New licensing framework for payments-related activities 18 min read
The Treasury recently published a further consultation paper (Consultation Paper 2) in connection with its proposal to introduce a new licensing framework for payments-related activities. It refines and clarifies the proposals in the previous consultation paper published in June 2023 (Consultation Paper 1) and invites further feedback from the public.
In this Insight, we take a closer look at the proposals that have been refined and clarified since the previous consultation paper.
Key takeaways
- A broad set of payment functions will be regulated under the AFSL regime, requiring many currently exempt payment service providers (PSPs) to obtain an AFSL.
- Money received from customers in relation to payment services will, in almost all cases, be subject to the client money rules.
- Stored value facilities (SVFs) will likely replace purchased payment facilities (PPFs) as a regulated non-banking store of value in the regulatory framework.
- A common access requirements framework will likely be developed to increase competition by facilitating direct access by non-ADIs to payment systems.
- Compliance with certain technical standards relating to payment systems is likely to be mandated for PSPs.
Regulation of payment functions within the AFSL regime
Consultation Paper 1 set out a proposal to overhaul the regulation of payments-related activities, defining new 'payment functions' that are to be regulated under the AFSL regime. Following feedback in response to Consultation Paper 1, Consultation Paper 2 proposes the following updated list of payment functions to be regulated.
| Payment function | Proposed definition |
| Stored value facilities (traditional SVFs) |
The following characteristics are proposed for defining SVFs:
|
| Issuance of payment stablecoins (Payment Stablecoin SVFs) | Issuers of payment stablecoins that store value and control the total supply of payment stablecoins through issuance and redemption activities. |
| Payment Instruments | A personalised or individualised set of procedures that allows a payer to instruct the entity with which its funds are held to initiate a transfer of funds to a payee. |
| Payment Initiation Services | The initiation of payments from a payer to a payee by a third-party entity, at the request of a customer. The entity initiating a payment is a third party to the payment account where the payer’s funds are held. |
| Payment Facilitation Services | Services that enter into the possession of funds for the purpose of facilitating a transfer between a payer and payee. This includes for the purpose of acquiring, aggregating, disbursing or otherwise transferring funds within Australia. This includes through accounts held at other financial institutions or service providers but controlled by the PSP. |
| Payment Technology and Enablement Services | Payment-specific services provided by third parties that enable payments to be made. These services enable a transfer of funds to occur but do not enter into possession of, or control of, the funds. Such services may be customer or merchant facing or engage with other PSPs. This function excludes Payment Initiation Services. |
| Cross-border Transfer Services | A service that transfers or enables the transfer of funds from Australia to a payee outside of Australia, and/or of funds from outside of Australia to a payee in Australia. |
Treasury proposes that Traditional SVFs, Payment Stablecoin SVFs, Payment Instruments, Payment Facilitation Services and Cross-Border Transfer Services will be regulated as financial products. Payment Initiation and Payment Technology and Enablement Services are proposed to be regulated as financial services, as part of a new financial service of 'providing payment services'. However, it does seek comments on alternative options, including to regulate only Traditional SVFs and Payment Stablecoin SVFs as financial products and the remaining functions as financial services, or to regulate all functions as financial products.
The main changes to the list of payment functions from Consultation Paper 1 are:
- 'Payment Facilitation, Authentication, Authorisation and Processing Services' has been split into 'Payment Facilitation Services' and 'Payment Technology and Enablement Services';
- 'Payments Clearing and Settlement Services' is no longer proposed to be a payment function covered by the AFSL regime – the risks associated with such services will be managed by payment system operators and the common access requirements; and
- 'Money Transfer Services' has been replaced with 'Cross-border Transfer Services'.
The definitional change to refer to funds being loaded onto an account or facility and the ability to direct the movement of funds to make payments, rather than only the holding of funds, clarifies Treasury's intention that credit facilities, stores of value that cannot be used to make payments (eg negotiable securities), the holding of funds in transit, merchant acquiring activities, deposit products and the storage of digital assets are not intended to be regulated as SVFs. Correspondingly, the two-day minimum holding period is no longer proposed.
Treasury also indicates that it intends for SVFs to replace purchased payment facilities (PPFs) as a class of regulated activities. However, unlike PPFs, Treasury's preferred approach is for SVFs to be carved out of the definition of 'banking business' and instead be regulated as a standalone class of activity. To prevent regulatory arbitrage between SVF and banking business regulation, Treasury proposes that SVFs will be prohibited from paying interest on stored funds.
Consultation Paper 2 proposes a bifurcated approach to regulating payment stablecoin facilities:
- the issuance and redemption functions facilitated by payment stablecoin facilities will be regulated as financial products under the SVF framework; and
- the transaction functions facilitated by third-party intermediaries will be regulated as financial products under the digital asset facility framework that Treasury is working on in parallel to payment functions regulation.
This function is intended to capture any entity that provides a financial service involving a Payment Instrument, as a Payment Instrument will be a financial product. Physical and digital debit and credit cards, 'buy now, pay later' cards and cheques will be Payment Instruments. Examples of activities given by Treasury include:
- entering into a contract with a customer to provide a Payment Instrument
- providing personalised security credentials and activation instructions to a customer
- setting the parameters (eg spending limits) for a Payment Instrument
- providing program management services for a Payment Instrument
- arranging for the issuance of a Payment Instrument.
This function is not intended to capture the operator of a payment system who does not themselves issue, or arrange for the issuing, of a Payment Instrument.
This function is intended to capture service providers who possess funds for the purpose of transferring them between a payer and payee, regardless of whether they are acting for, or on behalf of, the payer or payee. Payment Facilitation Services will differ from SVFs as SVFs will allow the customer to direct the timing and destination of the payment of stored funds.
This function is intended to capture merchant acquirers, payment facilitators and aggregators, some marketplaces and platforms, salary processors, superannuation clearing houses, payout providers and domestic remittance providers.
This function covers services that enable a funds transfer to occur but, unlike Payment Facilitation Services, do not involve the service provider possessing or controlling the funds. This includes services that are preliminary or necessary to a funds transfer, the transfer and custody of data associated with a payment and the operation and management of payment platforms, pass-through digital wallets and other similar services. The customer of the services may be the payer, payee or another PSP.
Examples of activities covered by this function include authentication, authorisation, routing and the capture and transfer of payment credentials.
General technical services provided to PSPs are not intended to be covered by this payment function.
This function is intended to capture only the movement of funds into or out of Australia. Domestic remittances will be regulated as Payment Facilitation Services. Treasury proposes a standalone function for cross-border transfers as they are subject to unique risks, including exchange rate risk, settlement risk across multiple currencies and the complexity of complying with disparate regulatory requirements between countries, and to reflect regulatory approaches taken in other jurisdictions.
As flagged in Consultation Paper 1, the following exemptions are proposed to be removed or amended:
- Ad hoc electronic funds transfer facilities issued by an ADI or operator of a payment system, under which transferred funds are available to the payee within two business days or other time reasonably required to complete the transaction (eg telegraphic transfer facilities)1—these are intended to be regulated as Cross-border Transfer Services.
- Facilities under which there is only one person to whom payments can be made2—some of these facilities may be covered by the proposed new 'limited network' exemption.
- Non-cash payment facilities under which all payments are debited to a credit facility3—Treasury is of the view that this exemption should be narrowed and seeks feedback as to the appropriate scope of the exemption.
- Facilities that are designated payment systems under the Payments Systems (Regulation) Act 1998 (Cth) (PSRA).4
Treasury also seeks further feedback on exemptions applying to unlicensed product issuers generally—issuing through an intermediary authorisation5 or from outside Australia through an AFS licensee.6 Further feedback is sought as to whether these exemptions should be denied in relation to SVFs, Payment Facilitation Services and Cross-border Transfer Services or if they should remain but unlicensed providers relying on them should be subject to client money obligations and reporting, audit and information provision obligations.
The following exemptions are proposed to apply in relation to payment functions:
| Proposed exemption | Comments |
| Cash-based payment services | These are currently excluded from regulation and present lower risks than non-cash payments. |
| Low value facilities |
ASIC currently provides relief for non-cash payment facilities that meet the following conditions:
This exemption is proposed to be retained, but the per-client and aggregate limits increased to $1500 and $15 million respectively. |
| Limited network |
An exemption is proposed for Payment Instruments that can be used only for a limited or specific purpose and meet one of the following conditions: (a) allow the holder to acquire goods or services only in the issuer's physical premises; (b) are issued by a professional issuer and allow the holder to acquire goods or services only within a limited network of service providers that have direct commercial agreements with the issuer; or (c) may be used only to acquire a very limited range of goods or services. Treasury also floated the possibility of this exemption being subject to a value limit. This exemption is intended to cover gift vouchers/cards, prepaid mobile credit and specific-purpose payment instruments (eg fuel cards). |
| Commercial agents | Treasury notes that some jurisdictions provide an exclusion for payment transactions between a payer and the payee, through a commercial agent authorised in an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of either the payer or the payee (but not both the payer and the payee)—eg a motor vehicle dealer who accepts payments for the manufacturer/wholesaler of the vehicle. Treasury seeks feedback as to whether such an exclusion should be included in the Australian regime. |
| Internal transactions by related entities | An exemption for transactions carried out between PSPs, or their agents or branches, for their own account is proposed, similar to the existing exemption for financial services provided to a related body corporate. |
| Operation of specified payment systems | Treasury is considering either abolishing the existing exemption for a facility that is a designated payment system,8 or replacing it with either an exemption for a designated payment system that is declared by the regulations to not be a payment system, or an exemption for the underlying operation of a payment system. Merchant or customer facing services provided by payment system operators are not intended to be exempt from the licensing regime. |
| Global financial messaging infrastructure | SWIFT messaging infrastructure is not intended to be regulated as a payment service. |
ASIC also seeks feedback on the following exemptions that were requested in submissions responding to Consultation Paper 1:
- salary packaging and payroll services
- loyalty schemes
- limited participant exemptions granted by ASIC.
Financial requirements to apply to PSPs
As AFS licensees, PSPs will be subject to financial requirements. In addition to the base-level solvency, positive net assets, cash needs, financial reporting and audit requirements, and the requirement to have arrangements for compensating retail clients, it is proposed that PSPs will be subject to the following additional or modified financial requirements.
Surplus liquid funds
The surplus liquid funds (SLF) requirement ordinarily applies to AFS licensees that hold at least $100,000 in client money or property. If it applies, the AFS licensee is required to hold $50,000 in SLF. However, Treasury proposes that all PSPs should be subject to an SLF requirement, regardless of whether they hold client money.
Adjusted surplus liquid funds
The adjusted surplus liquid funds (ASLF) requirement ordinarily applies if an AFS licensee incurs actual or contingent monetary liabilities to clients by entering into a transaction with a client in the course of providing a financial service to the client. If it applies, an AFS licensee is required to hold ASLF of $50,000 plus 5% of adjusted liabilities between $1 million and $100 million, plus 0.5% of adjusted liabilities exceeding $100 million, up to a maximum ASLF of $100 million. It is proposed that providers of all SVFs, Payment Facilitation Services and Cross-border Transfer Services would be subject to the ASLF requirement.
Client money rules
It is proposed that all PSPs that hold client money should be subject to the client money rules, regardless of the PSP's operating model or legal arrangement for holding funds. Specifically, the following payments-specific amendments and clarifications to the existing client money rules are proposed:
- Funds held by PSPs for processing payment are not money paid by way of remuneration or money that the licensee is otherwise entitled to.
- Funds that are used for purchasing an increased interest in a payment product (eg loading additional funds into an SVF) are not exempt from the client money obligations in relation to those funds.
- A PSP is not a person entitled to money for the purposes of existing regulations authorising withdrawals from a client money account.
- Restrictions on the ability of a PSP to seek general consents from clients to withdraw money from a client money account.
Consultation Paper 2 suggests that Treasury's preferred approach to payment functions is to require all money at rest to be held on trust in a designated client money account.
Prudential regulation of stored value facilities
Consultation Paper 1 proposed that 'Major SVFs' that store more than $50 million in aggregate customer funds, offer individual customers the ability to store more than $1000 for more than 31 days and allow customers to redeem funds on demand in Australian currency should be subject to prudential regulation by APRA. Consultation Paper 2 proposes:
- increasing the aggregate funds threshold to $100 million, on a group-wide basis
- removing the per-customer threshold
- potentially removing the 'redemption on demand' right as a definitional element, but instead imposing a requirement on all SVFs (including Payment Stablecoin SVFs) to allow customers to redeem the stored value at any time at par value.
This is intended to apply to both traditional SVFs and Payment Stablecoin SVFs.
A power for the minister to, after consultation with ASIC and APRA, designate any SVF provider or Payment Facilitation Service as being subject to ARPA's prudential regulation is also proposed.
To prevent regulatory arbitrage between SVFs and banking products, it is proposed that SVFs would be prohibited from paying interest on the funds stored and to provide disclosure of this fact (as well as other tailored, upfront and ongoing disclosure requirements).
Issuers of Payment Stablecoins are also proposed to be required to disclose the composition of their reserve assets and proof of liabilities on a monthly basis, to provide independent attestation of the composition of their reserve assets and to undergo an annual audit.
The following banking regulatory requirements are proposed to be extended to Major SVFs and designated Payment Facilitation Services:
- APRA powers and requirements under the Banking Act 1959 (Cth), including directions powers, prudential standard-making powers, enforcement powers and resolution powers (but not Financial Claims Scheme protections).
- Transfer of business provisions under the Financial Sector (Transfer and Restructure) Act 1999 (Cth).
- Ownership restrictions under the Financial Sector (Shareholdings) Act 1998 (Cth).
- The Financial Accountability Regime.
- Financial institution supervisory levies under the Financial Institutions Supervisory Levies Collection Act 1998 (Cth) and Authorised Deposit-taking Institutions Supervisory Levy Imposition Act 1998 (Cth).
Common access requirements
Separately from the AFS licensing regime, Consultation Paper 2 proposes that APRA will be responsible for setting common access requirements (CARs) for payment systems and issuing a licence to entities that satisfy the CARs. The CARs will impose governance, risk management, compliance, financial and operational capacity, business continuity and security obligations on PSPs seeking direct access to payment systems. The objective of the CARs will be to balance the management of risks to the financial system with the diversity, competition and innovation benefits that may result from opening up direct access to payment systems to non-ADIs.
The CARs are not proposed to be mandated in legislation. Instead, payment system operators would be expected to require, via their scheme rules, non-ADI PSPs to satisfy the CARs in order to be eligible for direct access to the scheme.
Mandatory technical standards
In response to feedback to Consultation Paper 1, Treasury has refined its proposal in relation to mandatory technical standards. It is proposed that:
- The Reserve Bank of Australia (RBA) will be responsible for authorising industry standard-setting bodies to be authorised standard-setting bodies (ASSBs) and for overseeing ASSBs.
- ASSBs will develop technical standards.
- The RBA, after consultation, will approve a technical standard to be mandatory (although Consultation Paper 2 also floats the option of giving the RBA only a veto power over mandatory technical standards imposed by an ASSB), and may also disallow a standard or direct the ASSB to amend the standard.
- Compliance with mandatory technical standards will be monitored and enforced by the ASSB, but major breaches will be referred to the regulator (the RBA or ASIC) for further action.
Mandatory technical standards are proposed to apply to 'participants' in a payment system as defined in the PSRA, regardless of whether or not they hold an AFSL. For PSPs who hold an AFSL, it is proposed that compliance with relevant technical standards will be a condition on their AFSL.
Transitional arrangements
The new licensing requirements are proposed to come into force 18 months after the legislation to introduce them is passed. It is proposed that entities would be required to lodge, and have accepted by ASIC, within six months after the legislation is passed.
Treasury proposes that PSPs that already hold an AFSL would be deemed to be authorised under the new regime and would not be required to apply to vary their AFSL. Instead, there would be a separate procedure by which they are required to notify ASIC of the payment functions that they provide via a prescribed notification process.
Next steps
Treasury asked for submissions in response to the Regulation of Payment Service Providers Consultation Paper by 2 February 2024.
The Government intends to consult on exposure draft legislation in 2024. Following the passage of the primary legislation, further consultation is expected to occur in relation to certain detailed elements of the regime, including the mandatory revised ePayments code, CARs and mandatory technical standards.
Footnotes
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Corporations Regulations reg 7.1.07G.
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Corporations Act s 763D(2)(a)(i).
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Corporations Act s 765A(1)(h)(ii).
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Corporations Act s 765A(1)(j).
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Corporations Act s 911A(2)(b).
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Corporations Regulations reg 7.6.01(1)(n). Financial product advice, custody and market making from outside Australia is covered by reg 7.6.01(1)(na).
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ASIC Corporations (Non-cash Payment Facilities) Instrument 2016/211, s 9.
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Corporations Act s 765A(1)(j)