On 11 October 2023, Commonwealth Treasury released draft legislation to reform the Payment Systems (Regulation) Act 1998 (Cth) (PSRA). This marks the first tranche of draft legislation in the Government’s payments reforms, with further draft legislation relating to the new licensing and conduct framework to be released next year.
The PSRA gives the Reserve Bank of Australia (RBA) the power to designate payment systems and, in respect of those designated systems, impose access regimes, make standards, arbitrate disputes and give directions to participants. The RBA has used these powers to impose standards in relation to interchange fees, merchant surcharges and has established access regimes in relation to Visa and Mastercard.
The draft legislation will:
1. Give the RBA and the Treasurer the ability to regulate a broader range of payment systems and participants within those systems
The RBA’s ability to regulate a payment system and its participants is currently limited by the definitions of those terms within the Act and a restriction on the RBA’s power to designate only where in the public interest to do so. The proposed changes will broaden the definition of payment system (to include those relating to digital currency) and participants (to include ancillary service providers such as Apple or Google (rather than just direct participants of those systems)) and introduce a new power for the Treasurer to designate payment systems where it is in the national interest to do so.
2. Give the RBA a broader range of enforcement tools including the ability to seek civil penalties or accept an enforceable undertaking (currently the PSRA only creates criminal offences).
The draft legislation does not remove the current requirement under the PSRA for holders of stored value to be authorised by the RBA. We expect this will occur as part of the licensing and conduct framework stream of the reforms next year.
While this draft legislation represents a very small part of the promised radical overhaul of the Australian payments system, it may have a significant impact on those who are not currently classified as participants in a payment system. This will depend on how the RBA and the Treasurer choose to exercise their new powers. We would encourage participants to consider making submissions on key issues.
We set out further detail on the key aspects of the draft legislation below.
Broadening the concepts of “payment system” and “participant”
Under the proposed new definitions of these terms, a broader range of payment systems may be designated, including those that use non-monetary digital assets or which are three-party or closed loop systems. The definition is not limited to “funds transfer systems” but includes an arrangement or series of arrangements under which transfer of funds are made (and related instruments or procedures). A new definition of “funds” will be introduced to include (non-exhaustively) money and digital units of value including digital currency within the meaning of the GST Act.
Interestingly, the draft legislation uses a different definition to the definition of “digital currency” in the AML/CTF Act. This will create inconsistency across the suite of payments legislation and appears inconsistent with the spirit of the Recommendation 13 in the Payments System Review conducted by Dr Scott Farrell (that alignment of payments regulatory requirements, including with respect to AML/CTF issues, should be improved). We agree with the need to align concepts of digital currency or value across payment system laws. We anticipate this alignment issue could also be highly relevant to any evolution of Australia’s regulation of the crypto-asset sector more generally. In this respect, the selection of the broad “digital units of value” concept for this legislation rather than the narrower AML/CTF Act definition of “digital currency” is interesting, and a possible sign that there will be a more-rather-than-less approach to any future regime for crypto exchanges, brokers and custodians that are not already caught under Australia’s financial regulatory regime, consistent with the broad definitions adopted in other major markets.
The draft legislation also expands the scope of participants that can be regulated. The proposed definition would include those that “operate, administer or participate” in a payment system and entities that “enable or facilitate” the operation, administration or participation in a payment system (ie entities with or without direct membership in the system). This includes:
- digital wallet services which facilitate payments by storing digital representations of cards (eg Google and Apple);
- providers of BNPL products;
- cash-in-transit services; and
- services that facilitate payment in crypto assets (eg stablecoins).
The definition is not intended to capture merchants that sell goods or services (unless they are a member of a payment system or provide payment services in their own right).
Although the new definition of “participant” is clearly broader than the existing definition (which many interpret as only capturing direct participants in the schemes), its outer limits are unclear. Given the diversity of payment systems that may be designated, we acknowledge the need for a definition that is system-agnostic and flexible. However, industry may wish to consider whether submissions should be made on how the sub-categories of “participant” are used in access regimes and standards (for example, whether standards should adopt the terminology used in the rules governing a payment system so it is clear who the obligations apply to).
New designation powers
Currently only the RBA has the power to designate payment systems, impose access regimes, make standards, arbitrate disputes and give directions to participants.
The draft legislation creates an additional power for the Treasurer to designate a payment system if it is in the “national interest”. As noted in the June 2023 Consultation Paper, this power is intended to provide the Government with the ability to respond to new and emerging issues in the payments system that are not within the RBA’s ‘public interest’ mandate (page 11). In contrast, the RBA may only designate a payment system if it is in the “public interest” which requires it to have regard to the desirability of payment systems being financially safe for use by participants, efficient and competitive, and not materially contributing to increased risk in the financial system (a “core public interest matter”). In determining whether a designation would be in the “national interest”, the Treasurer may have regard to a core public interest matter but must identify one or more matters other than a “core public interest matter” (the Explanatory Memorandum suggests these could include national security, consumer protection, data-related issues, innovation, cyber security, anti-money laundering and counter-terrorism financing, crisis management and accessibility).
Accordingly, the Treasurer’s designation power is significantly broader than the RBA’s. However, before designating a payment system (a “special designated payment system”), the Treasurer must consult with the RBA and each “special regulator” (to be prescribed in regulations and likely to include ASIC, APRA and the ACCC) and must consider whether alternatives to the designation exist.
Once designated as a “special designated payment system”, the Treasurer may appoint a “special regulator” and give directions to impose an access regime, make standards, arbitrate disputes and give directions to participants.
Although the RBA may separately designate that payment system to bring it within the RBA’s remit, the actions taken by the “special regulator” in respect of the payment system will prevail over the RBA’s to the extent of inconsistency.
The new designation regime is summarised in the figure below.
Consequences of breach
Currently the RBA has limited enforcement powers under the PSRA. It is a criminal offence to fail to comply with the RBA’s direction or to give information to the RBA. Under the draft legislation:
- these provisions will also become subject to civil penalties (being 500 penalty units for bodies corporate, calculated for each day of non-compliance); and
- the maximum criminal penalty for failing to comply with a direction of the RBA under section 21 has been doubled from 250 penalty units to 500 penalty units (for bodies corporate, calculated for each day of non-compliance).
The June 2023 Consultation Paper suggested that penalties might be imposed for breaches of standards and access regimes (rather than only for failure to comply with a direction or provide information). However this has not been taken up in the draft legislation.
The draft legislation also creates a framework for accepting enforceable undertakings from participants. These may relate to any matter in relation to which the RBA has a function or power under the PSRA or related instrument. If a participant breaches an undertaking, the RBA may apply to the Court to make a range of orders, including to perform certain actions, to pay the Commonwealth financial benefits obtained, or compensate any person who has suffered loss.
Next steps
Consultation is open until 1 November 2023.
Please let us know if you would like to discuss any aspect of the draft legislation (or the payments reform agenda more generally).
