Payments system modernisation - a new payments licence regime and proposed regulation of Payment Services Providers

In brief - Proposed changes to the Australian payments licensing framework, based on recommendations from the Payments System Review, will reshape the regulatory landscape, impacting a broad spectrum of Payment Services Providers and necessitating a careful examination of their payment functions and services to ensure compliance with the forthcoming payments licensing legislation.

In our previous article, we provided an overview of the Federal Government's roadmap for the regulation of the Australian payments system, digital currencies and emerging payment methods stemming from the Review of the Australian Payments System – Final report in August 2021 (Payments System Review).

The Payments System Review recommended, amongst other things:

• the introduction of a single, payments licensing framework via a functional or activity-based licence aligned with a defined list of payment functions - [Recommendation 9] 
• the development of a defined list of payment functions that require regulation - [Recommendation 8].

In June 2023, Treasury issued its consultation paper on Payments System Modernisation, which amongst other things, describes proposals to amend the payments licensing framework as part of the Government’s broader work to reform the payments system to ensure that Australia’s regulatory framework is fit for purpose (Licensing Consultation Proposals). 

In this regard, the Licensing Consultation Proposals refer to a separate consultation in late 2023 on the regulatory obligations that should be imposed under the payments licensing framework and the proposed introduction of legislation for the new payments licensing regime in 2024.

In anticipation of the foreshadowed additional consultation and the new payments licensing legislation, we summarise some of the salient features of the proposed licensing changes and comment on the likely regulatory framework based on the Licensing Consultation Proposals.

Proposed payment licensing changes

The current AFS Licensing regime generally captures the provision of payment services and payment related activities under the definition of 'non-cash payment facility'.

This article focuses on the proposed replacement or modification of the definition of a non-cash payment facility and substantial changes to the regulation of Payment Services Providers (PSPs) under the current AFS regime.

The Licensing Consultation Proposals, amongst other things, sought input in relation to Recommendation 8 of the Payment Systems Review, namely, the proposed list of payment functions that are intended to be regulated under a new licensing framework for PSPs. 

In this regard, the proposed new payments regulatory framework distinguishes between three payment facility classes: 

• Stored-value Facility - payment accounts or facilities that store value that can be used for the purpose of payments.
• Purchased Payment Facility - a facility under which a holder of stored value makes payment to another person on behalf of the user of the facility. 
• Payment Facilitation Services - services that transfer funds or facilitate the transfer of funds.

For the proposed payments licensing regime under the AFS regulatory framework, it is foreshadowed that the new regulated class of 'payment facilitation services' will focus on and encompass payment functions and activities which will capture a broader range of payment services providers requiring them to be licensed.

We have listed the proposed payment functions which will be regulated as payment facilitation services in Table 1 below.

Table 1 - Payment facilitation services

Payment function	Proposed definition and potential entities captured
Issuance of payment instruments	Definition Issuers of a payment instrument that is unique to a customer and can be used to make a transaction or provide instructions on their account or facility.
	Entities  Issuers of payment instruments (such as cheques and digital and physical cards). This includes Buy Now Pay Later providers that issue a virtual card. Issuers of a set of procedures or credentials (such as a PIN, password, or biometric data) to initiate a payment instruction order.
Payment initiation services	Definition Services that allow the instruction of a payment transaction at the request of the customer (payer or payee) concerning a payment account or facility held at another PSP, or from some other source of value or a credit facility.
	Entities  Services that allow a customer to request a payment transaction be initiated. Examples include recurring payment services and third-party payment initiation services.
Payment facilitation, authentication, authorisation, and processing services	Definition Services that enable payment instructions to be transferred (facilitation), provide the verification of customer credentials (authentication), payment authorisation, and/or processing of payment instructions.
	Entities  Pass-through digital wallets, merchant acquirers, card issuers, payment gateways and processors, and payment routing.
Payments clearing and settlement services	Definition Services for clearing or settlement of payment obligations or the exchange of payment messages for clearing or settlement of payment obligations, including clearing and/or settling account to account payments.
	Entities  Payments clearing and/or settlement providers.
Money transfer services	Definition Services that send or receive money overseas or within Australia for a customer, including through the creation of a payment account or without a payment account.
	Entities  Remittance service providers and domestic money transfer providers.

It is important to note that PSPs storing value for up to two business days are proposed to be regulated as payment facilitation services.

Payment functions related to Stored-value Facilities

In addition to the regulation of payment facilitation services, a proposed Stored-value Facilities (SVF) regulatory framework will replace the existing Purchased Payment Facilities regulatory framework.

Within the SVF category, two payment functions are proposed:

• issuance of payment accounts or facilities (‘traditional SVFs’); and 
• issuance of payment stablecoins (‘payment stablecoin SVFs’). 

A two-tier regulatory approach is proposed for SVFs, with standard SVFs to be regulated by ASIC and major SVFs to be regulated by ASIC and APRA.

Table 2 below sets out the proposed SVF payment functions and the entities that will be captured.

Table 2 - Stored-value regulation 

Payment function	Proposed definition and potential entities
Issuance of payment accounts or facilities for a limited period	Definition  Providers of payment accounts or facilities that store value for more than two business days and can be used for making payments. PSPs storing value for up to two business days are proposed to instead be regulated as payment facilitation services.
	Entities Likely to capture some digital wallets that store value, and issuers of pre-paid accounts.  ADIs, including entities currently regulated as Purchased Payment Facilities will not be regulated as payment facilitation services.
Issuance of payment stablecoins (‘payment stablecoin SVFs’)	Definition Issuers of payment stablecoins that store value and control the total supply of payment stablecoins through issuance and redemption activities.
	Entities Payment stablecoin issuers.

Exemptions and carve outs

In addition, the Licensing Consultation Proposals recommend related changes:

• to remove or amend several current exemptions under the AFSL regime (which are listed in Table 3 below); and 
• to move 'carve outs' in the current law into the new regime to the effect that they are not to be captured as a regulated payment function based on the limited risks they present. 

Therefore, whilst the 'carve outs' will be imported into the new regime as exclusions or exemptions, the removal or amendment of some current exemptions under the AFSL regime means that some exempted NCPFs may need to be licensed under the new framework.

Exclusions and exemptions proposed to be removed or amended 

The Licensing Consultation Proposals identify the following existing exclusions and exemptions to be removed or amended to ensure consistent regulation of payment services. 

Table 3 - Changes to current AFS regulatory exclusions and exemptions

Current exemption	Scope
Exchange and settlement between non-cash payment providers	Facilities for the exchange and settlement of non-cash payments between providers of non-cash payment facilities are currently excluded under the definition of ‘financial product’.
Electronic funds transfers	Some remittance service providers are currently excluded where the issuer is an operator of a payment system or an ADI payment is made within two business days and there is no standing arrangement with the client.
Payments debited to a credit facility	Payments made using a facility that will all be debited to a credit facility, such as payments made using a credit card are currently excluded under definition of ‘financial product.
Unlicensed product issuers that use licensed intermediaries	Product issuers are permitted to issue financial products without a licence if the issuer relies on a licensed intermediary that it has authorised to make offers to arrange for the issue of the product.
Relief given to specified entities and non-cash payment facilities	Individual ASIC exemptions that cover specified entities and non-cash payment facilities are expected to be captured by the new payments licensing regime if they are not consistent with the wider range of payment functions intended to be regulated.

That is, the new payment function definition will potentially capture the following payment functions and services that may be currently excluded or exempted:

• payment clearing and settlement services 
• money transfer services
• payment initiation services 
• SVF providers that have authorised a licensed intermediary to make offers to arrange for the issue of the product.

Further, individual ASIC exemptions that cover specified entities and NCPFs may no longer apply and will require issuers and providers to be licensed if those exemptions are not consistent with the wider range of payment functions intended to be regulated.

Excluded NCPFs under the new payments regime

It is proposed that the following payments services or NCPFs will not be captured as a regulated payment function based on the limited risks they present. 

Table 4 - Continuing exemptions under the new Payments Licensing Regime

Payment function	Scope of exemption
Low-value payment facilities	ASIC Corporations (Non-cash Payment Facilities) Instrument 2016/211 provides conditions relief to low-value non-cash payment facilities.
Limited purpose facilities	ASIC has granted conditional relief under RG 185 for NCPs that are not part of other financial products such as : gift facilities (e.g. vouchers or cards) prepaid mobile phone accounts loyalty schemes electronic road toll devices.
Payments in cash	Payments executed wholly in cash are currently excluded from the definition of non-cash payment. It is proposed that an exclusion be provided for the physical transport of cash and coins.

Each of these facilities which are currently the subject of conditional product class relief under an ASIC Instrument will be moved into primary legislation or regulations.

Next steps 

The Licensing Consultation Proposals indicate that it is intended there will be a separate consultation on the regulatory obligations for the payments licensing framework later in 2023. It is envisaged that the regulatory obligations may apply to each defined payment function, taking into account the risks posed by each function.

Further, it is proposed that:

• the payments licence will be implemented through the AFSL regime to minimise the number of licences a PSP may need to hold and ensure payment services are regulated in a manner consistent with other financial services
• PSPs would be authorised to provide only the specified payment functions under their payments licence and a PSP seeking to vary the payment functions they provide would need to vary their licence conditions.

As the proposed list of payment functions is broad and will capture a range of payment services not currently regulated as an NCPF under the AFSL regime, some NCPFs currently excluded and other payment services providers who are not currently licensed, will need to start considering if they may be captured under the legislation for the new payments licensing regime which is anticipated to be introduced in 2024.

Accordingly, all providers of the listed payment functions requiring an AFSL as set out in Table 1 above, particularly those not currently regulated, should plan and consider the nature of their payment services offering, the scope of the new payments licensing regime and ultimately authorisations that are likely to be required under a new payments licence.