Approach to Regulation
The Reserve Bank's Approach to Regulation of the Payments System
The Bank's objectives and approach to regulation of the payments system are shaped by its governing legislation, along with the intent of the legislators expressed at the time the legislative framework was established. The Bank is required to control risk and promote efficiency and competition in the payments system. However, there is a presumption in favour of self-regulation by the industry, with the Bank only intervening where the industry is unable to address a public interest concern. This means that in practice the Reserve Bank has imposed regulation in a relatively narrow range of payments system activity.
Objectives of Regulation
The Reserve Bank Act 1959 requires the Payments System Board to determine payments system policy in a way that will best contribute to:
- controlling risk in the financial system;
- promoting the efficiency of the payments system; and
- promoting competition in the market for payment services, consistent with the overall stability of the financial system.
The Payment Systems (Regulation) Act 1998 generally allows the Bank to regulate where it considers it to be in the public interest to do so. In determining the public interest, the Bank must have regard to the desirability of payment systems:
- being (in its opinion):
- financially safe for use by participants; and
- efficient; and
- competitive; and
- not (in its opinion) materially causing or contributing to increased risk to the financial system.
The Payment Systems and Netting Act 1998 allows the Bank to exercise its powers if it considers that systemic disruption to the financial system could otherwise result.
In practice, the joint objectives of efficiency, competition and controlling risk mean that the Bank must to some degree distinguish between systems whose smooth functioning is important to the stability of the financial system – due to the large values processed and the role played in financial markets or monetary policy – and those for which efficiency and competition are very important, due to the large number of (typically low value) transactions processed.
The first group, referred to as systemically important payment systems, are subject to formal oversight under the Bank's framework for Financial Market Infrastructures (FMIs), including a formal assessment on a regular basis. Currently the Reserve Bank Information and Transfer System (RITS) is the only payment system that falls into this category, though other types of FMIs are overseen in a similar fashion.
The second group of payment systems, for which efficiency and competition are the main focus, are commonly referred to as retail payment systems. This does not however mean that these systems cater solely to the household sector; some retail payment systems service the needs of the business and government sectors.
Promotion of Efficiency
In promoting the efficiency of the payments system, the Bank focuses on three things:
- technical efficiency – can processes be improved to reduce costs or improve the quality of the product?
- allocative efficiency – are resources being allocated in the most efficient way across the payments system as a whole?
- dynamic efficiency – do processes, products and the allocation of resources adjust over time?
The Bank has pursued policy (but not always regulation) in each area. For instance, some of the early work of the Bank when the current legislative framework was established was on the technical efficiency of the cheque system, with the Bank encouraging the move to a shorter cheque clearing cycle (from five to three days). On the other hand, much of the Bank's work on card interchange fees and surcharging has aimed at improving allocative efficiency. By improving price signals, regulation can result in payment choices that better reflect the underlying costs and benefits of different payment methods, resulting in more efficient use of the payments system and better allocation of resources. Finally, in its Strategic Review of Innovation in the Payments System, the Bank sought to address concerns about the capacity of the industry to respond to changing user demands. This work has resulted in new industry governance arrangements through the creation of the Australian Payments Council and the initiation of the project to deliver the New Payments Platform.
Promotion of Competition
In pursuing competition in the payments system, the Bank largely focuses on two areas. First, it seeks to free up any unwarranted restrictions on participation in individual payment systems. Doing so inevitably involves managing the balance between the competition that new participants can bring and managing any additional risks that arise, particularly where new entrants are not subject to the same form of prudential regulation as incumbents. The Bank also focuses on whether the actions of one party – whether a participant in a system or the system itself – are adversely affecting the capacity of another party to compete. The bilateral nature of some Australian payment systems can facilitate discriminatory behavior by participants against other participants. Where payment systems rely on shared infrastructure, it is also possible for one payment system to inhibit the access of another payment system. The principal regulatory tool the Bank has for addressing most of these issues is the imposition of an access regime, although a number of issues have been addressed without the need to take this step.
A Presumption in Favour of Self-regulation
The Explanatory Memorandum for the Payment Systems (Regulation) Bill 1998 made clear that the intent of the legislators was for the Bank's regulatory powers to be used sparingly. It stated that:
The philosophy of the Bill is, however, co-regulatory. Industry will continue to operate by self-regulation in so far as such regulation promotes an efficient, competitive and stable payments system. Where the RBA considers it in the public interest to intervene, the Bill empowers it to designate a payment system and develop access regimes and standards in close consultation with the industry and other interested parties.
This has been the approach adopted by the Bank; it imposes regulation only where it considers it necessary in the public interest and where the industry is unable or unwilling to address the Bank's concerns. Any regulatory action by the Bank is generally preceded by lengthy consultations with the industry in an effort to arrive at a non-regulatory solution. The result of this approach is that the scope of the Bank's regulation has been quite narrow, largely covering interchange fees and restrictions on merchants in card systems, along with access regimes for several card systems (two of which have subsequently been removed and a third eased significantly).
Other elements of the payments system remain unregulated. As an example, the Bank has not imposed any regulation in relation to fraud prevention in retail payment systems. The Bank's view is that in general payment system operators and participants have an incentive to manage payment fraud and to balance the cost of fraud detection and prevention techniques against the cost (including the reputational cost) of the fraud itself. The Bank would typically only seek to intervene in fraud prevention where it considered that a market failure was preventing such issues from being properly addressed or where public confidence in the payments system was at risk.