Transforming Australia’s payments system: Government responds to payments system regulation recommendations

Last week, the Australian Government released its much awaited response to recent inquiries into the Australian payments system. The Government affirmed its commitment to significantly reform the regulatory framework. We discuss the Government’s key responses to the law reform proposals in these inquiries and implications for industry.

The Government’s Response (Response), which can be found here, addresses the following inquiries.

• Review of the Australian Payments System
  
  
• Senate Select Committee on Australia as a Technology and Financial Centre Final Report
  
  
• Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services 

In releasing the Response, the Government has affirmed its commitment to significantly reforming the regulatory framework for the Australian payments system, particularly in respect to crypto-assets, Buy-Now-Pay-Later style credit products, and digital wallets (which allow consumers to store credit card and debit card details, amongst other things).

The Government has also agreed to implement a tiered payments licensing framework based on a list of payment functions. This could have a wide-ranging impact on financial services providers such as stored value facility issuers and remittance providers. 

Payment gateway providers, merchant acquirers and other payment intermediaries could also face greater regulation depending on the outcome of the consultation process for implementing these reforms.

The Government has committed to adopt the following recommendations: 

1. Key Recommendations adopted from the Review of the Australian Payments System

• Consumers and businesses should be at the centre of policy design and implementation (Recommendation 1)
  
  The Government agrees the regulatory architecture should serve the consumers and businesses that rely on the payments system.
  
  
• The Government, through the Treasurer, will take on enhanced leadership role on payments issues (Recommendations 2, 3, 4 & 15)
  
  The Response states:
  
  Given the increased complexity of payments issues and the acceleration of financial innovation, enhanced leadership, vision and oversight is needed in the payments ecosystem. The government, through the Treasurer, is best placed to provide this.[1]
  
  Given the range of regulators involved with the regulation of the payments system in Australia, the prominence given to Treasury (and the Treasurer) is notable. Additional resources will be allocated to the Treasury to build capability in payments and to strengthen coordination with industry and financial regulators.
  
  The Government will also develop a five-year strategic plan for the payments system to provide certainty on policy priorities and strategic direction. As part of this plan, the Government will also consider integration of key agencies to the New Payments Platform, including the use of PayID which can help reduce instances of scams, fraudulent and mistaken payments.
  
  Consultation on this strategic plan is to start immediately with the initial plan to be developed by mid-2022 and assessed annually from then.
  
  
• Expand definition of ‘payment system’ in the Payment Systems (Regulation) Act 1998 (Cth) (PSRA) (Recommendation 6)
  
  The Government will expand the definitions in the PSRA so that ‘the full suite of systems and participants within the payments ecosystem’ are adequately captured. According to the Response, ‘[e]xpanding the definition of a payment system will broaden the RBA’s ability to designate new and emerging payment systems under the PSRA, where it is in the public interest as defined in the PSRA’
  
  Treasury will commence consultation on these changes in early 2022 with Government to receive advice by mid-2022.
  
  
• Introduce a new Ministerial designation power (Recommendation 7)
  
  The Government will introduce a designation power to be used by the Treasurer when it is in the national interest to do so. This will enable those payment systems to be subject to regulation by the RBA or other regulators. The Treasurer will also have the power to direct regulators to develop rules and give binding directors to operators and participants in payments systems.
  
  The Treasurer will delegate the power to designate payment systems, where it is the public interest to do so, to the RBA. The Government has indicated that it will only exercise use of this power in exceptional circumstances or for matters of national significance.
  
  Treasury will commence consultation on this new power in early 2022 with Government to receive advice by mid-2022.
  
  
• Introduce a tiered payments licensing framework and mandate the ePayments Code for licensees (Recommendations 8, 9, 10, 11 and 12)
  
  The Government will consult with industry and introduce a new single, tiered payments licensing framework to improve regulatory certainty, and to ensure appropriate regulatory oversight. This framework would be implemented as part of the Australian financial services licence regime. The Government will consider how obligations that facilitate easier access would be incorporated, including the RBA working with payment system providers to ensure the licence design facilitates transparent and easy access, encouraging competition and innovation in the sector.
  
  Conditions of holding the licence will include compliance with obligations under the ePayments Code as well as technical standards set by authorised standard setting bodies.
  
  This tiered licensing framework will be based on a list of payment functions to be regulated determined through consultation with industry.
  
  Treasury will commence consultation on these measure in early 2022, with Government to receive advice on the list of payment functions to be regulated by mid-2022 and on the new licensing framework by the end of 2022.
  
  
• Establish regular payments forum with relevant regulators (Recommendation 13)
  
  The Treasury will establish a regular payments forum with relevant regulators (including AUSTRAC) to ensure coordination and alignment in approach and policy outcomes.
  
  This payments forum will be established in early 2022.
  
  
• Educating consumers and businesses (Recommendation 14)
  
  The Government will seek to further improve consumers’ and businesses’ knowledge of payments and digital skills to support a modern economy.
  
  The refreshed National Financial Capability Strategy will aim to increase the capability of individuals to deal with a changing financial landscape, including evolving payment methods.

2. Key Recommendations adopted from the Australia as a Technology and Financial Centre Final Report

• Consult on Digital Currency Exchange, custody regime for digital assets and new corporate structures (Recommendations 1, 2 & 4)
  
  Treasury will consult on the functions of Digital Currency Exchanges that are appropriate to be licensed by ASIC and what these obligations should entail, as well as a possible custody or depository regime for digital assets.
  
  Treasury will commence these consultations in early 2022, with Government to receive advice by mid-2022.
  
  Treasury will also consult with industry on an appropriate regulatory structure for innovative new corporate structures like Decentralised Autonomous Organisations. This process will commence in the second half of 2022, with advice to be provided to Government by the end of 2022.
  
  
• Conduct token mapping exercise to identify relevant characteristics of digital assets (Recommendation 3)
  
  This exercise will enable the relevant characteristics of digital assets to be identified. This process may be ongoing given new technology trends and approaches from overseas jurisdictions emerge.
  
  This process will commence in early 2022, with Government to receive advice by the end of 2022.
  
  
• Treasury to lead a policy review of the viability of a retail Central Bank Digital Currency (CDBC) in Australia (Recommendation 8)
  
  Treasury will lead a review, in partnership with the RBA, of a retail CDBC in Australia. This review will include investigating potential economic benefits, opportunities and risks of CDBC.
  
  This process will commence in second half of 2022, with Government to receive advice by the end of 2022.
  
  
• Enhance access to the New Payments Platform (Recommendation 11)
  
  Access issues will be addressed as part of the consultation to introduce a tiered payments licensing framework discussed above. 

3. Key Recommendations adopted from the Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services

Recommendations in this report agreed to by the Government are addressed in the Government’s response to the other reports. 

In summary, the Government agrees to the following recommendations which it will implement through the consultation processes referred to above: 

• Treasury will enhance its skills, capacity, and expertise in the payments space to become more proactive in developing policy and exhibiting leadership (Recommendation 1).
  
  
• The Government will task Treasury with legislative change to enable financial regulators to regulate stored-value facilities in-line with recommendations made by the Council of Financial Regulators (Recommendation 2).
  
  
• ASIC should continue to monitor the ePayments Code and ensure the Code is updated as and when necessary, and provide recommendations to Government on whether and how to expand the Code to payment platform providers (Recommendation 5).
  
  
• ASIC should be given the power to make the ePayments Code mandatory for all industry participants (Recommendation 7).
  
  
• The definition of a payments system within the Payment Systems (Regulation) Act 1988 should be expanded to encompass new and emerging payments systems and platforms, in keeping with the findings of the Treasury payments system Review (Recommendation 8).
  
  
• Treasury will consult with relevant agencies to provide policy advice on the merits of regulating payment platform providers as participants in the payments ecosystem (Recommendation 9).
   
• Payment systems should make their fee structures more transparent to consumers, merchants, and regulators (Recommendation 12).
  
  
• ASIC to regularly update its Moneysmart website to ensure it appropriately captures changes in the payments sector (Recommendation 14). 

What happens next?

The Treasury is expected to undertake consultation on most of its various responses in the first half of 2022 with Government to receive advice by mid-2022. The Response provides a detailed breakdown of activities in respect of each Response that the Government expects to complete by mid-2022 (see page 1 of the Response).   

Financial institutions, FinTechs and other entities which are operators or participants in the Australian payments system should consider making submissions.