Reforming the regulation of payment service providers

The definitions of SVF and payment instruments retain the existing concept of the single payee exemption which is part of the current non-cash payment facility definition. However, there are differences between the existing single payee exemption and what is proposed in the reforms. 

An arrangement will not be a SVF or a payment instrument if a payer can make non-cash payments only:

• to themselves; or
• one other person. This other person cannot change over time.

The concept of the person not changing over time is not embedded in existing legislation. Any service provider that relies on the single payee exemption should consider the terms of its arrangements and ensure that contractual restrictions on who payments can be made to are embedded into the terms of the product or service.

Credit facilities will continue to be exempt from the definition of financial products. 

While the Corporations Act currently exempts facilities for making non-cash payments from a credit facility, this exemption will be updated to reflect the use of payment instruments to make non-cash transfers of funds. These will be exempt if the credit facility is the only facility from the credit of which non-cash transfers of funds may be made using the payment instrument. The updated exemption is intended to cover payment instruments that are issued by the credit provider. 

This criteria differs from the current exemption which is available where all payments must be debited to a credit facility in order to be out of scope. 

The current exemption which allows certain one-off funds transfers to be made will be repealed. This exemption applies where an authorised deposit-taking institution or a payment system operator transfers funds electronically, on the client’s instructions, to a nominated person, within 2 business days or within a reasonable time and the issuer and the payer do not have a standing arrangement to transfer funds.

Treasury noted that this exemption was widely relied on in the market and in unintended ways.

Entities that rely on this exemption will need to reassess their business activities and determine whether they benefit from another exemption or whether an AFSL is required.

The existing authorised intermediary exemption is proposed to be amended to exclude where the service relates to the issue, variation or disposal of a payment product. This means that existing authorised intermediary arrangements which relate to issuing non-cash payment facilities will be restricted unless other exemptions apply.

All entities that currently rely on this exemption will need to consider whether other exemptions apply or consider alternative arrangements. 

The exemption for facilities which exchange and settle payments between the providers of those payments has been continued, but broadened. 

The exemption now addresses facilities which establish and settle obligations between providers of payment products or payments services through such a system or arrangement. 

Any entity that has restricted its current operations in order to rely on the previous exemption may be able to operate under less restrictions. 

New Division 2A of Part 7.8 is proposed to be added to the Corporations Act to deal with safeguarding money paid to new payment system licensees (although there is currently no definition of a ‘payment system licensee’). This would require payment system licensees to safeguard money paid to them:

• in connection with payment products or payment services; and
• for the benefit of the end users of those products or services.

The proposed regime for safeguarding relevant payment service money is through segregated accounts although other methods may be available with ASIC approval.

Major SVFs, who are subject to the separate APRA prudential regime, are exempted from these requirements (because they are proposed to be subject to stricter prudential requirements under the separate regime).

Any service provider whose products or services will require an AFSL as part of these reforms will need to consider the arrangements for receiving and treating money connected to those services and put in place appropriate arrangements to meet these safeguarding requirements.

Aligned with the proposals as part of the last consultation, the draft reforms would require licensees that are not otherwise required to be a member of AFCA, or otherwise involved in a relevant dispute, to take reasonable steps to cooperate with AFCA in resolving complaints. This obligation will apply where:

• the licensee provides a payment service or payment product related service; and
• the service is provided for the purpose of another licensee providing a financial service to a person as a retail client.

This may mean that a provider of services to wholesale clients, who then uses those services to provide services to a retail client, will need to cooperate with an AFCA process that impacts its clients.  

As part of the expanded obligations on major SVF providers (see further detail below), the Corporations Act will introduce new obligations relating to unclaimed money. This will require major SVF providers to lodge statements with ASIC annually in connection with unclaimed money and to pay the Commonwealth certain unclaimed SVF money each year.

These provisions would displace State and Territory unclaimed money regimes that would otherwise apply. The unclaimed money regimes of the States and Territories can be cumbersome to manage. Any major SVF provider that has an existing unclaimed monies framework in place for the purpose of one or more State or Territory regimes should revisit these arrangements as part of the reforms.

In a similar way that the Banking Act restricts words that can be used by non-banks, the Corporations Act restricts words that can be used by SVF providers. These restricted words can only be used by an AFS licensee authorised to issue SVFs and Major SVF providers registered with APRA.

These restricted phrases / words are:

• ‘Australian regulated SVF’
• ‘Australian regulated payment stablecoin’
• ‘APRA regulated SVF provider’
• ‘APRA regulated tokenised SVF provider’
• ‘APRA regulated payment stablecoin provider’
• 'APRA regulated Australian stablecoin provider’

Updating the Banking Act to incorporate updates to unclaimed money processes.

Changes to a range of other pieces of legislation including the Payment Systems (Regulation) Act 1998, Financial Sector (Collection of Data) Act 2001, Financial Sector (Shareholdings) Act 1998 Financial Sector (Transfer and Restructure) Act, 1999 and Competition and Consumer Act 2010.