As regulations take shape, Australia’s payment service providers should prepare now

The regulatory landscape is shifting as the definition of a “financial product” will expand to include many critical functions within the payments ecosystem. Some of the entities performing these critical payment functions may already have an Australian Financial Services Licence (AFSL) and a mature risk and compliance function. For others, this may be a dramatic change, requiring a shift in operational focus, towards adeptly managing their regulatory risk in the new landscape.

Broadly speaking, Treasury’s changes will target three types of risk: financial, operational, and misconduct. The intention is to introduce primary legislation in 2024 with more detailed regulations to follow, including consultations on a mandatory ePayments code, common access requirements, and mandatory technical standards. It is proposed that:

• Designated PSPs will be subject to prudential regulation by APRA, who will focus on major stored value facilities. Common access requirements will be developed for payments clearing and settlement.
• ASIC will monitor all PSPs that perform a payment function to ensure each one has an AFSL. Meanwhile, stored value will be regulated under the client money regime (as defined within the Corporations Act 2001). 
• The RBA will authorise an industry body to implement technical standards. Compliance with these standards will likely be a condition on every PSP’s AFSL.

Notable new requirements and implications for PSPs

While primary legislation has not yet been passed, enough is known about the legislation for PSPs to prepare themselves for many upcoming requirements.

1. Entities not currently regulated by APRA or ASIC
   These entities will need to start preparing quickly in order to ensure that they can continue their service and product offerings. This includes being ready to and applying for an AFSL, and applying a whole suite of regulatory obligations, summarised below.
   
2. Entities currently regulated by ASIC that may now be regulated by APRA
   Prudential regulation under APRA for Stored Value Facilities over $100m comes with substantially more stringent requirements than under the AFSL regime, that entities will need to prepare for well in advance.
   
   The latest consultation suggests that the existing exemption for products such as gift cards and loyalty schemes would be narrowed to only apply to “closed-loop” type systems, where the points or stored value can only be used to purchase products and services from the issuer, or its affiliates. Conversely, gift cards that could be used to purchase a broad range of products and services or for online marketplaces, would not be exempt and may fall under the definition of “stored value” for regulatory purposes. These products may be regulated by APRA, if over $100m in stored value, or under the AFSL as client money if below $100m in stored value.

Likely compliance requirements include:

• PSPs will need to obtain necessary licences to cover their full product suites. Regulators will receive a high volume of licence applications once the primary legislation takes effect, so we recommend PSPs prepare to lodge their applications sooner rather than later.

• Some PSPs will need to demonstrate how client money is managed separately from their own funds. Rigorous assurance requirements will be applied, so PSPs will need robust monitoring and control processes that are able to be evidenced.

• PSPs will need to meet base level financial requirements for positive liquidity and net asset ratios at a legal entity level and some are expected to be subject to additional financial requirements, which may be a new consideration for some global groups (who will need to bring the Australian regulations under their treasury management) and for local organisations that didn’t previously consider themselves to be financial services companies. For these entities structural changes might be considered, such as creating a new separate legal entity to fulfil regulatory obligations).

Likely financial reporting requirements include: 

• Holders of an AFSL need to prepare full general-purpose financial statements, which would need to be submitted four months after year-end. For many PSPs that have not prepared general purpose accounts in the past, this may result in a significant increase in financial disclosures required. 

• PSPs will need an adequate control framework to ensure compliance with technical standards, with monitoring mechanisms in place to detect any breaches. Auditors would be required to report any identified breaches to ASIC.

As well as regulatory requirements, PSPs can also get a head start on assessing the likely tax implications of Treasury’s changes – then updating systems and processes accordingly. Some PSPs may be reclassified in the regulatory framework, altering their GST treatment. PSPs need to keep a close eye on the unfolding consultation, while assessing how these changes might impact their costs and pricing.