Payments System Modernisation Tranche 1: key proposals at a glance

The Bill introduces two new categories of ‘payment product,’ which will be regulated as financial products under the Corporations Act:

1. Stored value facilities (SVFs) replace the existing concept of a purchased payment facility (PPF). An SVF is a facility that allows a person to store value – by transferring funds to the provider – and then subsequently redeem that value by making a non-cash funds transfer. Common examples include e-wallets and prepaid accounts. The SVF definition excludes single-payee facilities (such as some gift cards redeemable only at a single merchant), deposit products, managed investment schemes, and digital asset platforms.

    

   Tokenised SVFs are a new sub-category of SVF designed to capture payment stablecoins. A tokenised SVF is an SVF where the right to redeem a particular amount of funds is attached to a digital token. The amount redeemable must be fixed (for example, on a 1:1 basis) and denominated in a single currency. This means that ‘algorithmic’ stablecoins, or tokens whose value floats based on supply and demand (such as bitcoin or ether), are not intended to be captured.

2. Payment instruments cover facilities that provide a method for a payer to make non-cash funds transfers. This includes debit and prepaid card facilities, PayTo facilities, BPay facilities, and direct debit facilities.

The Bill introduces three new categories of ‘payment service,’ which will be regulated as financial services:

1. Payment initiation services cover activities that have the effect of initiating a non-cash funds transfer, such as services provided to merchants that enable them to request and receive payments from customers' bank accounts.
2. Payment facilitation services cover services where funds are transferred to the provider in connection with a non-cash funds transfer, on the basis that the provider will further transfer them. This captures merchant acquirers and remittance service providers.
3. Payment technology and enablement services cover activities undertaken for the dominant purpose of enabling non-cash funds transfers, including digital wallet services and payment gateways.

Self-custodial wallet software – where the user, not the provider, controls and initiates transfers of digital tokens – is expressly excluded from each of the payment service definitions.

The reforms create a dedicated regime for tokenised SVFs (payment stablecoins). Key features include:

• Restricted expressions. Expressions such as "Australian regulated SVF," "Australian regulated payment stablecoin," "APRA regulated SVF provider" and "APRA regulated payment stablecoin provider" will become restricted.
• Enhanced disclosure obligations. Tokenised SVF providers will be subject to ongoing disclosure obligations beyond ordinary PDS requirements. They must publish a notice of any material change or significant event that may reasonably affect the provider's ability to meet its redemption obligations, or the value of reserve assets. Major SVF providers must publish such notices immediately. Additionally, tokenised SVF providers must publish monthly statements regarding reserve assets and outstanding liabilities.
• Redemption rights must not be unreasonably restricted. It will be an offence for a tokenised SVF provider to unreasonably restrict a person from exercising the right to redeem an amount from the tokenised SVF. A restriction is taken to be unreasonable if it is not applied equally to all holders of digital tokens.

The Bill introduces new requirements for licensees to safeguard ‘relevant PS money’ – money that is paid, received, or credited in connection with payment system services or products. These provisions are modelled on the existing client money regime, but tailored for the payments context.

Key features of the safeguarding regime include:

• Statutory trust. All relevant payment services (PS) money is taken to be held on trust for the benefit of the end user, regardless of whether it has been segregated into a trust account. The licensee is the trustee and owes fiduciary duties.
• Segregation as the primary safeguarding method. Licensees must segregate relevant PS money into one or more designated trust accounts held with an Australian authorised deposit-taking institutions (ADI) by the end of the next business day after the money becomes relevant PS money.
• Alternative safeguarding methods. Licensees may apply to Australian Securities and Investments Commission (ASIC) for approval to use other safeguarding methods, such as insurance or guarantees. However, these alternative methods cannot be used for money credited to an SVF issued by the licensee – SVF balances must always be held in a segregated trust account.
• Protection from creditors. Segregated money is protected from attachment, set-off, security interests, and similar processes, except at the suit of a person otherwise entitled to the money.
• Guaranteed redemption period. For SVFs, a person who possesses a right to redeem money credited to an SVF will have a guaranteed six-year redemption period, starting from the first day the money can no longer be used for payments (such as an expiry date). This right cannot be contracted out of.

The Prudential Regulation Bill establishes a new prudential regulation framework administered by The Australian Prudential Regulation Authority (APRA) for payment entities that operate at scale.

Key features include:

• $200 million threshold. An SVF provider becomes a ‘major SVF provider’ – and enters APRA's regulatory perimeter – when the total amount of stored value in regulated facilities issued by the provider (and its related bodies corporate) exceeds a threshold to be prescribed in the rules. It is intended that this threshold will be $200 million. This represents a very significant increase from the current $10 million threshold under the PPF framework.
• Registration, not licensing. Major SVF providers will be required to register with APRA, but will not need a separate APRA licence. APRA will develop recalibrated prudential standards to reflect the more limited role and risks of SVFs compared to banking business.
• Local incorporation. Major SVF providers must be incorporated in Australia. Foreign entities wishing to operate at scale will need to establish a local subsidiary.
• Ministerial designation. The Minister may also designate an SVF provider (below the threshold) or a payment facilitation service provider for APRA regulation, where the entity materially contributes to the risk of financial instability.
• Opt-in pathway. SVF providers may also voluntarily opt in to APRA supervision, subject to APRA's approval.
• Statutory management and resolution powers. APRA will have broad powers to appoint statutory managers, direct recapitalisation, and manage the resolution of regulated entities. These powers are broadly consistent with those available to APRA for ADIs.

The existing ePayments Code, which is currently voluntary and administered by ASIC, will be replaced by a new mandatory code made by the Minister by legislative instrument.

The rulemaking power includes a non-exhaustive list of matters the code may address, such as processes for dealing with unauthorised transactions and mistaken payments, conduct requirements for electronic payments, information disclosure requirements, and procedures for disputes and breaches.

The code will distinguish between scams and mistaken payments. A payment made by a payer because of deliberate deception by another person (for example, a scam) will not be a "mistaken payment" for the purposes of the code. Scams are instead intended to be addressed through the Scams Prevention Framework under the Competition and Consumer Act.

One significant change for PSPs dealing with larger or institutional clients is that the existing exemption from ‘retail client’ status for sophisticated investors will not apply to the provision of SVFs, payment instruments, or payment services.

This means that PSPs will be required to have appropriate dispute resolution systems in place - including internal dispute resolution and Australian Financial Complaints Authority (AFCA) membership - even for clients who would otherwise qualify as sophisticated investors. This reflects the nature and widespread use of payment products and is intended to ensure that PSPs cannot rely on the existing exemption to the detriment of clients who should be treated as retail clients.

A modification to the existing wholesale client categories will deem licensed PSPs to be wholesale clients (for example, in the context of receiving payment services in a payment stack).

The reforms introduce new obligations on intermediary PSPs – that is, licensees that provide services to another licensee for the purpose of that other licensee providing payment services to retail clients.

Intermediary licensees must take reasonable steps to cooperate with AFCA in relation to any complaint relating to the provision of services by the other licensee, and must cooperate with the other licensee's internal dispute resolution procedures. This is designed to address the practical challenge that non-cooperation by an intermediary can impede complaint resolution for end consumers.

The Bill introduces a new framework for managing dormant or inactive money held in SVFs issued by major SVF providers.

An SVF will be treated as "inactive" if there has been no transaction activity by any holder for a period of seven years. Any money standing to the credit of an inactive SVF will be "unclaimed SVF money" and must be paid by the major SVF provider to the Commonwealth within three months after the end of the relevant calendar year.

A process is also established for individuals to claim reimbursement of unclaimed money, either from the responsible provider or, if the provider no longer exists, directly from ASIC.

The draft regulations introduce tailored exemptions from the AFS licensing framework for certain low-risk payment products and services.

Key exemptions include:

• Low value SVFs. Where the aggregate SVF liabilities of the provider (and related bodies) do not exceed $10 million, and no individual facility exceeds $1,000 in value (the per-facility cap does not apply to tokenised SVFs).
• Gift facilities. SVFs issued with a fixed value and marketed only as a gift product, which cannot be reloaded after issue.
• Prepaid mobile facilities. SVFs linked to prepaid telecommunications services.
• Low value payment services. Where the average monthly transaction volume does not exceed $8 million.

Even where these exemptions apply, issuers are still subject to conditions, including obligations to provide a disclosure document to retail clients, prominently display any expiry dates, and maintain an internal dispute resolution procedure.

The Bill commences 12 months after Royal Assent. On commencement, transitional arrangements provide for a ‘default transition period’ to allow PSPs to obtain the necessary AFS licence authorisations.

Existing NCP facility licensees will have a one-month default transition period and access to a streamlined licence variation process - ASIC will not have discretion to refuse these applications. All other PSPs will have a six-month default transition period.

A further "grace period" may extend the transition if a PSP has applied for a licence or licence variation during the default transition period but ASIC has not yet made a decision.

Authorised PPF providers will become registered major SVF providers. For other entities, a transition period will align to the Corporations Act transition periods (in other words, one month or six months depending on AFS licence status).

During the grace period, certain consumer protections - including the dispute resolution and safeguarding requirements - will apply as if the person held an AFS licence.