Alan L Tyree

The Business of Banking

Alan L Tyree*

The Banking Regulations 1966 have been amended to extend the concept of “banking business”.1 The effect is to extend the confusion which has resulted from the lack of any clear conceptual framework for “purchased payment facilities”.

1  Background

As a result of the Wallis recommendations, supervision of banking and payments has been split between the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA). The split has not been entirely successful, in part because APRA controls the exemptions for carrying on “any banking business” while the RBA, acting through the Payment Systems Board, has primary responsibility for the payment system.

This division of authority inevitably causes overlap and/or “underlap” for the simple reason that banking and payments have been inseparable since the first goldsmiths began issuing receipts that circulated as money: see Holden [1]. Throughout the 20th century, “banks” jealously guarded the right to control the making of third party payments from accounts. The result was, and is, a ready source of cheap depositor funds.

The problems (from the banks’ viewpoint) began in the 1980s when technology permitted credit unions and building societies to begin to infiltrate the payment system. ATMs proliferated, giving depositors in these institutions ready access to funds. The development of EFTPOS permitted depositors to make many common third party payments, gradually breaking down the banks’ monopoly.

As a result of the Wallis reforms, we now have “authorised deposit taking institutions” (ADIs) which are authorised to carry on “the business of banking”. Unfortunately, as mentioned, the regulatory scheme ignores the close relationship between payments and the “business of banking”.2

2  Payment system regulation

As everyone knows, technology has moved on to provide possible openings for non-ADIs to enter the payment system. Stored value cards, digital cash, and other Internet payment mechanisms have not yet been commercially successful, but most believe that they will ultimately have a serious impact on the payment system: for discussion of these, see [5], [4], and [2].

The Payment Systems (Regulation) Act 1998 (the PSA) attempted to deal with the situation through its definition of “purchased payment facility” (PPF). This is a facility (other than cash) in relation to which the following conditions are satisfied:3

As pointed out previously in this Journal (see[3]), the definition makes hardly any sense at all, and certainly does not distinguish between ordinary cheque accounts and other forms of payment. To compound the confusion, the “holder of stored value” (HSV) is defined to be the person who makes the payments referred to in the third part of the definition.

PPFs are “regulated” by requiring the HSV to be an ADI or to obtain an exemption from the RBA. Note that the HSV need not actually hold any of the value. It is easy to devise a scheme where the HSV makes the payments and then invoices the facility operator at regular intervals. The person who actually “holds the value” need not be subject to any regulation.

3  New regulations

As mentioned, the new Banking Regulations extend the definition of “banking business”. According to the RBA/APRA joint press release, the purpose is to eliminate the “dual regulatory structure” for HSVs. That is, to eliminate the situation where APRA has responsibility for supervision of ADIs which are also HSVs and the RBA has responsibility for those HSVs who have obtained an exemption under s9(3) of the PSA.

Under the new regulation, the provision of a PPF is “banking business” for certain types of PPFs. There is no indication of what it means to “provide a PPF”, but it is obvious that the “provider” need not be the HSV. For example, Company X issues a stored value card, making arrangements with Company Y to make the payments. Company Y is the HSV who must either be an ADI or must obtain an exemption from the RBA. Presumably Company X is the “provider” who, if the new Regulation applies, is carrying on “banking business”.

The Regulation has not accomplished what the press release stated was the aim. In the example, Company Y could obtain an exemption, thereby being regulated by the RBA. Company X is now potentially (see below) regulated by APRA.

The Regulation does not apply to all PPFs. It will only apply if APRA determines that:

Presumably the first condition means that the payment is denominated in Australian currency, but that is not what it says. The second part of the first condition reflects the usual confusion concerning the need for the HSV to actually hold stored value. The second condition is intended to exclude single purpose or limited issue cards.

4  Conclusion

Where are we? At the least:

Does it matter? From a practical point of view, probably not. The RBA has never exercised its statutory powers in any formal sense. Regulation has always been through “consultation” and “discussion” and “reasoning together”, and there is no reason to believe that anything has changed. The regulators see this as a flexible and effective approach. Others might see it as non-transparent.4

Is the statutory confusion necessary? Of course not. The new payment methods may easily be fitted into traditional legal models: see [5] for a discussion. This, of course, would not remove all difficulties but it could at least avoid the absurdity of the present confused statutes.

References

[1]
M J Holden. History of Negotiable Instruments in English Law. University of London Press, London, 1955.
[2]
Alan L Tyree. Digital Cash. Butterworths, 1997.
[3]
Alan L Tyree. Regulating the payment system - part 4 - purchased payment facilities. JBFLP, 10(4):305–307, 1999.
[4]
Alan L Tyree and Andrea Beatty. Digital cash in australia. JBFLP, 9:5, 1998.
[5]
Alan L Tyree and Andrea Beatty. The Law of Payment Systems. Butterworths, Sydney, June 2000. ISBN 0 409 31701 2.

*
Consultant, Mallesons Stephen Jaques, Sydney; formerly Landerer Professor of Information Technology and Law, University of Sydney.
1
Banking Amendment Regulations 2000 (No 1)
2
Lord Denning recognised this close relationship in United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431; unfortunately, it has never found favour in Australian cases. Equally unfortunately, it was ignored in the Wallis reform legislation.
3
Section 9, PSA
4
Others might also see it as less than completely effective. With only a handful of banks, the Australian payment system must be one of the easiest to regulate. Why did it nearly come unstuck in the early 1990s?