1999
This note examines the meaning of “purchased payment facility” (“PPF”) and the regulation of these in the Payment Systems (Regulation) Act 1998. It is shown that the regime of regulation is confused and serves little purpose. It is then argued that the reason for this is a fundamental confusion as to the legal nature of stored value cards and similar facilities.
Section 9(1) of the Payment Systems (Regulation) Act 1998 provides:
(1) A "purchased payment facility" is a facility (other than cash) in relation to which the following conditions are satisfied:
- (a)
the facility is purchased by a person from another person; and
- (b)
the facility is able to be used as a means of making payments up to the amount that, from time to time, is available for use under the conditions applying to the facility; and
- (c)
those payments are to be made by the provider of the facility or by a person acting under an arrangement with the provider (rather than by the user of the facility).
However, a facility covered by a declaration under subsection (3) is not a purchased payment facility for the purposes of this Act.
The notion of a “facility” is not defined, but s(9(4)) provides:
(4) In this section: (a) a reference to a facility includes a reference to a right to use a facility; and (b) a reference to the purchase of a facility includes a reference to the payment of an amount for a right to use a facility.
It is obvious, and confirmed by the Explanatory Memorandum, that these sections were intended to apply to new payment system developments such as smart cards and digital cash as well as to older facilities such as travellers’ cheques.
Whether a “facility” is a PPF will, of course, depend upon the details of the particular facility, but it is not hard to imagine that there will be problems of interpretation. Consider, for example, a reloadable stored value card (“SVC”) where there is an express clause that the card remains the property of the issuer. This is the most common form of proposals for general purpose SVCs.
Is the “facility” purchased? The card clearly is not purchased since there is an express clause to the effect that it remains the property of the issuer. Has the customer purchased a “right to use” the facility (ss4(a)) or paid “for a right to use” the facility (ss4(b))? It obviously may be argued that this is the case, but what is the difference between this “right” and the right to use an ordinary cheque account? It is difficult to identify any characteristic of the “right” that does not equally apply to an ordinary cheque account or an account that is operated by debit card. In each case money is advanced (to use a neutral term) and is then used to make payments to third parties in accordance with instructions from the customer.
The same arguments apply to the issue of digital cash. The situation is slightly different with travellers’ cheques since it may be argued that the customer is purchasing the negotiable instrument. However, the same argument applies to the purchase of a bill of exchange, and it seems unlikely that the section was intended to apply to the discount of bills.
The other parts of the definition of PPF are satisfied by most, if not all, modern payment mechanisms. Again taking the familiar cheque as an example, it is used as a means of making payments “up to the amount that, from time to time, is available for use under the conditions applying to the facility”, thus satisfying s9(1)(b). The resulting payment is made by the bank, not the user of the facility, a fundamental fact determined as long ago as Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 and clarified in Joachimson v Swiss Bank Corp [1921] 3 KB 110. Consequently s9(1)(c) is satisfied.
In short, modern payment systems always conform to the second and third parts of the definition. The only distinguishing feature of a PPF is that it is “purchased”, but this is either applicable to only a very small number of facilities or to virtually all payment facilities, depending on how you view the arguments above..
This difficulty of applying the definition did not escape the architects of the section. There is an escape hatch since the Reserve Bank is empowered under s9(3) to make “declaration” that a particular facility is not a PPF. If the Act were to be applied rigorously, we should expect to see many such declarations.
I will argue below that the application of the section is difficult because the underlying concepts are not clearly identified.
PPFs, whatever they might be, are “regulated” by Part 4 of the Act. The only significant “regulation” is that the “holder of stored value” must be an Authorised Deposit-taking Institution (“ADI”). Because the PPF concept is so vague in its application, the Act provides for the Reserve Bank to grant “declarations” (s9(3)) “authorities” (s23) and “exemptions” (s25), all of which have the effect of mitigating or removing to this regulatory requirement.
The Reserve Bank is given the power to make a declaration that a facility is not a PPF for the purposes of the Act: s9(3). It may only make such a declaration if it considers that it is “inappropriate” for the Act to apply to the facility having regard to:
any restrictions that limit the number or types of people who may purchase the facility; or
any restrictions that limit the number or types of people to whom payments may be made using the facility.
other matters that it considers are relevant.
The first item would apply to “in-house” and other restricted entry schemes. The second might apply to facilities such as special purpose cards such as telephone access cards or transport payment cards. It might be argued, reasonably in my view, that single purpose payment cards are not a “payment system” that requires regulation.
The only consequence of a declaration is that the Act does not apply to the facility. The declaration does not determine the legal nature of the facility or the other regulatory regimes that might be applicable.
Whatever a PPF might be, it is “regulated” by Part 4 of the Act. The only serious regulation is that the “holder of stored value” must be an ADI. The “holder of stored value” is the person who makes the payment referred to in s9(1)(c): see s9(2) and the interpretations in s2.
Presumably this means the person who factually makes the payment, not the person who is contractually bound to the customer to make the payment. To clarify this, let’s call the customer C, the person who sells the PPF I (the issuer) and the “holder of stored value” H.
C is in a contractual relationship with I, the terms found in the document usually called “Terms and Conditions” (“T&C”). Whatever else the contract might contain, there must be a promise by I that I will ensure that payments are made if the facility is used in accordance with the terms of the T&C. If C chooses to use H to effect these payments, that is of no concern to C since C has no contractual relationship with H except in the unlikely event that I is acting as agent for H in concluding the contract with C.
The Act “regulates” PPFs by requiring that H be an ADI or hold an authority or exemption: s22. While this sounds admirable from a system stability viewpoint, it fact it has little effect. It gives C little comfort in the event that I becomes insolvent. C has no contractual relationship with H so, in particular, C is not a “depositor” who would receive preference under s13A(3) of the Banking Act 1959. It might be argued that H holds the funds in trust for the customers of I, but such an argument is notoriously uncertain in outcome: see, for example, Re Kayford Ltd [1975] 1 All ER 602; [1975] 1 WLR 279; compare with Re Multi Guarantee Co Ltd [1987] BCLC 257.
But all of this is academic since H may not hold any funds at all. The contract between I and H may call for H to be reimbursed after payments have been made by H. In that case, the “regulation” of the Act does not even provide the system stability that was the obvious reason for the “regulation”.
What is the situation if H becomes insolvent? If I has deposited funds, then I will be entitled to the preferential treatment accorded to depositors by s13A(3). I is still obligated to C to provide for payments. Presumably I must find a new “holder of stored value”.
As seen above, the concept of a PPF is flawed. Parts (b) and (c) of the definition apply to almost all known payment systems. The application of (a), the “purchase” part of the definition, is vague and uncertain and probably also applies to almost all known payment systems.
Even if we could clearly identify PPFs, the regulation of them is ineffective because of the separation of the “holder of stored value” from the person who is contractually bound to make the payment. As noted above, there is no reason for the “holder of stored value” to hold any funds at all.
In my opinion, the confusion is the result of a fundamental misunderstanding of the payment instruments involved. The language of stored value cards and digital cash has misled us as to their legal nature. Commercial promoters talk of cards as “just like cash”, bankers speak of the “transfer of value” and computer scientists talk in terms of “tokens”.
Each of these terms is, of course, valuable in the appropriate context, but we should not be confused by them when attempting to analyse their legal nature. The situation is similar to the use of the word “deposit” in the last century which obscured the legal nature of a deposit as a loan: Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002.
The details of a new analysis are discussed elsewhere in this Journal, but the essence is that most PPFs are simply “distributed accounting” payment systems. In particular, a SVC serves two purposes:
it provides the accounting system; and
it provides the “access method”, that is, the means whereby payment instructions are issued.
This analysis has numerous benefits. It positions the SVC squarely in the mainstream of payment systems law, it avoids having to give legal meaning to new terms such as “transfer of value” and it avoids the legal problems associated with issuing “tokens”. Perhaps most importantly, it allows a regulatory scheme to be structured that has none of the difficulties associated with the PPF regime of the Payment System (Regulation) Act 1998.