Changes in the Regulation of Purchased Payment Facilities (April 2006)
In August 2005, the Payments System Board resolved that the provisions of the Payment Systems (Regulation) Act 1998 (PSRA) relating to the regulation of purchased payment facilities (PPFs) did not apply to the Westfield gift card facility. Pending the release by the Australian Securities and Investments Commission (ASIC) of its final policy on non-cash payment (NCP) facilities, the Board also endorsed the development of a more general class exclusion under section 9(3) of the PSRA to encompass similar products that may emerge in the future.
With ASIC having released its final policy on NCP facilities in November 2005, the Board has decided to:
- declare under section 9(3) of the PSRA that the Act does not apply to any gift card facilities (using the ASIC definition of gift cards, for regulatory consistency);
- make similar declarations for several other classes of non-cash payment facility – in particular, pre-paid mobile phone accounts, loyalty schemes and electronic road toll devices (again, based on ASIC definitions) – that, like gift cards, were not intended to be captured under the provisions of the PSRA; and
- increase the existing $1 million threshold under the Bank’s class exclusion for ‘limited facilities’ to $10 million.
1. Background
Under Part IV of the PSRA, the Reserve Bank has regulatory responsibility for PPFs. These are broadly defined in the PSRA and can include phone cards, university purchasing cards, gift cards and transport tickets/toll devices.
In 2000, the Australian Prudential Regulation Authority (APRA) assumed responsibility for the supervision of providers of PPFs issued on a ‘wide basis’ and with ‘deposit-like’ characteristics, and for which any unused stored value is redeemable on demand in Australian currency. The Bank retains responsibility for regulating providers of facilities not regulated by APRA – except in relation to consumer protection issues, for which ASIC has been made responsible. In particular, the Financial Services Reform Act 2001 requires providers of PPFs to be licensed by ASIC – creating the potential for facilities to go through overlapping licensing processes with the Bank and ASIC.
To address the potential for unnecessary overlap, the Bank announced in March 2004 that PPFs would:
- not be subject to the PSRA if the total amount outstanding was limited to less than $1 million, or the facility could be used to make payments to 50 or fewer persons; or
- be exempt from the provisions of the PSRA if the facilities’ obligations were guaranteed by an authorised deposit-taking institution (ADI) or by a Commonwealth, state or local government authority.
The first determination was made under section 9(3) of the PSRA, whereby the Bank may declare that the Act does not apply to a specific facility or a specific class of facilities.
The second was made under section 25(3) of the PSRA, under which the Bank may grant exemptions to a corporation (or class of corporations) allowing it to be the holder of stored value for a PPF.
In August 2005, the Board considered a request from Westfield for exemption or exclusion from the requirements of the PSRA for a proposed new electronic gift card, intended to be usable at any store in a Westfield shopping centre. The Board granted an exclusion to Westfield’s gift card under section 9(3) of the PSRA, on the basis that it was a limited/closed payments facility and would be regulated under existing corporations law and consumer protection legislation. The Board’s decision was based on the particular features of the gift card – notably, that it would be non-reloadable and non‑redeemable for cash, and usable only at stores within Westfield shopping malls.
At the time that this decision was taken the Bank was aware that ASIC was considering exempting certain types of simple, well-understood non-cash payment facilities, such as gift cards, from a range of requirements under the Financial Services Act 2001 and the Corporations Act 2001. After a lengthy public consultation process, ASIC released its final policy statement on NCP facilities on 15 November 2005.
The following sections describe the Bank’s reasons for its decisions in relation to each of the various classes of PPFs, mentioned earlier. These reasons reflect both the Bank’s own analysis, and the outcome of consultations with APRA and ASIC about the proposed decisions.
2. ASIC’s final policy and gift cards
In its policy statement on NCP facilities [PS185], ASIC granted unconditional class order relief to persons providing financial services in relation to gift cards (or vouchers). This means that they do not need to meet the licensing, conduct and disclosure obligations (as well as the hawking prohibition) set out in Chapter 7 of the Corporations Act 2001.
The specifics of what qualifies as a ‘gift facility’ are set out in a Class Order (CO 05/738). Essentially, ASIC defines a gift card/voucher as an NCP facility storing monetary value in a device that: is marketed solely as a ‘gift’; is not redeemable for cash (except for nominal amounts); is not reloadable; and must adequately and appropriately show any expiry date.
ASIC did not include any dollar limits – either to individual client balances or the total amount outstanding under the facility – in defining a gift card. Nor did it insist that client funds be held in trust, or include locational restrictions. In announcing its decision, ASIC did, however, note that NCP facilities are still evolving, and that it may need to review its policy in the future to take into account industry developments.
The Bank sees considerable merit in adopting ASIC’s definition of gift cards and declaring that such cards do not fall under the PSRA.
Critically, from the Bank’s perspective, ASIC’s notion of a gift card retains key elements of being a ‘closed facility’ for making payments. In particular, the facility must be marketed simply as a ‘gift card’ and must be non-redeemable for cash and non-reloadable. As such, the Bank sees no compelling reason to apply any special regulation to such facilities, or to adopt a more restrictive definition of gift cards than ASIC – especially since doing so could be open to criticism regarding regulatory overlap and inconsistency.
In deciding whether to declare that the PSRA should not apply to gift cards, as defined by ASIC, the Bank is required under section 9(3) of the PSRA to have regard to: the number or types of persons that have access to the facility; the number or types of persons to whom payments may be made using the facility; and any other matters the Bank deems relevant. While ASIC’s definition of gift card facility does not impose any restrictions per se on the number or types of persons who may use or receive payments using such a facility, the characteristics of these products required by ASIC (such as non-redeemability, non‑reloadability and the requirement to be solely marketed as gift cards) mean that these numbers and types are likely to be limited in practice, for any given facility. The Bank judges that these requirements are sufficient to ensure that these facilities will not become widespread means of payment of the sort requiring supervision by the Bank under the PSRA.
While the Bank is declaring that the PSRA does not apply to gift card schemes (as defined by ASIC), it will continue to monitor developments. It is conceivable that gift card schemes, such as that already established by Westfield, once freed from locational restrictions, could become significantly larger over time, and possibly evolve in unanticipated ways. Were such schemes to develop the characteristics of more ‘open’ payment systems, it might be necessary to review their exclusion from the requirements of the PSRA.
3. ASIC’s final policy and certain other NCP facilities
ASIC has also granted unconditional class order relief to persons providing financial services in relation to several other NCP facilities, notably:
- pre-paid mobile phone accounts;
- loyalty schemes; and
- electronic road toll devices.
These types of limited‑purpose payment facilities were not intended to be captured by the provisions of the PSRA. Currently, most of these forms of payment are already excluded from the PSRA under the Bank’s existing limited facilities criteria, because they involve payments to fewer than 50 people. However, instances could arise in the future where one or more such facilities fail to qualify for the Bank’s existing exclusions, despite being substantively similar to other facilities which do qualify. The Bank therefore sees merit in excluding these facilities from the operation of the Act, again using ASIC’s definitions.
4. Amendment of the Bank’s existing low-value facilities exemption
ASIC has also granted unconditional class order relief to persons providing financial services in relation to low‑value NCP facilities (as specified in ASIC’s Class Order CO 05/736). ASIC defines a low-value facility as one where the amount outstanding to any one client may not exceed $1000, and the total amount outstanding under the facility may not exceed $10 million. This latter figure is higher than the $1 million threshold that forms one of the Bank’s existing ‘limited facilities’ exclusion criteria – the other being a threshold of 50 for the number of persons to whom payments may be made using the facility.
The Bank’s limited experience in dealing with proposals for PPFs suggests that the $1 million threshold is on the low side – especially for facilities not in their initial trial phase. The Bank, therefore, sees merit, including for ‘regulatory consistency’, in aligning its dollar threshold with that of ASIC – that is, increasing it to $10 million. At the same time, the Bank is not at this time making any change to the threshold for the number of persons to whom payments may be made in order to qualify for its other ‘limited facilities’ exclusion.