Payments regulation reform: the Government consults on broad changes to payments system regulation

The key principles guiding the future direction of the payments system will be:

Trustworthiness

A system that is safe, reliable and resilient to fraud and other threats. Trustworthiness will be sought at both the individual transaction level and a system-wide level.

Accessibility

A system that is readily available, competitive and offers consumer choice. The payments system should encourage all types of payment participants to compete in a level and fair manner and cater to consumer preferences through competing services.

Innovation

A system that is agile, adaptable to challenges and forward-looking. The payments system must be able to respond quickly to new opportunities, and should enable efficient investment in solutions that will enhance the payment experience for consumers and businesses. The Strategic Plan identifies that this will require the regulatory framework to facilitate competition and innovation while preserving financial stability.

Efficiency

A system that is fast, seamless and low cost. Efficiency is sought both in the handling of payments – ie that payments are made and received in a timely, seamless and predictable manner – and in competitive pressures driving down payment costs.

The Strategic Plan then sets out key priorities for the payments system:

• promoting a safe and resilient system;
• updating the payments regulatory framework;
• modernising payments infrastructure;
• uplifting competition, productivity and innovation across the economy; and
• making Australia a leader in the global payments landscape.

For each priority, the Strategic Plan identifies next steps the Government will pursue, including the following:

• introduction of a new payments licensing framework to bolster consumer protections (discussed further below);
• establishment of a National Anti-Scam Centre and consulting on options for developing new industry codes across sectors (eg banking, telecommunications, digital platforms) in 2023;
• release of the Government's Cyber Security Strategy 2023–30;
• the Australian card payments system to begin migrating to the Advanced Encryption Standard in 2025;
• the RBA extending its supervision of payment systems to include prominent payment systems (eg, NPP, Visa, Mastercard and eftpos) in addition to systemically important payment systems;
• intervention to mandate least-cost routing if payment service providers, mobile wallet providers and other industry participants do not enable it in accordance with the RBA's expectations;
• consultation on phasing out of cheques, with a view to winding down the cheque system by 2030;
• working with industry to increase NPP capacity and usage and plan a transition away from the BECS;
• continued engagement with stakeholders on the potential interaction between the Consumer Data Right framework and the payments system;
• continued work towards an economy-wide Digital ID with an independent regulator;
• NPP Identified Institutions providing inbound international payment service functionality via the NPP;
• migration of the High Value Clearing System from SWIFT to ISO20022 messaging format by the end of 2025; and
• Treasury and the RBA releasing a paper in mid-2024 covering past work and a forward workplan regarding central bank digital currency and digital money in Australia.

The Licensing Consultation Paper proposes major changes to the regulation of payment services providers (PSPs), with many more activities falling within the regulatory perimeter of the AFSL regime. The Licensing Consultation Paper proposes a significant overhaul of the regulation of payment-related activities, with a broader and more precisely defined set of activities to be regulated under the AFSL regime in place of 'non-cash payment facilities'.

Many activities that are currently exempt from the AFSL regime would need to be covered by an AFSL.

The measures proposed in the Licensing Consultation Paper are:

• Extending the AFSL regime to two new groups of services relating to the provision of stored value facilities (SVFs) and payment facilitation services.
• In relation to SVFs, AFSL authorisations would be required for:
  • issuance of payment accounts or services ('traditional SVFs') – providers of payment accounts or facilities that store value for more than two business days and can be used to make payments; and
  • issuance of payment stablecoins ('payment stablecoin SVFs') – issuers of stablecoins that store value and control the total supply of payment stablecoins (by issuing and redeeming such stablecoins).
• In relation to payment facilitation services, AFSL authorisations would be required for:
  • issuance of payment instruments – that are unique to a customer and can be used to make a transaction or provide instructions on an account (eg, a cheque, digital / physical card or payment credential);
  • payment initiation services – which allow the instruction of a payment transaction at the request of the payer or payee as to a payment account or facility held with another PSP or some other source of value (eg direct debit and other third party initiated payments);
  • payment facilitation, authentication, authorisation and processing services – that enable payment instructions to be transferred, verify customer credentials, authorise payments or process payment instructions (eg, pass-through digital wallets such as Apple Pay, merchant acquiring, card issuing, payment gateways);
  • payments clearing and settlement services – for payment obligations or the exchange of messages for clearing / settlement purposes; and
  • money transfer services – that send or receive money overseas or within Australia, with or without a payment account (eg, remittance services).
• Removing current exemptions from the AFSL regime for certain payments-related services (see below).
• Co-regulation of 'major SVFs' by ASIC and APRA – this would cover SVFs that store more than $50 million in aggregate and $1,000 per customer for more than 31 days, and allow at call redemptions in Australian currency. They would be subject to capital and liquidity requirements, an obligation to comply with prudential standards and reporting requirements and an obligation to comply with technical standards set by authorised industry bodies.
• Exclusive ASIC regulation of 'standard SVFs' – this would cover SVFs that are not major SVFs, which would be subject to a requirement to hold client funds separately on trust and to comply with technical standards set by authorised industry bodies.
• Common access requirements for non-authorised deposit-taking institution (ADI) PSPs seeking access to payment systems for the purpose of payments clearing and settlement activities.
• Providing a single source of guidance or website portal for PSPs to access information on licensing requirements and processes across the various regulators with jurisdiction over PSPs – this seems to be a significant downgrade from the Payments System Review's recommendation for ASIC to be the single point of contact for PSPs.

While the technical means by which these activities will be incorporated into the AFSL regime is yet to be determined, the Licensing Consultation Paper suggests the following three options, all of which involve replacing the current concept of a 'non-cash payment facility' (NCPF):

1. the listed payment functions could replace the existing concept of a NCPF as a financial product;
2. the listed payments functions could be non-exhaustive examples in a new concept of 'payment services' that will replace NCPFs; or
3. regulating SVFs as a type of financial product to replace NCPFs, and regulating payment facilitation services as financial services.

Each payment function would require a separate authorisation condition, so that a PSP would be limited to providing the payment functions specified in its AFSL and would not be able to provide 'payment services' generally.

To ensure consistent regulation of payment services, it is proposed that certain exclusions in the existing payments licensing framework will be removed or amended, including:

• facilities for the exchange and settlement of non-cash payments between providers of non-cash payment facilities;¹
• electronic funds transfer facilities issued by ADIs or payment system operators under which money is made available to the payee electronically within two business days or other reasonably required time and where the issuer and payer do not have a standing arrangement to transfer funds electronically (eg ad hoc remittance or telegraphic transfer facilities);²
• non-cash payments debited to a credit facility;³
• unlicensed persons issuing NCPFs under intermediary authorisations⁴ and;
• any exemptions ASIC has provided to individual entities where those exemptions would not be consistent with the new, broader licensing regime – entities providing any of the abovementioned payment services under relief granted by ASIC should not assume that their relief will continue after implementation of these reforms.

However, the Licensing Consultation Paper suggests that the existing class order relief for low-value and limited-purpose NCPFs (gift vouchers/cards, prepaid mobile phone accounts, loyalty schemes and electronic road toll devices) will remain, as the Federal Government considers that those products present limited risks to consumers. These payment methods are generally simple, easy to use and usually understood by consumers, and costs of compliance would likely be disproportionate to any risks to them.

The Licensing Paper also proposes that payments executed wholly in cash, and the physical transport of physical currency, will continue to be excluded from the AFSL regime.

While the Licensing Consultation Paper proposes all providers of the listed payment functions be required to hold an AFSL, the obligations that would apply to the PSP would be tiered according to the risks posed to clients and the financial system as a whole. Major SVFs pose the greatest risk of harm, and therefore would be subject to bank-like obligations – capital and liquid asset holding requirements and relevant prudential standards, as well as the typical AFS licensee obligations. Standard SVFs are lower risk than major SVFs, and would therefore not be subject to capital and liquidity requirements (outside of the standard financial requirements applying to AFS licensees), but are proposed to be required to hold the stored value segregated on trust (possibly under the existing client money rules in the Corporations Act 2001 (Cth). Payment facilitation service providers, not taking and holding clients' funds, are proposed to be subject only to the need to obtain an AFSL. It is proposed providers of all of the listed payments functions be required to comply with technical standards set by industry bodies authorised by the RBA and comply with a legislatively mandated ePayments Code.

The effect of the proposed reforms will broaden the application of the AFSL regime to a wider range of payments-related services. Providers of payments services that are not currently within the AFSL regime, such as merchant acquiring facilities, payment gateways and digital wallets that store payment credentials without storing users' funds, will need to hold an AFSL with the appropriate authorisations (presumably, it would be possible to provide at least some of these services as an authorised representative of an AFS licensee with the appropriate authorisations). While this will impose on a lot of service providers the costs and burdens of compliance with the AFSL regime (although the cost impact will be mitigated somewhat by the tiered nature of the new obligations), it will provide a greater range of consumers with access to the protections conferred by the AFSL regime, including providers' conduct obligations and Australian Financial Complaints Authority dispute resolution (for retail clients).

The definition of 'payment system' in the PSRA would be broadened to cover any kind of arrangement or series of arrangements for enabling or facilitating payment or transfer of value, or a class of payments or transfer of value, including any instruments or procedures that relate to the arrangement or series of arrangements. Unlike the current definition, this definition is not intended to be limited to payments made using money, so that arrangements for payments using non-monetary assets, such as cryptocurrency, or those bypassing traditional payments infrastructure would also be covered. The definition is also intended to clarify that the PSRA applies to both bilateral and multilateral arrangements, including 'three party' and 'closed loop' systems, and not only multilateral arrangements involving multiple participants operating under a common set of rules.

The definition of 'participant' is proposed to be amended to cover all entities that play a role in the payments value chain, whether or not they are direct members subject to the rules of the particular payment system. This expanded definition is intended to capture entities that, while not formal members of any payment system, provide services (usually under arrangements with formal members) to enable or facilitate payments via a payment system. Digital wallets and cash in transit services are identified as specific targets of this expanded coverage.

The new ministerial designation power is intended to remedy the situation where the RBA cannot designate and intervene in a payments system due to the relatively narrow definition of 'public interest' in the PSRA. Under this new power, the Treasurer would be able to designate a payment system if they consider that doing so is in the national interest, and have consulted with the relevant regulators and affected parties. 'National interest' would cover a range of factors including national security, consumer protection, cyber security and accessibility.

However, unlike the RBA's designation power, the Treasurer's designation power would not enable them to give directions to participants in the designated payment system (this is a departure from the recommendations of the Payments System Review). Instead, the Treasurer would only be able to allocate responsibility for regulating the designated payment system to one or more regulators in the Treasury portfolio (or, with the agreement of the relevant Minister, to a regulator outside the Treasury portfolio) and to direct those regulators to implement a particular policy position on a national interest issue or matter. The kinds of directions that can be made to such regulators are not set out in any detail in the PRSA Consultation Paper, although it contemplates both general and specific directions being made.

The PSRA also seeks feedback on other potential reforms to the PSRA, including:

• increasing the scope of the RBA's power to impose regulatory obligations beyond access regimes and standards, such as in relation to broader conduct or operating procedures
• relaxing restrictions on the RBA's ability to publicly disclose information that it obtains by exercising its information gathering powers under the PSRA
• introducing an enforceable undertakings regime into the PSRA, and
• increasing penalties under the PSRA, including by introducing civil penalties as found in other financial services legislation.

Whether the RBA would with these expanded powers take a more interventionist role under the PSRA compared to with current practice, and how enthusiastically the Treasurer would use their ministerial designation power, is unknown.