Ministerial muscle - Australian government to strong arm payment systems regulation

11 minute read  24.10.2023 Richard Batten, Prayas Pradhan, Matthew Clifford

The Australian government has released exposure draft legislation to extend the reach of payment systems regulation in Australia. 


Key takeouts


  • The exposure draft legislation aims to modernise payment systems regulation to give the Reserve Bank and the Government the ability to ensure new and emerging payment systems, and their participants, are subject to appropriate oversight.  
  • A key element of the proposed regime is to give the responsible Minister the power to designate a payment system and to appoint a regulator to make rules applying to a broad range of participants in the payment system.
  • Submissions in response to the exposure draft legislation are due on 1 November 2023.

The Australian government is consulting on exposure draft legislation to amend payment systems regulation in Australia. The proposed legislation implements the proposals in the Government’s Consultation Paper on Reforms to the Payment Systems (Regulation) Act 1998 issued in June 2023 (Consultation Paper). 

Proposed changes 

The Exposure Draft of the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023: Amendment of the Payment Systems (Regulation) Act 1998 (Bill) proposes a number of significant amendments to the Payment Systems (Regulation) Act 1998 (Cth) (PSR Act) which will alter its scope and operation.

Specifically, the Bill proposes to:

  • expand the definition of 'payment system' to cover a broader set of payment arrangements (including those involving digital assets) and to include arrangements that facilitate a payment being made
  • broaden the definition of 'participant' to capture a greater number of entities involved in the payment chain, including those who play a role in facilitating or enabling payments to be made through a payment system
  • grant the Minister the power to designate a payments system as a 'special designated payments system' if the Minister considers that is in the national interest – noting that the Reserve Bank of Australia (RBA) has a similar power to designate a payment system if it is in the public interest (which will remain)
  • grant the Minister the power to nominate a regulator to perform regulatory powers and functions in relation to a special designated payments system (nominated regulator), including the imposition of an access regime, specific standards or directions on participants
  • grant the RBA (but oddly not nominated regulators) the power to enter into court enforceable undertakings with a participant in relation to a breach of the PSR Act, and 
  • introduce new penalties for failing to comply with a regulator’s direction (including civil penalties) and new civil penalties for failure to provide information requested by a regulator. 

The Bill only proposes changes to the regulation of payment systems. No changes are proposed in relation to the regulation of purchased payment facilities under Part 4 of the PSR Act. 

To help you understand the proposed changes, we have prepared a marked-up version of the current version of the PSR Act showing the changes proposed by the Bill.

The current regime

The PSR Act gives the RBA the ability to designate a payment system if the RBA considers it is in the public interest to do so. Once designated, the RBA can regulate the payment system by imposing an access regime or making standards which must be complied with. The RBA has only used its designation power under the PSR Act sparingly to date. The only designated payment systems currently are Mastercard, Visa and the EFTPOS system.

Broadening the remit

Broader definition of 'payment system'

The Bill proposes to expand the definition of 'payment system' to cover a broader set of payment arrangements. Payment systems will not be limited to the circulation of ‘money’ but will extend to any arrangement under which fund transfers are made, including transfers of ‘digital units of value, including digital currency’.

The amendments are intended to extend the regime beyond economy-wide payment systems to also enable designation of ‘three party’ or ‘closed loop’ systems, for example:

  • systems that consist only of multiple bilateral arrangements between an entity and the payers and payees which use that system, with no interactions between the payers and payees
  • systems where one entity – a card scheme – performs both the acquirer and issuer roles.

The Explanatory Memorandum to the Bill (EM) states that systems like American Express and Diners Club would be capable of meeting the updated definition of ‘payment system’, although it is not clear whether they would be designated.

Broader definition of 'participant'

The regime will also expand the definition of 'participant' to capture any entity that plays a role in facilitating or enabling payments to be made through a designated payment system. An entity that constitutes a 'participant' must comply with any access regime or standards that apply to the payment system.

The new definition of ‘participant’ is intended to capture all entities that play a role in the payment value chain including intermediaries, whether or not they have a direct relationship with the payment system, including providers of digital wallets. The EM states that this would extend to providers of buy now, pay later (BNPL) products, digital wallet passthrough services (e.g. ApplePay and Google Wallet), cash in transit services and crypto payment facilities including payments stablecoins), where they provide services through designated payment systems (such as Visa or Mastercard).

Why is the Minister now in the picture?

The 2021 Farrell Review into the regulatory architecture of Australia’s payment system (Farrell Review) recommended giving the Treasurer the power to designate payment systems in addition to the RBA. This is because the RBA can only designate a payment system under the PSR Act if it is in the 'public interest'.This is limited to considering whether among other things the system could materially cause or contribute to increased risk in the financial system. Issues such as national security or consumer protection are not enough on their own for the RBA to designate a payments system.

Is the Minister's designation power a blank cheque?

The Bill makes no changes to the RBA's existing power to designate payment systems. But the Bill does grant the Minister a separate power to designate a payment system if it considered to be in the national interest to do so.

Before the Minister designates a payment system, they must:

  • consult with the RBA and each prescribed special regulator (the EM indicates the special regulators are likely to be ASIC, APRA and the ACCC) – the Consultation Paper states that the Minister should consult with affected parties but there is no requirement to this effect in the Bill
  • consider whether there are alternatives to the designation – i.e. whether alternative legislative regimes are available and would be more suitable, and
  • consult with the nominated regulator (i.e. the regulator nominated by the Minister to be responsible for regulating the payment system) (this could be the RBA or one of the special regulators) and be satisfied the nomination is consistent with other functions of the regulator.

There is no definition of 'national interest' in the Bill. The EM indicates that the matters the Minister may consider include:

  • national security
  • consumer protection
  • data-related issues
  • innovation
  • cyber security
  • AML/CTF
  • crisis management
  • accessibility.

This is similar to the difference between the Minister’s power and that of the RBA identified by the Farrell Review:

[Source: The Australian Government the Treasury, Figure 4.1, Payment systems review: From system to ecosystem (Farrell Review), June 2021] 

The Minister also has a broad power to give directions to the nominated regulator in relation to the performance of their functions or the exercise of their powers in relation to a designated payment system. This power is effectively only limited by the requirement to consult with the nominated regulator (and their responsible Minister) and to act in the (undefined) national interest. Unlike other legislative instruments, the proposed Ministerial directions under the PSR Act are not subject to Parliamentary disallowance or sunsetting. However, the Minister cannot give directions that relate to individual participants in a payment system.

This approach is justified by Government on the basis that a broad power is required because there may be a wide variety of circumstances in where national interest concerns may arise. However, it is not clear why this means that Parliamentary oversight (in the form of disallowance) or sunsetting (simply requiring the direction to be remade if it remains appropriate) are not necessary or appropriate. It is also not clear why a broader consultation requirement could not be imposed (in relation to directions or more generally in relation to the decision to designate a payment system or in relation to any proposed access regime or standards), with the ability to make temporary directions where circumstances require urgency.

Powers – RBA v Minister

The effect of designation by the Minister is very similar to designation by the RBA. The key differences are:

  • while the RBA can regulate any payment system it designates, the Minister must appoint one of the special regulators to regulate a payment system it designates. Although this could be the RBA (and the EM states that the RBA is likely to be the most suitable regulator), another regulator could be more suitable depending on the nature of the concern, e.g. ASIC or the ACCC if consumer protection is the focus 
  • if a payment system is designated by both the Minister and the RBA, any standards or access regime made by the nominated regulator take precedence over those made by the RBA to the extent of any inconsistency. This clearly displays the Australian government's intention to flex its muscles over the regulation of payment systems in Australia.

Who will be regulated?

The short answer is that we don’t know. The Bill does not propose any change to the mechanics of the PSR Act. A payment system must still be designated under the PSR Act either by the RBA or the Minister before any obligations apply and the only obligations are those specified by the RBA or nominated regulator in any access regime or standards they make for the payment system.

The RBA has only designated a handful of economy-wide payment systems under the PSR Act. The Bill does propose to widen the type of payment systems and participants who can be regulated but not the circumstances in which they can be regulated by the RBA.It is not therefore clear that the changes will have any significant effect on the RBA’s use of its powers.

However, the Farrell Review did state that expanding the definition of payment system will better position the RBA to regulate new and emerging payment systems. The reforms certainly create the potential for RBA to take a more active role but only if that is in the public interest, i.e. among other things, if a payment system could materially cause or contribute to increased risk in the financial system.

There is clearly greater scope for the Minister to designate payment systems. However, there is no indication of when this power will be used, apart from the national interest considerations discussed above.

Legislative design principles

We prepared a report on streamlining regulation relating to the Australian Law Reform Commission (ALRC) Review of the Legislative Framework for Corporations and Financial Services Regulation. Our report was lodged with the ALRC by IAG as part of its submission on ALRC Interim Report B in December 2022.In that Report, we identified certain design principles for regulatory regimes including:

  • regulation by principles-based legislation setting out the norms of conduct regulated entities are required to comply with
  • empowering the regulator to make rules after appropriate consultation to impose specific requirements to provide certainty and clarity where the statutory principles required elaboration
  • any rule making power or body should be subject to appropriate oversight. 

In a sense, the Bill and the PSR Act implement an aspect of this approach by not taking a prescriptive approach to regulation and conferring a wide rule-making power on nominated regulators.

However, the design principles we have proposed reflect a need for a coherent approach to regulation with principles set by Parliament and consultation and oversight a key component of a well-governed system. In contrast, the regime established in the PSR Act by the Bill is effectively a form of regulation by executive fiat with very limited oversight. We believe that responsive regulation is not inherently inconsistent with appropriate checks and balances on the use of regulatory powers.

Next steps

Consultation on the exposure draft legislation closes on 1 November 2023.Please contact us if you have any queries or require any assistance with making a submission.

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