Prudential Standard APS 610 Prudential Requirements for Providers of Purchased Payment Facilities
EXPLANATORY STATEMENT
Issued by the authority of the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1)(c) of the Banking Act 1959 (the Banking Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by a class of authorised deposit-taking institutions (ADIs). Purchased payment facility providers (PPF providers) are one such class of ADI.
Legislative background
Purchased payment facilities (PPFs) include stored value cards, internet–based payment systems and travellers’ cheques. PPFs are specifically designed as means of payment rather than of storing wealth, and they typically hold relatively small amounts of money as a residue of the services provided.
The legislative framework governing the prudential supervision of PPFs reflects the recommendations of the 1997 Financial System Inquiry (the Inquiry). As part of its response to the Inquiry, the Government enacted the Payment Systems (Regulation) Act 1998 (the PSR Act), which charged the Reserve Bank of Australia with responsibility for regulating the payment system, including PPFs payment facilities and their providers (defined in the PSR Act as holders of stored value (HSV)).
The Government subsequently determined that in the interests of ensuring consistency of regulatory treatment, all PPFs akin to banking business, regardless of whether the provider was an ADI or not, should fall under the requirements of the Banking Act and be prudentially supervised by APRA. To facilitate this, the definition of banking business was extended by the Banking Amendment Regulations 2001 (No 1) to include the provision of PPFs which have the following deposit-like characteristics:
- the product must be available, on a wide basis, for purchase and use as a means of payment; and
- the stored value must be redeemable by the user on demand in Australian currency.
APS 610 Prudential Requirements for Providers of Purchased Payment Facilities
The proposed standard recognises the significant differences in the nature and riskiness of providing a PPF compared to traditional banking business, while still providing an appropriate level of protection for PPF beneficiaries. Its key requirements are:
- authorisation would be conditional and limited to PPF business rather than the general business of banking;
- all PPF providers would be exempted from the risk-based capital adequacy framework applying to other classes of ADI in recognition of the significant differences between traditional banking business and PPFs;
- all PPF providers would be required to meet ADI prudential standards on governance, fitness and propriety, outsourcing, business continuity management and auditing requirements; and
- those PPF providers with stored value liabilities at risk would be required to hold some statutory capital determined by simple rules, hold at all times high quality liquid assets equal to their stored value liabilities, as well as meet certain operational risk requirements.
Consultation
In May 2005, APRA released for public comment a draft of the standard as well as an associated set of guidelines for authorisation. APRA received two submissions in response. Although no substantive problems were raised during public consultation, APRA has made several changes to the proposals to ensure the prudential framework is flexible enough to encourage a dynamic, safe and competitive payments system.
Regulation impact statement
A Regulation Impact Statement is required for the new standard and is attached to this Explanatory Statement.
Commencement date
APRA has determined that this standard will come into effect on the day it is registered on the Federal Register of Legislative Instruments.