On 8 December 2023, the Australian Treasury released the Second Consultation Paper on the Payments System Modernisation: Regulation of Payment Service Providers (“Consultation Paper“) that provides some further details on the proposed broadening of the licensing and regulatory framework for payment service providers (PSPs). This follows the Treasury’s initial consultation conducted in June earlier this year. (Read our alert here).
Given that legislation is expected sometime next year and it is suggested new applicants are expected to apply for an AFSL within the first six months following its introduction (in order to take advantage of an 18-month transition period), next year could prove to be a busy period for the Payments industry, in particular for those who previously fell outside the relevant licensing regime.
Regulate under existing AFSL licensing framework
The Consultation Paper proposes to adopt the current AFSL framework for PSP providers to apply for and hold an AFSL for financial services provided in respect of one or more PSP functions being proposed.
Transition to new framework
It is suggested PSPs will be given 18 months to be licensed, provided that they apply within the first six months of the passage of the legislation. PSPs that already hold an AFSL do not need to vary their existing licence for new authorisations, but must notify ASIC of the payment function they provide.
Change to overall concept
Currently, the concept of a facility through which a person makes non-cash payments forms the basis of whether a payment provider is required to hold an AFSL. This underlying concept of ‘makes non-cash payments’ is proposed to be replaced with a broader ‘uses a payment product’ or similar, with expanded functions of what comprises either a payment product or providing a payment service.
Payment products and new type of financial services
As introduced in the June consultation, the new ‘payment product’ definition is proposed to apply to traditional stored value facilities (SVFs), payment stablecoins, payment instruments, payment facilitation services and cross-border transfer services (which replaces the June consultation money transfer services function).
Payment technology and enablement services has been separated out as its own function and in addition to payment initiation services will form a new financial services category, namely ‘providing payment services’.
Clearing and settlement services function has been removed.
The Consultation Paper provides a proposed conceptual definition, purpose and scope for each function as well as a number of examples of which industries are intended to be captured. Treasury expect to draft the legal definitions for each of these concepts following the end of the consultation process.
The broad range of effected industries in the payments space has not considerably narrowed since the last consultation, even with substantive pushback from a number of industries in relation to their limited role in handling customer funds, for example regulation of digital wallets that tokenise payment instruments. However, the multiple functions headings may enable varying levels of regulation to be applied to different functions based on the corresponding risk Treasury considers will apply. Whether or not client funds are handled is critical to a number of functions and will likely be a factor in determining this level of risk.
State of current exemptions
A number of exemptions are proposed to be modified or removed to reflect the new regulatory framework, for example the exemption for certain electronic funds transfers will be removed in light of the intention to introduce ‘Cross-border Transfer Services’ within the licensing framework.
Payments that access a credit facility will be maintained, but narrowed to exclude commercial credit. This is on the basis that only consumer credit is being regulated under another regime.
The current exemptions for low-value or limited purpose facilities are intended to remain albeit with amendments such as higher thresholds for low value facilities and broader language for limited purpose facilities to negate the need to have various specific exemptions.
The Consultation flags the removal of the ‘limited participant’ exemption and is also seeking feedback on the ‘loyalty schemes’ exemption on the basis that certain widely used or large value loyalty schemes could present risks to consumers.
Other new exemptions are being proposed to introduce including those available in other jurisdictions such as for a commercial agent that acts only on behalf of the payer or payee in a payment transaction or for certain internal transactions between related entities or their agents for their own account.
Treasury is also consulting with industry in relation to the application of client monies to all PSPs that hold client money, including SVFs, payment facilitation services and cross-border transfer services. It is expressly proposed for the client money rules to apply to the full range of payment facilitators including SVFs ‘regardless of the PSP’s operating model or legal arrangement for holding funds’. Treasury further specifies that this includes where the money was paid ‘in exchange for a contractual promise to the customer or user to be able to make those payments’ or for ‘purchasing an increased interest’ which seems clearly intended to counter the view that such monies fall outside the client monies framework on the basis it has been ‘paid to acquire an increased interest’ in a financial product.
Major SVFs and major stablecoin issuers holding over AUD 100 million (or if the provider is otherwise designated) will also be subject to prudential regulation under APRA, and will require an APRA licence.
A review of the ePayments Code will be undertaken by the Australian Government, which will likely result in its mandatory application. This change will also provide an opportunity for the Minister to set mandatory, baseline consumer protections with respect to disclosure, listing and switching rules, obligations regarding unauthorised transactions, obligations regarding mistaken payments, and remedies if an obligation is breached.
The Australian Government is seeking submissions to the Consultation Paper until 2 February 2024, following which there is a proposal to introduce legislation for the payments licensing framework in 2024.
Further consultation will be commenced on additional elements of the overall reforms, such as the design of supporting regulations for the ePayments Code, common access requirements, and mandatory technical standards.
For entities in the payments industry who to date have operated outside of the Australian ‘non-cash payments’ regulatory regime, now is a good time to review these proposals and assess your operations in Australia to see if the new payments regulatory regime (if passed as contemplated in the Consultation Paper) will affect your operations in 2024.