Last week, in announcing its Strategic Plan for Australia’s Payments System (Strategic Plan) Treasury has provided the clearest direction to date on how it plans to modernise and revamp the regulatory framework for payments in Australia. It outlines the Australian Government’s key priorities and initiatives for modernising and regulating payments systems in coming years. This announcement follows a very broad consultation on its strategic plan released earlier in the year (read our earlier update here) and a number of reviews undertaken in this space. It also follows the announcement of Treasury’s intention to adapt the existing credit licensing framework to regulate Buy Now Pay Later (BNPL) providers (read our earlier update here).
The Strategic Plan covers a broad range of themes that focus on future-proofing the frameworks and systems that facilitate the full spectrum of payments within, into and out of Australia. The plan is ambitious and will likely impact multiple industries and regulatory bodies and all payment facilitators, scheme operators and providers large and small.
- Key takeaways
- In depth
- Next steps
The plan includes:
- safety and security initiatives to combat the recent increase of payment scams and frauds
- updating the payments regulatory framework including a new licensing framework
- broader and flexible ministerial powers to tackle evolving payments systems that develop
- transitioning away from BECS and cheques
- transitioning to the New Payments Platform
- maintaining the ability to transact in cash
- further alignment with open banking and the Consumer Data Rights framework
- specific targets for ensuring cross-border payments are cheaper, faster, more transparent
A part of this announcement and to already take steps towards some of these aims, two consultation papers were also released with fairly tight timelines for making submissions:
- Proposed reforms to the Payment Systems (Regulation) Act 1998 (PSRA): The Government is seeking to expand the regulatory perimeter of the PSRA and introduce Ministerial powers to more efficiently respond to evolving issues and seeks feedback on its proposed approach (available here).
- Licensing: Defining Payment Functions: Consultation on the introduction of a tiered licensing framework for Payment Service Providers (PSPs) proposed to fit within the current Australian financial services licensing (AFSL) framework but potentially standing on its own. The focus of this paper is to determine definitions and descriptions for the full range of PSPs and payment products that operate in Australia based on their payment functions and determine which of these should be subject to licensing and regulatory oversight (available here).
While many of the proposals remain at a high level, clearly there are multiple sectors involved in various stages of payment initiation, facilitation or processing that have until now relied on a narrow approach to regulation of non-cash payments that excludes their industry or product offering. By listing potential entity types for each of the proposed payment functions, these industries are on notice to remain close to the progression of these proposals and to be prepared to take steps to become licensed once it becomes likely that this is necessary. This includes (amongst other roles and products): digital wallets, merchant acquirers, payment gateways and processors, payment routing, payment stablecoins, BNPL virtual cards and services that allow payment initiation.
There are also a wide range of those involved in payments that rely on the broad range of exemptions currently in place. Consideration of whether this continues to be the case for your business and whether yours is a service that may fall under one of the new payment function categories is a step you could already be looking at.
Please contact our team if you have any queries in relation to your current or planned activities or the likely scope of the proposed licensing framework.
The Strategic Plan for Australia’s Payments System includes an outline of Treasury’s key priorities and supporting initiatives under the following headings.
1. Promoting a safe and resilient system
The Treasury aims to provide a safe and secure manner in which Australians can transact. A reduction in the prevalence of scams and fraud is on measure to protect consumers. In achieving this, the Treasury has pledged to establish a National Anti-Scam Centre, and is also set to consult on options for the development of new industry codes across various sectors, including banks, telecommunications and digital platforms. A new payments licensing framework is also set to be developed to bolster consumer protections (which is detailed further in the second consultation paper).
Rapid technological developments are stated to provide a growing threat of cyber incidents. The Australian Government is set to release its Cyber Security Strategy 2023-2030 in 2023, to aid in strengthening defences against cyber-attacks. Industry wide migration towards the safer Advanced Encryption Standard has also been pledged to be achieved across the industry by 2025.
These rapid technological advancements are also more susceptible to system outages, malfunctions and flow-on impacts resulting from external shocks. Hence, there is a need for payments systems being more operationally resilient and secure in the face of cyber threats. In attempting to curb the effect of such outages, the RBA and the Payment Systems Board, which currently supervise systematically important systems, will also be supervising prominent payment systems such as the NPP, Visa, Mastercard and eftpos. A consultation by the RBA is expected on the development and implementation of an updated framework for the supervision of prominent payment systems.
2. Updating the payments regulatory framework
The PSRA will be updated to reflect modern definitions of ‘payment system’ and ‘participant’ and to provide greater coverage of the legislative provisions. Introduction of Ministerial powers have also been proposed to provide the Australian Government greater ambit in responding to issues which may be beyond the remit of independent regulators where issues are of a ‘national interest’.
The current consultation on the new licensing framework for payment service providers, will soon be supplemented by a second round of consultation in late 2023. Following the outcomes of the consultation process, introduction of legislation for the new payments licensing regime may be on the cards (this is detailed further in the first consultation paper).
3. Modernising payments infrastructure
In the hopes of modernising the existing payments infrastructure, Treasury is set to consult with relevant Commonwealth, state and territory agencies, on transitioning away from the use of cheques. In light of this, changes to existing legislation will likely entrench the use and acceptance of cheques. Similarly, the use of the Bulk Electronic Clearing System (BECS) will also be transitioned away from. However, despite the substantial decline in the use of cash as a method of payment, the Australian Government will be in favour of supporting Australians in having continued access to cash ‘for as long as Australians want to use cash’.
4. Uplifting competition, productivity and innovation across the economy
The Consumer Data Rights framework (CDR framework) enabled consumers to instruct accredited third parties to initiate actions on their behalf. The Treasury is set to continue working with stakeholders on understanding how the CDR framework works and aligns with developments within the payments systems. The Treasury will also ensure the widespread use of Digital ID is considered in relation to the design and creation of policy and legislation. This will ultimately allow the transition to an economy-wide Digital ID ecosystem.
In ensuring greater innovation across the economy, the Treasury will work on tackling digital skill shortages by investing in local training and skills development. In line with innovation, the Treasury will also consult on the safe and responsible use of AI, hoping to increase community trust and confidence in the technology.
5. Australia as a leader in the global payments landscape
The Australian Government is committed to ensuring Australia remains a technological innovation leader. However, the key to achieving this is greater industry coordination. In aiming to achieve this, the Australian Government is set to host an industry stakeholder roundtable for the payments systems. The Strategic Plan also sets out the specific targets for ensuring cross-border payments are cheaper, faster, more transparent and more accessible for 2027. The RBA and the Digital Finance Cooperative Research Centre (DFCRD) is also set to report on the Central Bank Digital Currency pilot in mid-2023.
Consultation Paper: Reforms to the Payment Systems (Regulation) Act 1998
The paper broadly addresses proposed reforms to expand the application of the Payment Systems (Regulation) Act 1998 (PSRA) and introduce Ministerial powers to designate new and developing payment systems to be subject to regulatory oversight.
Feedback on the proposals raised are due 5 July.
1. Expanding the ‘Payment System’ scope
A proposal to expand the current definition of ‘Payment System’ under section 7 of the PSRA to provide wider regulatory coverage. Specifically, this definition is to apply to ‘transfers of value’ instead of being limited to ‘funds transfer systems which facilitate the circulation of money’. This is set to ensure newer and more complex payments systems are adequately caught and regulated under the PSRA, where it is in the ‘public interest’ to do so.
Expanding the coverage of ‘Payment System’, which is currently interpreted as being limited to only ‘multilateral arrangements’, will ensure that both multilateral and bilateral arrangements are governed by the provisions, thereby extending to both ‘third party’ and ‘closed loop’ systems. Expansion of the definition to a more technology neutral approach referring to ‘value’ rather than ‘funds’ will also ensure non-monetary digital assets for payments are caught under the PSRA.
There are also proposed changes for the definition of ‘participant’ to ensure the legislative provisions can be applied to all entities which play a role in the payments value chain. This is intended to capture entities which will not be directly caught as members of a payment system, but which still play an important role in facilitating or enabling payments. This proposal has the potential to capture digital wallets which store digital representations of payment cards or other payment services and be subject to RBA standards or specific regulation.
The updates hope to provide a principle-based definition which are at risk of becoming quickly outdated given the rapid nature of technological advancements. This approach is in line with other jurisdictions.
2. Introduction of Ministerial powers
Currently, only the RBA has designation powers to act on issues in the ‘public interest’, and to give directions to regulators to develop regulatory rules in response. However, this is currently viewed as precluding the government and regulators from quickly addressing payments issues that arise. Most recently this has been raised in relation to the BNPL industry.
Proposals have been made for government intervention powers where emerging payments issues of national concern arise. Such government oversight is intended to address the increased complexity of payments issues and the acceleration of financial innovation.
Proposed new powers will enable Treasury to direct regulators to develop specific rules for payments systems and to ‘designate’ specific payments systems on the basis of ‘national interest’ grounds.
3. Further reforms
Further proposals relate to expanded information gathering powers, ability to accept court enforceable undertakings from payment system participants (replacing the current practice of accepting voluntary undertakings), reform of the penalties framework to also introduce civil penalty provisions and obligations to rectify breaches and consultation to address whether the mechanism to resolve differences between the Government and the RBA continues to be appropriate.
Consultation Paper: Payments system modernisation (Licensing: Defining payment functions)
This consultation focusses on determining the appropriate scope of payment related activities that should be subject to licensing and regulatory oversight. It attempts to map out definitions and descriptions for the broad range of payment activities based on their payment functions, with high level proposals setting out the extent to which each should be licensed.
Feedback on the proposals raised are due 19 July.
1. Outline of proposals
- There are seven proposed payment functions, each with significant overlap. It is proposed that PSPs performing several functions will only require one licence specifying the payment functions they are authorised to perform.
- The payments licensing framework could be implemented under the current AFSL regime or through the establishment of a separate regulatory framework, however, the proposals seem to support the former.
- To simplify the process of obtaining different authorisations, ASIC is proposed as the single point of contact through which PSPs should be able to apply for various authorisations, without having to go to multiple regulators. This is consistent with it being licensed within the AFSL framework.
- Certain payment services are proposed to be exempt or excluded from being a financial product or requiring an AFSL.
- Proposed obligations for various payment functions include, in some combination (all of which are described in more detail below): Base Requirements, Prudential Requirements, and/or Common access requirements.
- A number of existing exemptions that apply to particular non-cash payment facilities are expressly stated as being inconsistent with the new licensing framework and are to be reconsidered.
2. Payment functions – Definitions and entities
The paper includes a table of the following seven proposed payment functions and their descriptions (see full table on page 10 of the paper). The table also usefully lists example entities that would fall within each heading.
Essentially it is proposed that these will replace the existing concept of a facility through which a person makes non-cash payments.
The functions listed and defined are:
- Stored-value facilities
- 1. Issuance of traditional payment accounts or facilities
- 2. Issuance of payment stablecoins
- Payment facilitation services:
- 3. Issuance of payment instruments
- 4. Payment initiation services
- 5. Payment facilitation, authentication, authorisation and processing services
- 6. Payments clearing and settlement services
- 7. Money transfer services
Feedback is being sought as to whether certain requirements (such as licensing, disclosure, design and distribution obligations, and the hawking prohibition) should be ‘switched off’ for certain functions or activities, such as payments clearing and settlement which is not consumer facing.
3. Exemptions and exclusions
Treasury is proposing to maintain a number of well established exclusions and exemptions for low-value and limited-purpose facilities, and to provide certainty for these in legislation or regulations.
However it is also proposed to reconsider the following exemptions that are stated as being inconsistent with the proposed regime:
- exchange and settlement between non-cash payment providers
- one-off electronic funds transfers
- payments debited to a credit facility
- unlicensed product issuers that use licensed intermediaries
- relief given to specified entities and non-cash payment facilities on individual basis
3. Proposed obligation and risk-based characterisations
The paper includes an appendix of proposed obligations for different payment functions (see full appendix on page 35 of the paper). The table is split among four tiers of payment providers that are proposed to attract different obligations.
4. International regulatory frameworks
Countries such as the EU, UK, Singapore, and China all have similar frameworks which define payment services. The proposals in this Consultation Paper are stated to draw on EU/UK’s list of payment functions and their e-money institution authorisation framework.
The EU is also currently reviewing which services should be added to their list of payment services (e.g., digital wallet services, crypto asset payments, BNPL services, payment processing, and operating payment systems), which Treasury is monitoring.
Each consultation paper features a series of ‘consultation questions’ for interested stakeholders to provide feedback. These questions range from agreement with high-level principles and objectives to specific initiatives proposed. We encourage participation in the Government’s consultations and will provide further updates as and when further consultation papers or reports are released and as the proposals progress.
Please contact our team if you have any queries or require any assistance with making a submission or if you have any queries in relation to your current or planned activities or the likely scope of the proposed licensing framework.
The first Consultation Paper closes 7 July 2023 and the second is open until 19 July 2023.