2023
The draft Financial Services Reform Bill, known more familiarly as CLERP6, was released in mid-February. The bill purports to implement a uniform regime of regulation for all financial products.
The overall scheme of the bill is to require “Financial Service Providers” (FSPs) to obtain a licence. Licensed FSPs must maintain certain standards and meet certain disclosure requirements.
The bill also regulates certain “Clearing and Settlement Facilities” (CS Facilities).
The bill is wide ranging. This note is concerned with only a small part of it – the application to “non-cash payment facilities” and to clearing systems associated with payment facilities.
A facility through which a person makes a non-cash payment is a “Financial product”.2 A person makes non-cash payments if they make payments, or cause payments to be made, otherwise than by the physical delivery of currency.3
Section 763D(2) provides some important exceptions, but none of these apply to most consumer payment facilities of interest:
payment through a credit facility - but this is to be defined by the regulations.
single payee facilities or facilities identified in the regulations;
payment by letter of credit, bank cheque or bank guarantee;
“settlement” obligations incurred by participants in a non-cash payment scheme.
The “credit facility” exception is intended to exclude facilities that are regulated by the Consumer Credit Code. The treatment of “hybrid” schemes will cause some problems. What of a facility that provides a single card which functions both as a credit card and a debit card? What of an EFTPOS facility that allows overdrafts? The best view is that these schemes will be regulated under CLERP6 insofar as they are “non-cash payment” facilities and under the CCC insofar as they are credit facilities, but the matter needs clarification.
Section 765A provides further exceptions. Of relevance:
a facility that is an approved RTGS systems under the Payment Systems and Netting Act 1998;
facility that is a designated payment system for the purposes of the Payment Systems (Regulation) Act 1998;
a facility that is a payment system operated as part of a licensed CS facility.
It is not at all clear why the exception exists for designated payment systems. The Payment Systems (Regulation) Act 1998 purports to regulate access and standards of payment systems. These are quite different matters than the consumer-investor orientation of CLERP6. There is a suggestion in the Commentary that the PSA will be amended, but no details are provided. Even so, there seems little sense in the Payment Systems Board regulating some payment systems while ASIC regulates others. Most consumer advocates would find the idea of the PSB regulating consumer rights to be unpalatable.
The scope of the CS facility exception is unclear. If, say, the APCA paper clearing stream is a licensed CS facility, does that mean the the cheque system is no longer a “non-cash payment facility”? The better view seems that it remains a “financial product”, but some clarification would be helpful.
Payment system participants will “provide a financial service” if they “deal in a financial product”: Section 766A. Participants “deal in a financial product” if they “issue” a financial product or “dispose” of a financial product: Section 766C. These terms are not well suited to non-cash payment products, but the better view is that payment system participants are “dealing” in the product.
Section 768A defines a Clearing and Settlement (CS) facility. The main characteristics are:
operated as a business
provides a mechanism for all parties to transactions relating to financial products to meet obligations to each other that arise from entering into the transactions
of a kind prescribed by the regulations.
Most payment schemes will require some clearing facility. It is hard to imagine a payment clearing mechanism that does not meet the CS Facility definition. Note that the clearing facility will ordinarily be operated by an organisation separate from the individual payment scheme participants.
Exceptions include (Section 768A(2)):
an ADI acting in the ordinary course of its banking business - this is probably not relevant since it is not the participating ADI which is the CS facility;
certain actions of a participant in a CS facility - again, not relevant since we are concerned with the Clearing/settling organisation rather than the individual participants.
As financial services providers (FSPs), each participant in a payment scheme will require an Australian FSP Licence: s881A
As the operator of a CS facility the scheme clearing facility will require an Australian CS facility licence. The Minister may exempt a facility from the licence requirement but in so doing must request the Payments System Board to regulate the facility.
Note that the current Payment Systems (Regulation) Act does not make provisions for regulating CS facilities. The Commentary indicates that the Act will be amended.
Distribution of stored value cards by newsagents or other retail distribution systems may pose problems.
By section 881A(2)(a), no licence is needed by an “authorised representative”, but an “authorised representative” cannot appoint sub-representatives: s887B. The result is that each and every employee of the retail outlet must be an “authorised representative”. This is clearly intolerable.
By Section 883B, a FSP providing services to retail clients must have
adequate arrangements for compensation for pecuniary losses;
caused by failure to adequately provide financial services
Banks should argue that existing ABIO Scheme + supervision by APRA = “adequate compensation scheme” for the purposes of s883B. Other ADIs may mount similar arguments.
A CS facility where participants provide services to retail customers must have an “adequate” compensation scheme: Section 851A.
The losses covered by the compensation scheme must include those which are essentially the defalcation or fraudulent misuse of money or other property by the participant and the insolvency of a participant: see s855C.
It is not at all clear how this might apply to a payment system. The protection of depositors in the event of an insolvency of a participant is a radical departure from existing law.
The CLERP 6 disclosure regime is based on three documents: the Financial Services Guide (FSG), the Statement of Advice (SOA), and the Product Disclosure Statement (PDS). The documents are also known as Financial Services Document 1, 2 and 3.
The PDS is the document that is most difficult to define for the purposes of payment systems. The Bill adopts the “directed disclosure” approach and attempts to balance the need for the client to receive sufficient information against the possibility of “information overload”. The aim is to ensure that clients can make reasonable comparisons and informed decisions.
“Directed disclosure” is achieved by listing topics that must be included in all PDSs to the extent that they are relevant to the product. “Statements” must include all relevant details, but “information” need include only so much detail as would be required by the reasonable retail client when considering the product in question.
Banks are worried about “double regulation” under the Payment Systems (Regulation) Act and CLERP6. This may be misconceived since the acts regulate different things. But note that there is a suggestion in the Commentary that the PS(Reg)A is to be amended.
Although the argument of “double regulation” may be misconceived, it does seem that there should be provision for automatically granting a licence to ADIs and others who have qualified for supervision by another regulatory body.