On 8 December 2023, Treasury released its second consultation paper (Consultation Paper) in relation to an enhanced regulatory framework for Australian payment service providers (PSPs). The Consultation Paper follows Treasury’s first consultation paper covering ‘in scope’ activities and a draft bill that was recently introduced into Parliament regarding amendments to the Payment Systems (Regulation) Act 1998 (Cth) (PSRA). These enhancements form part of the Government’s Strategic Plan for Australia’s Payments System.
The Consultation Paper proposes regulating the payments industry across 5 key areas:
- Financial services licensing, including requiring PSPs to hold an Australian financial services licence (AFSL).
- Prudential regulation, including requiring major stored value facility (Major SVF) and major payment stablecoin (Major PSC) issuers holding in excess of $100 million to be authorised by the Australian Prudential Regulation Authority (APRA).
- Common access requirements to be set and supervised by APRA, enabling non authorised deposit-taking institutions (ADIs) to seek direct access to Australian payment systems;
- Introducing a formal standard setting framework for certain mandatory technical payment standards, to be set by the Reserve Bank of Australia (RBA) and implemented by a new industry standard setting board.
- Introducing ePayments Code reforms that will allow the Minister to set a mandatory revised code in identified segments.
Under the Corporations Act 2001 (Cth), entities providing financial services in relation to non-cash payment (NCP) facilities are required to hold an AFSL. However, through multiple payment system reviews and Treasury’s first consultation paper, the Government has recommended enhancing this regime and providing clarity on its scope.
Treasury proposes implementing this recommendation by:
- replacing the NCP facility financial product definition with a new ‘payment product’ definition; and
- including ‘payment service’ as a new financial service.
New requirement to hold an AFSL
Entities will trigger the requirement to hold an AFSL if they provide:
Treasury proposes capturing 5 arrangements under the new ‘payment product’ definition.
Out of scope
Traditional stored value facilities (SVF)
Treasury will repeal the existing purchased payment facility (PPF) definition and define SVFs as a stand alone class of regulated entities.
All arrangements or facilities that involve holding customer funds that can be used to make payments or transfers (whether in an existing account or as an overlay platform service). For example, existing PPFs, staged digital wallets, value stored on online accounts, prepaid cards.
Payment stablecoin (PSC) SVFs
A PSC is:
at face value through a claim provided by a payment stablecoin issuer to a customer.
All arrangements or facilities that involve a third party issuing an asset backed digital token that is intended to maintain a stable value relative to a fiat currency and can be claimed fiat currency against that face value. For example, stablecoin (eg, USDC) issuers.
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.
For example, issuers of cheques, debit cards, credit cards, BNPL cards, virtual payment instruments, advisers and distributors.
Entities that administer systems or infrastructure for the operation of payment instruments (eg, card schemes).
Payment facilitation services
Taking possession of funds for the purpose of facilitating a transfer between a payer and a payee in Australia (eg, acquiring, aggregating, disbursing and otherwise transferring funds). This includes through accounts held at other financial institutions but controlled by the PSP. This will capture PSPs regardless of whether they act for either or both the payer and payee.
Cross-border transfer services.
Cross-border transfer services
A service that transfers or enables the transfer of funds from an Australian payer to an offshore payee, or from an offshore payer to an Australian payee. This also applies where the receiving account is outside Australia but the owner is in Australia (or vice versa).
Domestic transfer services.
Treasury has removed clearing and settlement services from scope (these services were proposed in the first consultation paper) as the associated risks are managed by requirements imposed on payment system operators and common access requirements.
Treasury proposes 3 financial service categories relevant for PSPs under the enhanced regime.
Out of scope
Financial services in relation to payment products
This includes existing financial services such as:
Existing exclusions and exemptions will apply (eg, authorised representative appointments).
Payment initiation services
The initiation of payments (at a customer’s request) from a payer to a payee by a third party. The entity initiating a payment is different to the entity that holds the payer’s funds.
Entities that perform PayTo services in the New Payments Platform (NPP) (eg, entities authorised to initiate payments under PayTo agreements or mandates) and entities that provide direct debit services or direct credit services in the Bulk Electronic Clearing System.
Payment technology and enablement services
Payment specific services to enable payments to be made. That is, they enable a funds transfer to occur but do not possess or control the funds in the transfer. These entities may be customer or merchant facing or engage with other PSPs, and Treasury proposes to create this delineation.
Technical services such as cloud storage services, telecommunications networks, mobile phones or e-invoicing.
There are a range of payment specific AFSL exemptions and product exclusions. Treasury proposes removing, amending or adding exclusions and exemptions under the enhanced regime.
Treasury proposes removing the following exclusions:
- EFTs: Certain electronic funds transfers where there is no standing arrangement to transfer funds in this manner.
- Single payee exemption: Facilities where there is only one person to whom payments can be made.
- Payment systems: Facilities that are designated payment systems under the PSRA.
New or amended
Treasury proposes adding or amending the following exclusions and exemptions:
- Credit: There is an existing exclusion for facilities where payments are made from a credit facility. Treasury proposes amending this to address an existing loophole where a facility may be a credit facility but not regulated under the National Consumer Credit Protection Act 2009 (Cth).
- Cash: Cash based payment services are currently excluded under the NCP definition. This will remain excluded under new definitions.
- Low value payments: The existing low value NCP facility relief thresholds will be increased from $1,000 per client and $10 million facility aggregate to $1,500 per client and $15 million facility aggregate. The existing RBA relief for limited value and participant PPFs will also be repealed.
- Limited networks: This new exemption will be available for payment instruments that can be used only for a limited or specific purpose and meet one of the following conditions:
- allow the holder to acquire goods or services only in the issuer’s physical premises;
- are issued by a professional issuer and allow the holder to acquire goods or services only within a limited network of service providers which have direct commercial agreements with the issuer; or
- may be used only to acquire a very limited range of goods or services.
This exclusion is intended to replace the need for exemptions relating to gift cards, prepaid mobile phone accounts, and purpose specific instruments (eg, transport, fuel and printing cards).
- Commercial agents: Treasury is considering an exclusion where a commercial agent is authorised to negotiate or conclude the sale or purchase of goods or services on behalf of either the payer or payee, but not both the payer and payee (ie, not applying to online marketplaces that intermediate payments between both buyers and sellers).
- Transactions with related entities: Financial services involving payments are excluded from licensing requirements if payments can only be made to the issuer or a related body corporate. A similar exclusion will be proposed under the enhanced regime.
- Operation of specific payment systems: Given the expansion of the PSRA, the existing exclusion will be removed. Treasury is considering replacing it with an exclusion for designated payment systems or special designated payment systems that are declared under the regulations not to be a financial product.
- Global financial messaging infrastructure: Global financial messaging infrastructure that is subject to regulatory oversight (eg, Society for Worldwide Interbank Financial Telecommunications (SWIFT)) will not be captured.
Treasury also welcomes feedback on other exclusions, including not-for-profit, charitable and religious activities, electronic lodgement network operators, salary packaging and processing, loyalty schemes, limited participant payment arrangements and facilities used for third party payments.
All entities providing either payment services or other financial services for payment products will be required to comply with obligations under financial services law. At a high level, this includes:
- holding an AFSL with appropriate authorisations and complying with licence conditions;
- complying with general licensee obligations (including appropriate resources and financial requirements);
- having compensation arrangements in place for retail clients;
- complying with disclosure obligations for retail clients;
- complying with client money obligations (including holding client money on trust with an ADI);
- providing information and assistance to ASIC (including in relation to reportable situations);
- complying with financial records and statement obligations, including appointing an auditor;
- complying with design and distribution obligations (DDO); and
- complying with hawking prohibitions for retail clients.
Existing exemptions from these obligations will continue to apply (eg, existing exemptions for DDO compliance in relation to certain payment facilities). Treasury anticipates a need for bespoke requirements for some products and service providers. For example:
- All licensees are required to comply with base level financial requirements (eg, solvency, cash needs, auditor). However, some PSPs will be required to comply with standard surplus liquid fund (SLF) requirements while others will be subject to adjusted SLF requirements (eg, SVFs, payment facilitation services and cross-border transfer services).
- Certain payment technology and enablement services will not required to provide a financial services guide (eg, because the requirements are not well suited to the technical nature of the services).
- SVF and PSC issuers will be required to provide additional disclosures (eg, confirmation of transaction provisions, issue periodic statements to retail clients, disclose that the SVF is not a deposit product and not subject to the same level of protections as depositors), and comply with reporting regimes administered by APRA.
- PSC issuers will be required to publicly disclose the composition of reserve assets monthly along with proof of liabilities. Issuers will be required to provide independent attestation of the composition of these assets and undertake an annual external audit. Reserves must be high quality and highly liquid assets as determined under client money rules or determined by APRA (for Major PSCs). All reserve assets will be segregated from the issuer’s own assets and must be marked to market on a daily basis to be equal to at least 100% of par value of tokens issued at all times.
Treasury proposes the payments licensing requirements will come into force 18 months after the passage of legislation. However, it is suggested that entities submit an AFSL application within 6 months of the passage of legislation. Treasury proposes that any PSPs already holding an AFSL will not need to vary their existing licence but will need to notify ASIC of the payment functions they operate.
SVFs include both traditional SVFs and PSC SVFs. The enhanced regime will distinguish between Standard SVFs and Major SVFs. Treasury has amended the previously proposed definition for ‘Major SVF’ by increasing the overall threshold to $100 million and removing the criteria for a person to hold more than $1,000 per client for greater than 31 days. Treasury now proposes that Major SVFs:
- store more than $100 million in customer funds (on a whole of group basis); and
- offer the functionality to allow their customers to redeem their funds on demand in Australian dollars.
Standard SVFs includes facilities below this $100 million threshold. However, the Minister will be able to amend these thresholds and may designate particular SVF providers or payment facilitation services as being subject to this regulation.
Standards SVFs will be required to hold an AFSL, while Major SVFs will be required to hold both an AFSL and an APRA authorisation.
APRA intends to review and update Prudential Standard APS 610 in 2025 to support Major SVF reforms. APRA will also receive extended powers to apply to Major SVFs (eg, directions powers, enforcement powers, transfer of business provisions, restrictions on shareholdings, powers under the Financial Accountability Regime, and collection of levies).
APRA will determine additional capital requirements under the enhanced prudential framework and will consider the holistic risks PSC arrangements. The prudential requirements under the SVF framework will only apply to non-bank issued stablecoins which require all non-bank issued stablecoins to be collateralised 1:1 with appropriate reserves. Banks that issue stablecoins by tokenising liabilities of the bank or by holding 1:1 reserves are already prudentially regulated and subject to higher regulatory threshold.
As above, Treasury proposes the payments licensing requirements will come into force 18 months after the passage of legislation. Further information on APRA’s licensing expectations will be released once APRA commences its consultation process. Entities subject to existing PPF class exemptions will be required to comply with these conditions until APRA has notified them of their application outcome. Given the RBA’s reduced role in relation to PPFs, no entity can apply for a PPF class exemption once the payments legislation has passed.
The common access requirements (CARs) are a proposed set of regulatory obligations for non-ADI PSPs seeking direct access to Australian payment systems to clear and settle payments. APRA will be responsible for setting and supervising CARs as a new prudential standard and entities that meet the CARs will need to be authorised and supervised by APRA under a new licence category. Clearing and settling entities will generally not also require an AFSL.
The current access requirements set by payment system operators typically favour ADIs (eg, non-ADI PSPs are not eligible to become direct participants in the NPP). The primary objective of CARs is to level the playing field for non-ADI PSPs seeking direct access, while managing the associated risks to the financial system and economy. It is expected that only a small number of PSPs will obtain CAR authorisation.
CARs will not be mandated in legislation and will not be imposed on payment system operators, but such operators may require PSPs to meet the CARs requirements in their scheme rules for non-ADI participants. However, the RBA will work with operators to meet the objectives of allowing PSPs meeting the CARs to be eligible to join the system (just as ADIs) and are not subject to discriminatory requirements. APRA will publish a list of CAR entities.
The current Australian standards landscape involves a mix of voluntary guidelines (eg, QR code guidelines), rules governing access to shared infrastructure and arrangements (eg, BECS) and rules that members of a particular payment system or community are obliged to comply with (eg, AusPayNet). Treasury proposes introducing a formal standard setting framework for certain mandatory technical standards. It is proposed that the broadened PSRA definition for ‘participant’ will capture the group of entities that will be subject to technical standard compliance. Compliance will also be an AFSL condition.
Treasury proposes that the RBA will authorise the industry standard setting body and oversee its effectiveness in performing its functions. The RBA will be able to direct, guide and sanction this body. The mandatory technical standards will seek to promote efficiency and competition, and manage risk, in the payments system. There must be a clear public interest case for a technical standard to be made mandatory.
Subscription to the ePayments Code is currently voluntary. The Government proposes undertaking a holistic review of the ePayments Code, which will include reforms that will allow the Minister to set a mandatory revised code. Obligations may apply across the sector or to specific PSPs. The Minister will be able to set mandatory, baseline consumer protections in relation to the following subject matters:
- disclosure requirements;
- listing and switching rules;
- obligations (including apportionment of liability) with respect to unauthorised transactions;
- obligations with respect to mistaken payments; and
- remedies available in the event an obligation is breached.
While Treasury’s Consultation Paper includes further refinement of captured payment arrangements and facilities, the enhanced regime will still bring most of Australia’s current payment industry providers within scope of regulation (eg, including the requirement to hold an AFSL). Given the significant impact this regime will having on existing providers, Treasury should expect to receive a broad range of submissions across the payments and payments adjacent industry.
Treasury’s consultation closes on 2 February 2024. Please reach out should you wish to discuss or make a submission.