Payment System modernisation – licensing: second consultation paper released
By John Bassilios and Max Ding
The Federal Government is continuing to seek feedback on a licensing framework for payment service providers (PSPs), and has released a second consultation paper on the proposed framework.
This consultation paper follows the first consultation paper released in June 2023 seeking feedback on a list of seven proposed payment functions to be licensed, which you can read about in our earlier update: ‘Payments system modernisation – licensing: defining payment functions’.
The proposed new payments licensing framework is part of the Government’s broader strategic plan for Australia’s payments system. You can read our updates on other aspects of the Government’s broader plan: 'Treasury releases strategic plan for Australia’s payments system', ‘Reforms to the Payment Systems (Regulation) Act 1998’, and ‘Modernising the payments regulatory framework to address emerging risks: draft legislation released’.
In this update, we outline the Government’s updated proposals concerning the licensing framework for PSPs in response to stakeholder feedback received on the first consultation paper.
Broadly, the second consultation paper includes an updated list of payment functions to be licensed and seeks to leverage the existing Australian Financial Services framework to regulate PSPs.
The Government intends to introduce legislation for the payments licensing regime in 2024.
Public consultation on the second consultation paper is open until 2 February 2024.
Updating the proposed payment functions
The Government’s first consultation paper proposed seven payment functions, which have now been updated with greater clarity, including how the updated functions will be incorporated into law as defined financial products and services.
The table below summarises the updated payment functions.
|Stored-value Facilities (‘traditional SVFs’)
|Funds loaded onto an account or facility. Customers are able to direct the movement of these funds, for the purposes of paying for goods or services, transferring to another person, or withdrawing the funds.
|Digital wallets that store value, value stored on online accounts, virtual and physical pre-paid cards.
|Issuance of Payment Stablecoins (‘Payment Stablecoin SVFs’)
|Issuers of payment stablecoins that store value and control the total supply of payment stablecoins through issuance and redemption activities.
However, this is not intended to include closed loop stablecoin operators, that can only be used within a particular environment or are limited to a specific platform.
|Payment stablecoin issuers
|A personalised or individualised set of procedures that allows a payer to instruct an entity with which its funds are held to initiate a transfer of funds to a payee.
|Issuers of digital and physical cards (eg debit and credit cards, Buy Now Pay Later cards), cheques.
|Payment Initiation Services
|The initiation of payments from a payer to a payee by a third-party entity, at the request of a customer. The entity initiating a payment is a third party to the payment account where the payer’s funds are held.
|PayTo services, recurring payments initiated by a third party, direct debit or credit services.
|Payment Facilitation Services
|The process of entering into the possession of funds for the purpose of facilitating a transfer between a payer and payee. This includes for the purpose of acquiring, aggregating, disbursing, or otherwise transferring of funds within Australia.
|Merchant acquirers, payment facilitators and aggregators, certain marketplaces and platforms, payout providers, certain payment processors, domestic money transfer service providers.
|Payment Technology and Enablement Services
|Payment specific services provided by third parties that enable payments to be made. These services enable a transfer of funds to occur but do not enter into possession or control of the funds.
|Pass through digital wallets, payment gateways.
|Cross-border Transfer Services
|A service that transfers or enables the transfer of funds from Australia to a payee outside of Australia, and/or of funds from outside of Australia to a payee in Australia
|Certain remittance providers, or international money transfer service providers.
The key differences between the functions proposed in the Government’s first consultation paper and the functions listed above are that:
- The ‘Payment Facilitation, Authentication, Authorisation, and Processing Services’ function has been split into two distinct functions: (i) ‘Payment Facilitation Services’; and (ii) ‘Payment Technology and Enablement Services’.
- The ‘Payments Clearing and Settlement Services’ function has been removed.
- The ‘Money Transfer Services’ function has been replaced with a ‘Cross-border Transfer Services’ function.
How will the payment functions be incorporated into law?
The Government has also provided greater clarity as to how each of the payment functions defined above is proposed to be incorporated into law. Namely, the Government has proposed that the above payment functions be incorporated into the definitions of ‘financial product’ and ‘financial services’, which are products and activities already regulated under financial services laws under the Corporations Act 2001 (Cth).
In particular, under current financial services law, ‘financial product’ includes a facility through which a person ‘makes non-cash payments’. However, it is proposed that this definition be replaced with a broader concept of a facility through which a person ‘uses a payment product’. ‘Payment product’ would be defined to include the payment functions of stored value facilities (capturing traditional stored value facilities and payment stablecoin facilities), payment instruments, payment facilitation services, and cross-border transfer services. The introduction of this broader definition is on the basis that particular payment functions do not fit within the existing concept of ‘makes non-cash payments’.
Moreover, under current financial services law, ‘financial service’ includes ‘providing financial product advice’, ‘dealing in a financial product’ and ‘making a market for a financial product’. The Government proposes to retain these financial services definitions; however, the Government proposes to add ‘providing payment services’ as a new category of financial service. A person would be providing a ‘payment service’ if they provide payment initiation services or payment technology and enablement services. The proposed treatment of these payment functions as a new form of ‘financial service’ is intended to reflect that the product-based obligations which apply to ‘financial products’ may not be fit for purpose for these payment functions.
What obligations will apply to PSPs engaging in payment functions?
As payment functions are proposed to be captured under an expanded definition of ‘financial product’ and ‘financial services’ under the current financial services regime, PSPs engaging in the payment functions described above will be subject to the existing obligations applying to financial service providers under the Corporations Act 2001 (Cth).
These obligations include:
- the requirement to hold an Australian Financial Services License (AFSL) with the appropriate authorisations relating to the specific payment function the business is looking to offer, as well as any other financial services to be provided by the business;
- providing financial services efficiently, honestly, and fairly;
- managing conflicts of interest;
- having a dispute resolution system for retail clients;
- having arrangements for compensating retail clients;
- meeting solvency and cash reserve requirements;
- keeping and submitting financial records;
- financial requirements including holding surplus liquid funds and adjusted surplus liquid funds; and
- client money rules for PSPs that hold client funds.
We note that transitional arrangements are proposed to apply to PSPs that already hold an AFSL, who would not need to apply to vary their existing license but would need to notify ASIC of the payment functions they operate through a prescribed notification process administered by ASIC.
For all other PSPs, it is proposed that the payments licensing requirements come into force 18 months after passage of the relevant legislation for PSPs which are caught by the new legislation and which submit an AFSL application within six months from the passage of the legislation.
Finally, some PSPs will also be subject to additional regulatory processes under the Government’s proposals, including:
- major stored value facilities (including payment stablecoins), as well as any payment facilitation services designated under a proposed ministerial designation power, will require an APRA license and be subject to ongoing prudential supervision;
- stored value facilities (including payment stablecoins) will be subject to additional regulatory obligations in addition to general AFSL obligations, including prohibitions on paying interest in relation to funds stored, additional disclosure requirements, additional reporting requirements with APRA, and giving consumers redemption rights in relation to the monetary value stored in a stored value facility or issued tokens; and
- PSPs that provide a designated service that include remittance arrangements need to enrol and register with AUSTRAC and comply with relevant AML/CTF obligations.
Exclusions and exemptions that are proposed to be removed, amended and added
For consistency with introducing the proposed changes in relation to PSPs under the current financial services regime, the Government proposes to remove or amend a number of existing exclusions and exemptions from the financial services regime, including those concerning electronic funds transfers and payment facilities.
Government is also proposing to introduce a number of potential new exclusions and exemptions that may be appropriate to apply to certain PSPs, for example:
- maintaining the current exclusion of cash-based payment services due to the lower risks they present;
- maintaining the current exemption of low value non-cash payment facilities from licensing, conduct and disclosure obligations, and hawking prohibitions, and increasing the monetary thresholds for what qualifies as a ‘low value non-cash payment facility’, therefore capturing a larger number of non-cash payment facilities (however, low value non-cash payment facilities are subject to alternative disclosure and dispute resolution obligations);
- introducing a ‘limited network’ exclusion for payment instruments such as gift cards and pre-paid mobile phone accounts that can only be used for a limited or specific purpose and which meet one of the following conditions:
- allow the holder to acquire goods or services only in the issuer’s physical premises; or
- are issued by a professional issuer and allow the holder to acquire goods or services only within a limited network of service providers that have direct commercial agreements with the issuer; or
- may be used only to acquire a very limited range of goods or services.
Common access requirements, industry standard-setting framework, and ePayments Code
The Government’s second consultation paper also proposes to introduce:
- common access requirements to provide a pathway for non-bank PSPs to gain access to Australian payments systems to clear and settle payments;
- a standard-setting framework for the payments industry in relation to core technical standards developed by authorised standard-setting bodies where existing voluntary standards are inadequate; and
- a mandatory ePayments Code to replace the existing voluntary code and a ministerial rule-making power to set baseline consumer protections to ensure consistent consumer protection for unauthorised transactions and mistaken payments.
The Government intends to introduce legislation for the payments licensing regime in 2024.
Following the passage of primary legislation, certain detailed aspects of the proposed reforms will be subject to further consultation, including the design of supporting regulations for the mandatory revised ePayments Code, common access requirements, and mandatory technical standards.
Public consultation on the consultation paper is open until 2 February 2024. Please feel free to reach out if you require assistance with making a submission.
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