Late last month, the Australian Government released the final report of the Payments System Review. While any legislative changes are some time away, any shifts will have far reaching impacts across the industry. We explore the key themes and recommendations of the Report and outline considerations for operators and participants in the Australian payments system.
The review of the regulatory architecture of the payments system is part of the Digital Business Package announced in the midst of the COVID-19 pandemic in the 2020-21 Budget.
The key purpose of the review is to ensure the payments system remains "fit for purpose" and is capable of supporting innovation both for businesses and consumers.
Across the industry, any laws relating to the report's recommendations will likely impact financial institutions, fintechs, payment facilitators, money remitters, stored value facility providers and other operators and participants in the Australian payments system.
Digital wallets, buy-now-pay-later arrangements and digital currencies could also be subject to increased regulatory oversight in the future. However, no specific recommendations have been made on these relatively new innovations at this stage.
Analysing the key themes
The Report makes 15 recommendations. Some recommendations are detailed and others are expressed in broad terms.
The key themes emerging from this Report include:
- Enhanced payments leadership through the Treasury and aligned regulation
The Report makes a number of recommendations within this theme.
These include introducing a Ministerial power to designate payment systems and participants of payment systems where it is in the national interest to do so.1 Designation power would include a power to require other regulators to develop regulatory rules and give binding directions to operators and participants in the payments system.
Additionally, the Treasury's payment policy function should be enhanced.2The Report explains that this enhanced function should not replace or duplicate the roles of the RBA or other regulators. The enhanced function should instead articulate the government's stance on payments issues, involve stakeholders to identify trends in market and provide a platform for solving issues with other regulators.
- Single, tiered payments licensing framework
The Report recommends that a list of payment functions should be developed.3 Providers of the payment functions in this list should be required to obtain the single payments licence with the relevant authorisations.4
Notably the Report recommends that the ePayments Code5 and core industry standards should be mandated for these licensees.6 There should also be a single point of contact being ASIC to coordinate the authorisations required from other regulators, such as AUSTRAC for the purposes of the AML laws and APRA for large stored value facility providers.7
It is open to the Government to implement the new payments licensing framework by introducing new authorisations to cover the relevant payments functions. These authorisations would need to be obtained as part of the existing Australian financial services licensing regime in Chapter 7 of the Corporations Act 2001 (Cth).
One alternative discussed in the Report is to introduce an entirely new payments licensing regime alongside the current Australian financial services licensing framework. The challenge of untangling payments related aspects from the current regulatory framework is acknowledged in the Report and the complexity of this task may be a deterrent for the Government in adopting this alternative approach. The recent wave of reforms such as the introduction of the Consumer Data Right regime, the Design and Distribution Obligations regime and the new breach reporting obligations further complicates the task of introducing a new payments licensing regime which may interact with these reforms.
Risks and opportunities
The Report presents a significant opportunity for the Government to make it simpler for entities to navigate the Australian regulatory framework for payments system while ensuring consumers are protected.
A single payments licensing framework in Australia will also bring the Australian framework into alignment with overseas jurisdictions such as Singapore and the UK with obvious benefits to foreign fintechs and other financial institutions looking to enter the Australian market.
However, given the broad nature of most of the recommendations, there is a risk the implementation of the recommendations could have unintended consequences:
- The introduction of a list of payment functions may mean that payment functions which were previously unregulated become regulated under the new payment licensing framework. This may include payment gateway providers, merchant acquirers and other payment intermediaries being subject to additional regulation.
- The Report refers to several innovations in the payments system such as digital wallets, buy-now-pay-later arrangements and digital currencies. While no specific recommendations are made in respect of these, the Report makes it clear that the risks associated with these relatively new payment instruments should be considered by the regulators in the consideration of the future regulatory settings and definition of "payments system". This leaves it wide open for the Government to consider further regulatory settings for these arrangements with no certainty to the participants in these arrangements as to what such settings may involve.
- The Report notes the increased resourcing needs at the Treasury and ASIC that follow from the recommendations. However, no further detail is discussed. If implemented, the source of funding (industry or otherwise) may ultimately determine the burden of these regulatory reforms.
What happens next?
The Treasury is expected to undertake consultation on the recommendations in the second half of 2021 ahead of the government finalising a response before the end of the year.
As part of the consultation period, financial institutions, fintechs and other entities which are operators or participants in the Australian payments system should consider making submissions.
In delivering against its stated objective to promote a more innovative and robust payments environment, we hope to see more precise responses by the Government on the legal framework for implementing the recommendations in the Report in due course.
1Recommendation 7, Final Report on the Australian Payment Systems Review.
2 Recommendation 4, Final Report on the Australian Payment Systems Review.
3 Recommendation 8, Final Report on the Australian Payment Systems Review.
4 Recommendation 9, Final Report on the Australian Payment Systems Review.
5 Recommendation 10, Final Report on the Australian Payment Systems Review.
6 Recommendation 12, Final Report on the Australian Payment Systems Review.
7 Recommendations 11 and 13, Final Report on the Australian Payment Systems Review.
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