,660	18.00%	3,839	136%	170	3%	0.50
  Category 2 Retail DP	463	925	1,387	3.75%	582	72%	-438	-24%	-1.15
  Category 2 Custody/Wholesale DP	648	370	1,017	2.75%	677	199%	269	36%	0.75
  Category 3 DP	50 (a)	56	106	0.29%	29	37%	-32	-23%	-0.11
  FMI DP	148	4	152	0.41%	119	360%	115	310%	0.31

  Footnotes

  • (a) In this scenario, the Category 3 Model DP would have a calculated CPF of £28,000, which would likely fail to cover the marginal costs incurred by the Bank of such a DP operating in CHAPS. Consequently, it would be subject to the de minimis CPF, which for illustrative purposes we have modelled at £50,000. It is important to note that a final decision on the nature and value of the de minimis fee will be determined in due course based on our analysis of marginal costs. We will share further details on the de minimis fee in our Summer 2023 tariff communication. As such, the £50,000 figure is purely illustrative and not indicative of what the de minimis fee will actually be.