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Payment Systems (Regulation) Bill 1998
Bills Digest No.181 1997-98
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. O ther sources should be consulted to determine the subsequent official status of the Bill.
Payment Systems (Regulation) Bill 1998
The Bill proposes a new regulatory framework for the payments system. While existing industry self-regulatory arrangements will be retained wherever th ese are performing satisfactorily, the bill provides powers to the Reserve Bank of Australia (RBA) to enable it to undertake more direct regulation by designating payment systems as subject to the new law where it is considered in the public interest to do so.
Once a payment system is designated, the bill provides that it may be subject to the imposition of rules of access for participants on commercial terms, the determination of standards, the giving of enforceable directions, or the voluntary arbitration of disputes on technical standards.
The bill also provides for a comprehensive regime of prudential regulation of the store-of-value backing purchased payment facilities. This will apply to all forms of such facilities, including stored value cards, travellers cheques and Internet cash facilities.
The payments system is the set of arrangements for transferring funds among members of the community. In modern society, all payments have one or two basic foundations, namely cas h, or an instruction to transfer a claim to cash.
A payment system consists of the infrastructure which facilitates the several million payments made each day in Australia, that is, the mechanics of how individuals, businesses and governments are enabled to meet their monetary obligations to others. A safe and reliable payments system is also essential for the smooth functioning of a country’s economy.
The payment system comprises:
â¢ a wide and evolving range of payment instruments such as cash and non-cas h payment instruments like cheques, plastic transaction cards and electronic funds transfer systems;
â¢ banks and non-bank financial institutions with facilities for recording, communicating, distributing and settling transactions and, in most cases, for ho lding transaction balances; and
â¢ related services provided by industry bodies and government to coordinate and supervise operations.
The risks, which are of particular interest to those responsible for managing the national payments system, come from expo sures between institutions’ participation in the payments clearing and settlement process. These risks would crystallise if an institution were unable to meet its settlement obligations to other participants in the payments system.
The Australian financial system has been the subject of numerous government inquiries. An important facet of public policy has been the desire of government to keep up to date with developments in financial markets, finance products and technology.
Government appointed review committees known as the Manning Committee (1964), the Rae Committee (1974), the Campbell Committee (1981), the Martin Committee (1984) and the Wallis Committee (1997), and the political recognition of the value of competition as a rationalisation for economic growth, have led to fundamental changes in the Australian financial system since the late 1970’s.
The key objective driving reform in payments clearing and settlement in Australia is the enhancement of the safety and integrity of the system. It is also important to improve the efficiency with which payments instructions are handled and funds made available, and to promote greater competitive equity among service providers.
The W allis Committee was set up to stocktake the results of financial deregulation of the Australian financial system since the early 1980’s, to establish a common regulatory framework for overlapping financial products and to propose ways of dealing with further financial innovation.
The Final Report of the Financial System Inquiry (FSI), chaired by Mr Stan Wallis (President of the Business Council of Australia), was released in April 1997. A number of recommendations were made to intensify competition and efficiency in the financial system, including recommendations for substantially streamlined regulatory arrangements.
Of special relevance to banking law, the Committee recommended the formation of a Payments System Board under the control of the RBA to regulate the payments system; liberalisation of access to the clearing system; regulation of stored value cards; and laws to allow for electronic commerce.
In response to the Wallis Committee Report, the Treasurer announced(1) that the Government intends to institute a wide-ranging set of financial system reforms. With respect to the payments system, the Government accepted the Committees’ recommendations.
This bill details the proposed new regulatory framework for the payments system, which is being introduced consistent with the recommendations of the FSI.
Amendments to the Reserve Bank Act 1959 , as provided for in the Financial Sector Reform (Amendments and Transitional Provisions) Bill 1998 , provide for the creation of the Payments System Board (PSB) within the RBA to provide for policy making in relation to the payments system and to increase the accountability of the RBA in relation to its role in the payments system.
Clause 11 provides that the RBA may designate a payment system where it considers it to be in the public interest.
A payment system is defined in clause 7 to mean ‘… a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system.’
The meaning of public interest is set out in Clause 8 , which seeks to inject financial safety, efficiency, competitiveness and systemic risk considerations into the concept.
Once designated, clause 12 enables the RBA to impose an access regime on the participants in that designated payment system.
Clause 14 enables the RBA to vary an access regime.
Clause 15 provides for when an access regime ceases to be in force, namely:
â¢ the access regime contains an expiry date and that date is reached; or
â¢ the RB A, on application of the participants in the designated payment system concerned, revokes the access regime; or
â¢ the RBA revokes the access regime on its own initiative; or
â¢ the payment system concerned ceases to exist or ceases to be a designated paymen t system.
Clause 16 provides a person who is denied access to a designated payment system with the capacity to request that the RBA use its power under clause 21 to remedy the situation.
Access, in relation to a payment system , is defined in clause 7 to mean ‘the entitlement or eligibility of a person to become a participant in the system, as a user of the system, on a commercial basis on terms that are fair and reasonable.’
Clause 17 provides an additional, or alternative, remedy to clause 16 by providing that a person who is denied access to a designated payment system may take the matter to the Federal Court.
Clause 18 provides the RBA with the capacity to determine standards to be complied with by participants in a designated payment system. Any such standards may be varied or revoked by the RBA. Failure to comply with a standard is not an offence, but it may lead to a direction being given under clause 21 .
Clauses 19 and 20 provide that the RBA may arrange for the arbitration of a dispute between parties to a designated payment system where the dispute raises concerns related to the safety, efficiency or competitiveness of payment systems or raises systemic risk concerns for the financial system as a whole.
A dispute being settled by arbitration does not prevent a person from taking the matter to court unless otherwise ordered by the court.
Clause 21 provides that if the RBA considers that a participant in a designated payment system has either failed to comply with a standard or has failed to comply with an access regime, the RBA may give a direction to that participant.
The direction is to require that a participant take, or refrain from taking, a particular action that the RBA considers appropriate. Such a direction is to be consistent with any applicable access regime or standard.
Failure to comply with a direction will be an offence.
Part 4 comprising clauses 22-25 provides the framework for the regulation of purchased payment facilities, such as smart cards and electronic cash. As noted in the Explanatory Memorandum, purchased payment facilities embody the unique characteristic that consumers pay for the facility using conventional means, cash for example, and rely on the holder of the stored value backing that facility to subsequently redeem that value.(2)
Part 4 proposes regulation designed to provide security to the store of value in the interests of protecting consumers and to promote public confidence in these systems while increasing the level of competition and efficiency.
The explanatory memorandum states that the central regulatory provision of Part 4 is the requirement that holders of the stored value backing purchased payment facilities be an authorised deposit-taking institution (ADI) or have an authority or exemption issued by the RBA. However, the provisions of Part 4 are expressed to apply only to constitutional corporations(3), presumably for constitutional law reasons. It would seem, therefore, that neither individuals nor non-corporate bodies would be so regulated.
Clause 23 provides that a corporation may apply to the RBA for the authority to be a holder of the stored value of a class of purchased payment facilities. The application process is outlined in Clause 27 .
The RBA may impose, vary or revoke conditions on the authority. These conditions would be directed at ensuring the corporation is able to meet its obligations.
Clause 24 provides that the RBA may give a direction to a corporation that has been granted an authority under clause 23 if the RBA considers that the corporation has failed to comply with a condition of the authority. The direction will be to require the corporation to take specified action, or to refrain from specified action, as the RBA considers appropriate having regard to the failure.
Clause 25 empowers the RBA to grant exemptions to a corporation, or a class of corporations, which are not authorised deposit-taking institutions within the meaning of the Banking Act 1959 , or which have not been granted authority by the RBA under clause 23 . The exemption continues to be in force until it is revoked, which the RBA may do if it no longer believes that the corporation will be able to meet its financial obligations.
Clause 26 provides the RBA’s information collection powers applicable to participants in payments systems, whether designated or not, and corporations authorised or exempted to hold the stored value of purchased payment facilities.
It should be noted that the RBA will not be able to require non-corporate bodies or individuals to provide information under this provision, unless perhaps, they are participants in a ‘designated payment system’ as distinct from a ‘payment system’. This i s so by virtue of the definition of participant in a payment system in clause 7 , discussed further at the end of this digest.
Clause 27 provides that the RBA may determine the requirements for applications made in relation to this Bill.
Clause 28 outlines the obligation for consultation that must be undertaken by the RBA when imposing or varying an access regime, or a standard of a designated payment system.
Clause 29 outlines the notification obligations of the RBA with regard to the determination or variation of a standard, or the imposition or variation of an access regime.
1. The provisions of Part 3 relating to the regulation of designated payment systems will not apply to non-corporate bodies or individuals, unless the rather not so obvious, and perhaps, dubious distinction can be drawn between a participant in a payment system and a ‘participant in a designated payment system’. Individuals and non-corporate bodies participating in a barter system, for example, would most likely fall outside the scope of this Bill.
This is because the definition of participant in a payment system in clause 7 is expressed to relate only to corporations.
This distinction is also relevant to sub-clause 26(1) , which relates to Part 3 .
2. As indicated earlier, Part 4 does not appear to apply to non-corporate bodies or individuals. Furthermore, the lack of power to regulate in this regard could only be overcome if the RBA designated such a payment system under clause 11 , assuming the distinction drawn above is a valid one.
1. Statement by the Treasurer, The Hon Peter Costello MP, 2 September 1997 together with associated documentation tabled in the House of Representatives.
2. Headnote to Part 4 of the Explanatory Memorandum , at p.21.
3. A constitutional corporation is defined in clause 7 to mean ‘a corporation to which paragraph 51(xx) of the Constitution applies.’
22 April 1998
Bills Digest Service
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