Snapshot
- After the release of its first consultation paper (CP1) on a new licensing regime for Payment Service Providers (PSPs) in June, Treasury has (on 8 December 2023) released a second paper (CP2) providing an updated list of payment functions intended to be captured under the new regime and which will leverage the Australian Financial Services framework to regulate PSPs.
- The Government is updating the payments regulatory framework to ensure it is fit for purpose for the modern economy. These updates follow through with the policy objectives outlined in the Strategic Plan for Australia’s Payments System released in June 2023.
- Amendments to the Payments Systems (Regulation) Act 1998 (Cth) (‘PSRA’) and the introduction of a licensing framework for PSPs, are levers the Government hopes will address the policy issues posed by new payments technologies.
- The Government has indicated its intention to introduce legislation for the new payments licensing regime some time in 2024. Certain detailed elements of the reforms will be subject to further consultation. These include the design of supporting regulations for the mandatory revised ePayments code, common access requirements, and mandatory technical standards.
Proposed payment functions for regulation
CP2 proposes an updated list of payment functions which will be captured by the regulation. These functions are intended to ensure that the ‘regulatory perimeter’ reflects the nature of the industry and is appropriate for addressing key risks, whilst retaining technological and competitive neutrality.
The following payment functions are those which the Government proposes to regulate, however, the definitions contained are not finalised and are intended to demonstrate policy intent only. It is intended these functions will become defined financial products and services, to be incorporated into legislation following the consultation process.
Table of payment functions
| Payment function | Description | Illustrative examples |
|---|---|---|
| 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 | Current Purchased Payment Facilities, 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 | Payment stablecoin issuers |
| Payment Instruments | 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 (e.g. 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 | Passthrough digital wallets, payment gateways |
| Cross-border Transfer Services | 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 |
Licensing Process
The usual AFSL authorisation process is proposed to apply under this new regime for all PSPs seeking to be licensed. AFSL authorisations specify the types of financial products/and or services a licensee is able to provide.
CP2 acknowledges that many PSP offerings involve a wide range of products and services. Where a PSP wishes to expand to other products and services, the proposed licensing approach would mean that it must seek a variation to its AFSL authorisation for each newly defined payment function it is looking to offer.
Key general obligations for providing financial services
PSPs required to hold an AFSL under the proposed reforms would be subject to the existing requirements contained in the Corporations Act, Chapter 7. However, certain obligations, such as design and distribution obligations, disclosure obligations, and dispute resolution obligations, will only apply if a licensee is providing services to retail clients. The proposed key obligations are summarised below:
Key obligations for PSPs providing financial services
| Obligation | Proposed treatment | Existing exemptions |
|---|---|---|
| Hold an AFSL, comply with licence conditions | Obligation will apply, unless exempt | Include limited dealing and advice services by a recipient of payments for goods or service |
| General obligations under s912A of the Corporations Act, including financial requirements | Obligations will apply, unless exempt. SVFs, Payment Facilitation Services and Cross-border Transfer Services to hold Adjusted Surplus Liquid Funds. All other PSPs to hold Surplus Liquid Funds | APRA-regulated bodies are exempt from financial and risk obligations |
| Have compensation arrangements for retail clients | Obligation will apply Provide an exemption for Payment Technology and Enablement Services. No other changes (except updating reference to non-cash payments) | Dealing in financial product advice about a basic deposit product, a facility for making non-cash payments related to a basic deposit product and other specified situations |
| Client money obligations under Part 7.8 of the Corporations Act. | Obligation will apply to all PSPs that hold funds | Market participants subject to ASIC Market Integrity Rules can be exempt from reconciliation requirements |
| Provide information and assistance to ASIC, notify client of reportable situations | Obligation will apply | APRA regulated bodies in some cases are exempt from requirements to notify ASIC |
| Keep financial records, lodge statements, appoint an auditor | Obligation will apply | Limited AFS licensees have reduced requirements |
Additional obligations where provided financial services involve a financial product
| Obligation | Proposed treatment of PSPs | Existing relevant exemptions |
|---|---|---|
| Design and Distribution obligations, including making a target market determination (If servicing retail clients) | Obligation will continue to apply to debit cards, credit products and SVFs. No changes to existing exemptions (except updating reference to non-cash payment) ASIC would consider the reforms when it considers whether to provide relief. | Certain money products and credit facilities. Non-cash payment facilities (aside from debit cards, credit products and SVFs) |
| Disclosure - Product Disclosure Statement (PDS) (if servicing retail clients) | Obligation will apply. No changes to existing exemptions (except updating reference to non-cash payments) | Basic deposit products, or a facility for making non-cash payments that is related to a basic deposit product, or a traveller’s cheque |
| No hawking to retail clients | Exempt payment products where the consumer initiates contact. No other changes to existing exemptions (except updating reference to non-cash payment) | Basic banking products (which include a facility for making non-cash payments) if the consumer initiates contact |
Regulatory framework for SVFs
CP2 proposes a graduated regulatory framework where Standard SVFs will require an AFSL; and Major SVFs will require an additional APRA licence. It is intended for Major SVFs to be those facilities which: store more than $100 million in customer funds, on a whole of group basis, and/or offer the functionality to allow their customers to redeem their funds on demand in AUD.
Under this regime, any SVF which has more than $100 million in stored funds that does not have an APRA licence, would be carrying on unauthorised business.
To keep the regime flexible and adaptable to emerging products and services, CP2 further proposes that the Responsible Minister will wield the power to amend the size threshold for Major SVFs and be able to ‘designate’ any particular SVF or Payment Facilitation Service as being subject to APRA’s prudential supervision.
ePayments Code
A key component of the reforms advanced is a legislatively mandated ePayments Code. The Government asserts that a Code would ensure that Australian consumers are better protected and would reflect the importance and necessity of providing baseline consumer protections across the payments ecosystem.
The Government intends to undertake a holistic review of the current ePayments Code after the passage of the licensing reforms, before mandating its subscription.
Any other future reforms to the ePayments Code are proposed to be made through the creation of a Ministerial rule-making power. Obligations may apply across the payments sector or a cross-section of PSPs as appropriate.
Next steps
If you have questions, or require assistance, in relation to how the proposed reforms to the Payment Services Regime may impact your business, please contact the Financial Services & Advisory team at HWL Ebsworth.