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LONDON (Reuters) - Britain is to set up a new regulator to prise open the privately-owned payments system and cut the cost for new entrants to take on big high street banks.
The "utilities style" regulator will have a core aim of increasing competition in a sector that handled 17.5 billion non-cash payment transactions last year, the finance ministry said in a statement.
The Payments Systems Regulator, a working title, will sit under the Financial Conduct Authority, assume its new powers in late 2014 and be up and running by spring 2015.
It will have powers to fine rule breakers and end the stranglehold of big banks by being able to force changes in ownership of payments systems and scrutinise investments.
"The government is determined to open up competition in the banking sector so that it serves the needs of the British economy, businesses and customers," financial services minister Sajid Javid said.
Business minister Vince Cable told a CityUK dinner on Tuesday evening the new regulator will "deal with monopoly payments systems preventing new banks from coming in".
The payments system is currently overseen by the Payments Council, an industry body made up of the system's users and owners such as Lloyds, Barclays, HSBC and RBS. It sets policy and sparked uproar when it decided to scrap cheques, a decision it had to reverse.
Currently smaller rivals have to pay the big banks to access key services and the incumbents can block access or charge unfair fees to new entrants, the finance ministry said.
Policymakers want more innovation because much of the investment goes into maintaining the existing system.
The finance ministry said in Sweden people can split a restaurant bill by paying back a friend via text message, while in the Netherlands it's possible to pay online without needing to enter card or account details.
"The scope here for doing things better is enormous," Bank of England director for financial stability, Andrew Haldane, told parliament in February.
But the creation of a regulator stops short of Haldane's more radical idea for a utility payments platform for any bank to plug into on equal terms.
Omar Ali, UK head of banking at consultancy EY, said offering innovative payments won't be enough.
"To really win consumers over, new entrants will need to prove themselves financially as well as offer a compelling proposition on fees, better service quality and even in this digital age, outstanding service in their branches and on the telephone," Ali said.
The Bank will have a veto on any decisions by the new regulator that could harm financial stability.
The industry's policy role will be radically reduced.
"The government expects that the industry will replace the existing Payments Council with a pure trade body to co-ordinate the owners and operators of payment systems and related infrastructure, to guard against the development of payments strategy in silo," the government said on Wednesday.
The regulator will be able to "expressly instruct the industry to organise themselves to produce an integrated, holistic plan for development and innovation in UK payments."
The Payments Council said it has proved that innovation can be achieved through collaboration and with minimal regulation.
The council said it introduced seven-day account switching, led in chip and pin technology, and next year will allow customers to pay each other using only a mobile phone number.
Editing by Ruth Pitchford