Modernising the payments regulatory framework to address emerging risks: draft legislation released

By John Bassilios and Max Ding

The Federal Government has released exposure draft legislation (the Bill) amending the Payment Systems (Regulation) Act 1998 (PSRA). It seeks to modernise the payments regulatory framework and ensure that both government and regulators are equipped to address emerging risks related to payments in Australia.

In this update, we outline the proposed amendments to the PSRA, which are largely consistent with the consultation paper released in June of this year concerning the amendments, and the earlier recommendations of the June 2021 Review of the Payments System.

The Bill is part of the Government’s broader strategic plan for Australia’s payments system, which also includes a proposed new payments licensing framework. You can read about these proposals in our other updates: ‘Treasury releases strategic plan for Australia’s payments system‘ and ‘Payments system modernisation – licensing: defining payment functions‘. The introduction of the Bill into legislation will represent the first step of the Government’s broader strategic plan.

Broadly, the Bill expands the regulatory scope of the PSRA by updating key definitions to capture broader sections of the modern payments system ecosystem, introducing new Ministerial powers that can be exercised in the ‘national interest’ to ensure the Government can respond to payments issues beyond the existing remit of the RBA, and introducing an enforceable undertakings framework and updating the PSRA penalty framework to better support enforcement and compliance.

Public consultation on the Bill is open until 1 November 2023.

Updating the definition of ‘payment system’ and ‘participant’

Under the current law, the RBA has the ability to designate a ‘payment system’ and consequently impose regulation on ‘participants’ of a designated payment system.

Under the current law, the definition of ‘payment system’ is limited to the circulation of ‘money’ and can also be interpreted to be limited to arrangements in which there are multiple participants that operate under a common set of rules. Under the new Bill, the new definition of ‘payment system’ is expanded to cover a broader set of arrangements, including payment systems that facilitate payments in digital currency, as well as ‘closed loop’ and ‘three party’ systems such as American Express and Diners Club.

In terms of the definition of ‘participant’, under the current law, this can be interpreted to be limited to entities that are formal members of a designated payment system that are subject to the rules governing the operation of the system. Under the new Bill, the new definition of ‘participant’ captures all entities involved in the payment value chain, including entities with or without a direct relationship to a payment system. This definition is intended to extend the coverage of the PSRA to ‘Buy Now, Pay Later’ products, digital wallet passthrough services (eg ApplePay and Google Wallet), and services that facilitate payments in crypto assets (such as payments stablecoins).

It is important to note that falling within these definitions does not automatically mean a ‘participant’ of a designated ‘payment system’ will be regulated or have any obligations imposed on them. Obligations under regulation will only occur through access regimes and standards on ‘public interest’ grounds.

New Ministerial powers to address payment issues on ‘national interest’ grounds

Under the current law, only the RBA has the ability to designate a ‘payment system’ and impose obligations on ‘participants’ of a designated ‘payment system’ where there are ‘public interest’ grounds. The new Bill provides that the Treasury may also designate a payment system’ if it considers that it is in the ‘national interest’ to do so. Consideration of ‘national interest’ is broader than the current ‘public interest’ consideration required of the RBA when designating payment systems. Government envisages that Treasury may have regard to the following factors when undertaking its ‘national interest’ consideration:

• national security;
• consumer protection;
• data-related issues;
• innovation;
• cyber security;
• AML/CTF;
• crisis management; and
• accessibility

Moreover, before designating a payment system, Treasury must consult with the RBA and relevant regulators prescribed by regulations.

It is important to note that designation by the Treasury does not mean that it can directly impose obligations on participants in designated payment systems. Rather, Treasury is empowered to nominate a relevant regulatory entity (including the RBA) perform regulatory powers and functions in relation to a payment system Treasury has designated, and direct nominated regulators about the performance of functions and powers where such direction is in the national interest and consistent with the functions of the regulator. The intention of this mechanism is to ensure that regulators who have superior knowledge and expertise in the space remain the entities directly responsible for regulating participants in payment systems which Treasury has designated. As discussed above, the imposition of obligations by the RBA or other relevant regulatory entities will only occur through access regimes and standards where there are ‘public interest’ grounds.

Changes to support enforcement and compliance under the PSRA

Under the Bill, the maximum penalties for certain criminal offences under the PSRA have been increased to better reflect the seriousness of certain misconduct under the PSRA. The Bill also introduces a civil penalty framework.

Furthermore, the Bill introduces a formal regime for the RBA to accept and enforce undertakings made by participants of payment systems. Currently, the practice is for the RBA to obtain voluntary undertakings. The introduction of an enforceable undertakings regime under the PSRA creates a formal process for court enforcement of the terms of an undertaking in the event of a breach.

Reforms not covered by the Bill

The Government’s consultation paper released in June of this year also contemplated several other changes to the PSRA, which are discussed in our previous update on the paper, including:

• clarifying the scope of the current power of the RBA to impose regulatory obligations through an access regime or standard to expand the scope of these powers to cover broader issues;
• allowing the RBA greater ability to publicly disclose certain information that is in the public interest; and
• repealing procedures to resolve differences of opinion between the Government and RBA and the implications of this on payments system policy and the new Ministerial designation power.

We note that the new Bill does not address these proposed reforms.

Public consultation on the Bill is open until 1 November 2023. Please feel free to reach out if you require assistance with making a submission.