Organisations that play minor roles in moving money, or which are otherwise currently exempt, are now likely to be captured by the introduction of new legislation following the conclusion of Treasury’s recent consultation on major reforms to the payments industry. Reforms are now expected to be introduced in the next 12 months, resulting in a new wave of licensing.
In this article, we explore what licensing of the payments industry under the Australian financial services licensing (AFSL) regime could look like and what you can do now to start preparing.
Key Takeaways
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Who is currently captured under the regime?
Currently, only a small number of payment providers hold an AFSL to provide financial services in relation to non-cash payments. This includes major providers such as PayPal or remittance businesses that do not qualify to operate under an exemption. If you currently operate under an exemption, then how you carry out your business and the regulatory requirements that apply to you are likely to change.
Broader range of payment providers to now be regulated
Under the proposed reforms, payments providers are now likely to be captured under one of the 7 types of proposed payment functions (see our previous article here). This means that many organisations that play an ancillary role in the payments chain (e.g. payment tech providers) will be regulated and required to maintain an AFSL. These operators have had no prior exposure to financial services or the regulatory regime that applies to AFSL holders and lack the infrastructure, compliance frameworks and resources required to maintain an AFSL.
Competency Challenges
A key consideration when applying for an AFSL is showing ASIC that you have people in the business (known as your Responsible Managers) who have the knowledge and skills to oversee the significant day-to-day provision of financial services (i.e. the payments services). ASIC have prescriptive requirements for demonstrating organisational competence and relies heavily on Responsible Managers showing previous regulated experience. It will be challenging for many payments organisations to demonstrate regulated experience given the number of operators who are not currently regulated.
In the past, when new financial services have been introduced (e.g. claims handling and limited-AFSLs for accountants) and previously unregulated industries entered the regulated space, ASIC has considered broader experience from Responsible Managers. ASIC allowed these new entrants to rely on relevant but unregulated prior experience that sufficiently demonstrated competency in managing the services that the business was to provide in a licensed environment. We anticipate that this may be the case for payments providers, however, it is important that those currently in the payments space consider the experience of individuals currently in the business that are responsible for overseeing key payments functions. Irrespective of whether ASIC provides some relief for Responsible Managers, individuals are likely to still need to be able to demonstrate that they possess relevant (although unregulated) experience in at least 3 out of the last 5 years and hold a relevant tertiary qualification. For more information about Responsible Managers, see our upcoming article: Licensing Essentials: Responsible Managers in a Nutshell.
Consider your business model and what payment functions are relevant
Payments can seem straightforward and seamless to a consumer. However, those navigating the transactions and payments functionality behind the scenes may find that it can be complex when it comes to identifying who is providing financial services in relation to payments.
Most operators will need to hold their own AFSL, and understanding now which entity needs to hold a licence is imperative as this will likely impact more broadly on how your products are offered to customers and how you manage risk within your business. It is important to review your current corporate structure, product offerings and future growth opportunities to best prepare for how these reforms will impact you.
Get ready for AFSL compliance
Whilst all the regulatory details are not yet clear we do know that the general conduct obligations that apply to all current AFSL holders will apply to payments licensees. This includes (but is not limited to) the requirement to have appropriate dispute resolution systems in place, including membership with the Australian Financial Complaints Authority (AFCA) if you service retail clients and professional indemnity (PI) insurance to compensate retail clients where a licensee has breached its obligations.
It is important to spend the time now preparing to comply with these obligations. Consider whether you will manage these compliance arrangements in house, whether you will outsource these functions, or a combination of both. It will come down to whether you have the skills and resources in house to support your business to manage these compliance obligations.
We recommend familiarising yourself with the obligations that will apply, reading ASIC guidance and beginning to either develop new or update existing policies that deal with areas such as dispute resolution, conflicts management, outsourcing, technology systems and disclosure requirements. Alternatively, you can purchase our AFS Licensee Manual which is a comprehensive guide to the AFS licence obligations (available at our eStore).
Likely approach to licensing
The new regime will look broadly similar to the current AFSL obligations that apply to non-cash payment providers. It is unclear how ASIC will approach those with existing non-cash payment licences and whether it will offer a streamlined or more efficient approach to transitioning to the new regime. Treasury has proposed that existing licensees may be able to simply notify ASIC of which of the new authorisations it will need.
Based on our experience, once the legislation is passed and the regime takes effect, ASIC will provide set timeframes for lodgment of applications for new licence applicants. It is likely that ASIC will see a significant influx in licensing applications but may not have a proportionate increase in internal resources to manage the increase to its existing workload. There is also the potential for other new regimes to commence around the same time (including BNPL and digital assets facilities). In the normal course of business, ASIC’s service standards to assess and grant a licence range from 4 – 9 months, but it may be prudent to allow longer in this case. You will need to factor in these timeframes once the licensing process commences.
We also do not yet know if there will be grandfathering i.e. permission to trade until your licence application is determined one way or the other. It is therefore critical to be prepared for the upcoming reforms and have your licence submitted early with effective and high quality documents to ensure you are able to operate during the transition period and that ASIC can smoothly review your application with minimal additional questions.
Get in touch
If you require advice or guidance on how the upcoming reforms may impact your business, contact us for more information. You can read more in our Submission to Treasury on ‘Payment System Modernisation: the Regulation of payment service providers’.
For more information, please contact Jaime Lumsden, Sónia Cruz, Nicholas Pavouris or Ruth Fesseha.
