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Payment Systems (Regulation) Bill 1998
Introduced: 26 March 1998
House: House of
Commencement: On commencement of the Australian Prudential
Regulation Authority Act 1998
The Bill proposes a new
regulatory framework for the payments system. While existing
industry self-regulatory arrangements will be retained wherever
these 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
The Payments System
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 cash, 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:
- a wide and evolving range of payment instruments such as cash
and non-cash payment instruments like cheques, plastic transaction
cards and electronic funds transfer systems;
- banks and non-bank financial institutions with facilities for
recording, communicating, distributing and settling transactions
and, in most cases, for holding transaction balances; and
- 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 exposures
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.
Reforms to the Financial 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
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
The Wallis Committee
The Wallis 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
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'
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
Regulation of Payment Systems
Clause 11 provides that the RBA may designate a
payment system where it considers it to be in the public
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
Once designated, clause 12 enables the RBA to
impose an access regime on the participants in that designated
Clause 14 enables the RBA to vary an access
Clause 15 provides for when an access regime
ceases to be in force, namely:
- the access regime contains an expiry date and that date is
- the RBA, on application of the participants in the designated
payment system concerned, revokes the access regime; or
- the RBA revokes the access regime on its own initiative;
- the payment system concerned ceases to exist or ceases to be a
designated payment 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
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
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
A dispute being settled by arbitration does not prevent a person
from taking the matter to court unless otherwise ordered by the
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.
Regulation of Purchased Payment
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 is 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
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
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.
- 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.
- 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
- 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
- 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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Commonwealth of Australia 1998
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