New AFS licensing framework for payment service providers: draft legislation released

New licensing framework for PSPs

The new proposed regulatory framework for payment service providers (PSPs) operating in Australia has now been released.  The new laws build on previous consultations on draft legislation — see our article on those measure here: ‘New exposure draft legislation released for the regulation of non-cash payment providers’.

Under the proposed laws, PSPs will generally be required to hold an Australian financial services (AFS) licence with relevant payment authorisations, unless an exemption or exclusion applies.

Certain payment activities will now be regulated as financial products, while others will be regulated as financial services.

Payment functions proposed to be regulated as financial products include:

• Stored-value facilities (SVFs), such as prepaid cards.
• Tokenised SVFs, including stablecoin arrangements backed by stored funds.
• Payment instruments, such as debit and credit cards.

Tokens attached to rights under tokenised SVFs will not be treated as separate financial products, ensuring that stablecoin-type arrangements are regulated through the underlying stored-value facility.

Other payment activities which will now be regulated as financial services include:

• Payment initiation services, such as direct debit services.
• Payment facilitation services, including merchant acquiring and cross-border transfers.
• Payment technology and enablement services (PTES), such as payment gateways, although purely back-end technology services will not be regulated.

Segregated payment accounts required

A key element of the reforms is that PSPs will generally be required to segregate payment funds and hold them in trust accounts with authorised deposit-taking institutions (ADIs).

Additional reform-specific obligations include:

• disclosure requirements for tokenised SVFs;
• a prohibition on SVFs paying interest benefits; and
• a statutory right for users to redeem stored value.

Licensing exemptions and prudential oversight

The legislation package also includes proposed licensing exemptions which are intended to clarify the scope of the new licensing regime. Many existing exclusions, such as those for certain low-value facilities, gift facilities and loyalty schemes, will continue to apply with some refinements.

Major stored-value facility providers that hold $200 million or more in stored value must be registered with the Australian Prudential Regulation Authority (APRA).

Transitional arrangements and next steps

The draft legislation proposes that the reforms will commence 12 months the new legislation is passed, with transitional arrangements depending on a provider’s licensing status.

PSPs without relevant authorisations will have six months after commencement to apply for an AFS licence, while existing AFS licensees will have one month to apply for an AFS licence variation under a streamlined process.

Separate transition arrangements will apply for entities captured by the new prudential regime.

We will continue to monitor developments as the draft legislation progresses through consultation.

For more information, email Chris Mee at cmee@cnmlegal.com.au or Jessica Bauers at jbauers@cnmlegal.com.au, or call 07 3211 4010.