EXPLANATORY STATEMENT

Banking Act 1959
Subsection 66(1)(d) and 66(1B)

CONSENT TO USE RESTRICTED EXPRESSIONS ‘PURCHASED PAYMENT FACILITY PROVIDER’ AND ‘PPF PROVIDER’

Issued by the authority of the Australian Prudential Regulation Authority (APRA)

This explanatory statement relates to the instrument made by APRA under paragraph 66(1)(d) and subsection 66(1B) of the Banking Act 1959 (the Act), Consent to use restricted expressions: class consent – providers of purchased payment facilities dated 16 November 2005 (the instrument).

APRA’s power under section 66 of the Act to consent to the use of restricted words and expressions relating to banking

Subsection 66(1) of the Act prohibits anyone who is carrying on a financial business, whether or not in Australia, from assuming or using in Australia a restricted word or expression in relation to that financial business without APRA’s consent.

The expressions ‘purchased payment facility provider’ and ‘PPF provider’ are restricted expressions by virtue of the instrument made by APRA under subsection 66(5) of the Act, Determination of restricted expressions -‘Purchased payment facility provider’ and ‘PPF provider’ dated 16 November 2005 (the Determination).

Subsection 66(1B) of the Act provides that a consent given by APRA for the purposes of subsection 66(1) can be expressed to apply to a particular person or to a class of persons.

Purpose of the instrument

The purpose of this instrument is to give consent to ADIs to use the restricted expressions ‘purchased payment facility provider’ and ‘PPF provider’.

Background

Purchased payment facilities (PPFs) include stored value cards, internet based payment systems and travellers’ cheques.  The legislative framework governing the prudential supervision of PPFs reflects the recommendations of the 1997 Financial System Inquiry (Inquiry).  As part of its response to the Inquiry, the Government enacted the Payment Systems (Regulation) Act 1998 (PSR Act), which charged the Reserve Bank of Australia with responsibility for regulating the payment system, including PPFs and their providers (defined in the PSR Act as holders of stored value). 

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 Act and be prudentially supervised by APRA.  To facilitate this, the definition of banking business was extended by a regulation enacted under the Act in 2000 to include the provision of PPFs.

In November 2005, APRA determined final regulatory arrangements for authorising and supervising a new class of ADIs which operate PPFs (PPF providers).  The new entities will be supervised as a new class of ADI under a new Prudential Standard APS 610 Prudential Requirements for Providers of Purchased Payment Facilities (APS 610).  Institutions already authorised as ADIs under the Act will also be eligible to act as PPF providers without further authorisation.

The new PPF provider model is designed to ensure the safety and integrity of the payments system as well as to provide an appropriate level of protection for the value held in the scheme. 

Unlike ordinary ADIs, PPF providers will only be authorised to provide a PPF.  They will not be authorized to conduct the general business of banking.  PPF providers will not be authorised to accept deposits for the purpose of making advances of money (other than where incidental credit balances resulting from the provision of PPFs result in liabilities that are subject to APRA requirements on investment and liquidity).

Explanation of the instrument

This instrument grants the necessary consent to ADIs to allow them to use the terms ‘purchased payment facility provider’ and ‘PPF provider’.  This facilitates the operation of APS 610 by allowing those institutions which are legally entitled to operate PPFs to identify themselves as PPF providers.  The complementary section 66(5) determination prevents those institutions that are not entitled to operate a PPF using the restricted expressions.  The overall effect of these two instruments will be that only those entities legally entitled to operate a PPF will be entitled to use the restricted expressions.

Consultation

This instrument forms a part of a package of instruments relating to the prudential supervision of PPF providers.  APRA undertook public consultation on its proposed regime for supervision of these institutions between 6 May and 30 June 2005.  The Guidelines for Authorisation of Providers of Purchased Payment Facilities (the Guidelines), released as part of that package, indicated that the terms ‘purchased payment facility provider’ and ‘PPF provider’ would be restricted expressions under the Act.  The Guidelines also indicated that institutions legally entitled to operate a PPF would be able to use the restricted expressions that are the subject of this instrument.  Two submissions were received, neither of which commented on this aspect of the proposal.

In light of this broader consultation process, it was not viewed as necessary to undertake further consultation in relation to this instrument.

Commencement date

APRA has determined that this instrument will come into effect on the day it is registered on the Federal Register of Legislative of Instruments.