The Australian Government has released the Council of Financial Regulators’ (CFR) final report (Regulation of Stored-value Facilities in Australia) of its review into the regulation of stored value facilities (SVFs) in Australia. The final report includes 11 recommendations aimed at simplifying and modernising regulatory arrangements for SVFs.
The final report was delivered to the Government in October 2019. However, this has only recently been made public following the 2020-21 Budget and the Government’s announcement to modernise the regulation of payment providers, including a new regulatory framework for SVFs.
The current regulation of SVFs exists within a framework spanning multiple regulators with overlapping and sometimes contradictory mandates. While the regime was originally designed to primarily address gift, loyalty and travel cards, recent trends in digital wallet payments has brought into question how the regime is to apply to such products. It is likely that the recommendations will come as a welcome change to many industry participants.
It is anticipated that the Treasury will work with the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to develop a reform package in consultation with stakeholders to implement the proposed streamlined regime.
The release of the final report comes in the midst of both the Reserve Bank of Australia (RBA) and Treasury conducting simultaneous reviews into the regulation of Australia’s retail payments systems. Both reports are due in 2021 and will likely impact the proposed implementation of the CFR’s recommendations.
Background
Following recommendations in the Financial System Inquiry and the Productivity Commission’s report on Competition in the Australian Financial System, the CFR initiated the review into the regulation of SVFs in September 2018. Through the release of its issues paper, the CFR requested submissions from industry on a broad range of areas, with the following review objectives:
- identifying opportunities to simplify the regulatory framework for SVFs (including purchased payment facilities (PPFs));
- ensuring that regulation does not pose an undue obstacle to innovation and competition, while maintaining appropriate levels of consumer protection and safety;
- identifying any necessary changes to enable regulation to adapt to developments in the payments market;
- identifying opportunities to improve the competitive neutrality of regulation; and
- improving the transparency and clarity of regulation, from the perspective of regulated entities, potential new entrants, and consumers.
The CFR received 9 submissions (including from CBA, Ant Financial, PayPal and the Australian Payments Network).
The CFR concluded its review and delivered the recently released final report to the Government in October 2019. While it was known that the report broadly recommended streamlining the SVF regulatory regime, much of the detail remained undisclosed.
Council of Financial Regulators’ Recommendations
The CFR’s key recommendations are as follows.
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Recommendation 1 |
SVFs should be introduced as a new class of regulated product, replacing PPFs in the regulatory framework. Regulation should be graduated and commensurate with consumer risks. |
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Recommendation 2 |
Certain SVFs that pose limited risk to consumers (eg, small/limited facilities) should continue to be exempt from most regulatory requirements. |
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Recommendation 3 |
Payment product issuers that hold client funds for a short period of time to facilitate a payment should be required to hold an Australian financial services licence (AFSL) and comply with the updated ePayments code. |
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Recommendation 4 |
ASIC should be given the power to make compliance with the ePayments code mandatory (eg, through a rule-making power). |
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Recommendation 5 |
APRA and ASIC should be responsible for regulating and licensing SVF providers. The RBA should no longer be involved in regulating individual providers of SVFs. |
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Recommendation 6 |
APRA should be responsible for prudential supervision of large SVFs that enable consumers to hold a significant amount of funds for long periods and to withdraw their funds on demand in Australian currency (e.g. by transferring funds to their bank account). |
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Recommendation 7 |
APRA should review its existing PPF prudential framework, with a view to introducing requirements for SVFs that are simpler, more targeted to the key risks posed by such entities and, where appropriate, better aligned with international approaches. |
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Recommendation 8 |
ASIC should be responsible for regulating SVFs that do not meet the criteria for APRA prudential supervision. In addition to holding an AFSL, providers should be subject to additional requirements administered by ASIC to ensure the safety of consumers’ funds. In particular, the Corporations Act 2001 should be amended to ensure that protections on client money loaded in to SVFs operate effectively and cannot be used as working capital. |
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Recommendation 9 |
AFSL holders subject to the amended client money protections should be required to report to ASIC on the amount of stored value that is held and transaction flows. |
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Recommendation 10 |
A revised regulatory framework should incorporate a mechanism to ‘designate’ certain facilities as being subject to APRA supervision in the public interest. The CFR should develop principles to guide such decisions, which could be vested in the Minister or exercised jointly by APRA and ASIC. |
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Recommendation 11 |
The CFR agencies should further consider additional measures to improve the clarity and transparency of SVF regulation for consumers and regulated entities. |
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