Banking (prudential standards) determination No. 3 of 2005 - Prudential Standard APS 610 - Prudential Requirements for Providers of Purchased Payment Facilities

Overview

The Prudential Standard APS 610, introduced by the Australian Prudential Regulation Authority (APRA) in 2005, establishes the prudential requirements for providers of purchased payment facilities (PPFs) such as stored value cards, internet-based payment systems, and travellers' cheques. This standard was enacted under the Banking Act 1959 to address the need for a tailored regulatory approach for PPF providers, distinct from traditional banking entities, while ensuring adequate protection for users. The policy objective is to recognise the differences in the nature and risk profile of PPFs compared to conventional banking activities, ensuring that PPF providers adhere to prudential standards on governance, fitness and propriety, and operational risk management, while exempting them from the broader capital adequacy requirements applicable to other authorised deposit-taking institutions (ADIs). APRA sought public feedback on the draft standard in May 2005, resulting in minor adjustments to enhance the flexibility and competitiveness of the payments system.

Scope and Application

Prudential Standard APS 610, Prudential Requirements for Providers of Purchased Payment Facilities, applies to entities providing purchased payment facilities (PPFs), which encompass products such as stored value cards, internet-based payment systems, and travellers’ cheques. These entities, termed PPF providers, fall under the class of authorised deposit-taking institutions (ADIs) as outlined in the Banking Act 1959. The standard is issued under the authority of the Australian Prudential Regulation Authority (APRA), which has the power to set prudential standards for ADIs. While PPF providers are not subject to the same risk-based capital adequacy framework as other ADIs, they are required to meet specific prudential standards including governance, fitness and propriety, outsourcing, business continuity management, and auditing requirements. PPF providers with stored value liabilities are additionally required to hold statutory capital and high-quality liquid assets equivalent to their liabilities. The standard applies nationally across Australia, with its reach extending to all PPF providers, regardless of whether they are ADIs or not, provided they meet the criteria of being available widely for purchase and use as a means of payment and having redeemable stored value in Australian currency. The standard does not apply to PPFs that do not meet these criteria, and it is complemented by subordinate instruments that provide further detail and flexibility to ensure a safe and competitive payments system.

Key Provisions

The Prudential Standard APS 610 sets forth the prudential requirements for providers of purchased payment facilities (PPFs) under the Banking Act 1959 (s 11AF(1)(c)). This standard applies specifically to entities providing PPFs, which include stored value cards, internet-based payment systems, and travellers' cheques, among other similar products. A key aspect of the standard is that it recognises the distinct nature and risk profile of PPFs compared to traditional banking activities, while still ensuring adequate protection for PPF users. Authorisation for PPF providers is conditional and restricted to PPF business rather than encompassing the broader scope of banking activities (APS 610). Additionally, PPF providers are exempt from the risk-based capital adequacy framework that applies to other authorised deposit-taking institutions (ADIs), reflecting the different risks associated with PPFs. Despite this exemption, PPF providers must still adhere to ADI prudential standards for governance, fitness and propriety, outsourcing, business continuity management, and auditing requirements. Furthermore, PPF providers with stored value liabilities must hold statutory capital as per the rules set out in the standard, maintain high-quality liquid assets equal to their stored value liabilities at all times, and meet specific operational risk requirements. Under APS 610, PPF providers are subject to several obligations and requirements to ensure they can meet their prudential obligations. Firstly, they must obtain authorisation from the Australian Prudential Regulation Authority (APRA) specifically for their PPF business, ensuring that their operations are compliant with the standards set forth in the prudential requirements. Additionally, PPF providers must adhere to the governance, fitness and propriety, outsourcing, business continuity management, and auditing requirements that apply to all ADIs. This ensures that the PPF provider has robust internal controls, capable management, and effective risk management practices in place. PPF providers with stored value liabilities must also maintain statutory capital and high-quality liquid assets to ensure they can meet their obligations to users. These requirements aim to provide confidence in the financial stability of PPF providers and protect consumers who use these services. Failure to comply with the requirements set out in APS 610 can result in both civil and criminal consequences. PPF providers who do not meet their prudential obligations may face enforcement actions from APRA, including fines, public reprimands, or even the revocation of their authorisation to operate. In cases where the failure to comply with prudential requirements leads to financial instability or harm to PPF users, criminal charges may be brought against the responsible individuals or entities. The maximum penalties for breaches of the Banking Act or related regulations can include substantial fines for both individuals and corporations, as well as potential imprisonment for those found guilty of criminal offences. It is crucial for PPF providers to understand and comply with the provisions of APS 610 to avoid these potential consequences and maintain their authorisation to operate in the Australian financial system.