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Digital age drives Singapore's payment services reforms

ANALYSIS: Plans to reform payment services laws in Singapore reflect the innovation being seen in the payments market in the digital age and the need to update rules and regulations to account for that.07 Dec 2018

The Payment Services Bill was read for the first time by Singapore's parliament on 19 November and is likely to take effect at the end of 2019.

Under the proposed new legislation, more types of payment services would fall subject to licensing than currently. The Bill also contains powers for the Monetary Authority of Singapore (MAS) to designate critical payment systems for regulation.

Businesses active in the payments market in Singapore should review their existing and proposed operations and consider whether there are any licences or exemptions that may be applicable when the new regime comes into force.

Background and overview

MAS previously confirmed its intention to reform payments laws in Singapore to support fintech innovation back in 2016. It subsequently consulted on plans to do so in November 2017 before the Payment Services Bill was then introduced before parliament.

Currently, payment services in Singapore are regulated under the Payment System (Oversight) Act (PSOA) and Money-Changing and Remittance Business Act (MCRBA). However, the existing regime under the two statutes has not been clear on how newer digital payments services and methods should be regulated.

The Payment Services Bill seeks to streamline the regulation of all digital payment services within a single activity-based regime that will be overseen by MAS. Both the PSOA and the MCRBA will be repealed when the new legislation is finalised and comes into force, scheduled for the end of 2019.

The new Bill consists of two parallel frameworks: a designation framework and a licensing framework. The designation framework is similar to the current PSOA regime, in that it allows the MAS to name payment systems that are crucial to financial stability as "designated payment systems". Such payment systems will be subject to more stringent obligations under the new Bill to ensure financial stability and efficiency of their operations.

Under the licensing framework, payment service providers will be required to hold a licence for the payment services that they provide, unless an exemption applies.

The licensing framework

The licensing regime establishes three classes of licences that will correspond to the risk posed by the nature and scale of the payment services provided: a money-changing licence; a standard payment institution licence, and a major payment institution licence.

  • money-changing licence: money-changing licensees will only be allowed to conduct money-changing services. Should they wish to provide other payment services, they will have to obtain a standard payment institution licence instead
  • standard payment institution licence: standard payment institutions can conduct any number of regulated payment service activities below a specified threshold (depending on the payment service activity(ies) undertaken. If the service provider's activities exceed the relevant threshold, they will have to obtain a major payment institution licence.
  • major payment institution licence: payment service providers will have to apply for a major payment institution licence if the total value of all payment transactions they process for a payment service (other than an e-money account issuance service) is more than $36 million per calendar year. If the payment service provider operates an e-money account issuance service, the wording of the Bill suggests that the service provider will have to apply for a major payment institution licence if the average daily value in a calendar year stored across all issued accounts exceeds $5 million.

According to the Bill, payment service providers would only need to hold one licence from any of the three tiers. The licence will set out the payment activity or activities that the licensee is permitted to conduct.

The amount of licence fees payable is likely to differ based on the type of licence and number of payment service activities that a particular licence requires, and will be payable to MAS on an annual basis.

Activity-based licensing

The Bill identifies seven payment service activities that will be regulated, three of which are not currently regulated. These are:

  • account issuance services: issuing maintaining or operating a payment account in Singapore, such as an e-wallet or non-bank credit card;
  • domestic money transfer services: providing local funds transfer services in Singapore, including payment gateway services and payment kiosk services;
  • digital payment token services: digital payment tokens are not denominated or pegged to any currency. They are intended as a medium of exchange and can be transferred, traded or stored electronically. Under the Bill, buying or selling digital payment tokens, and providing a platform to allow persons to exchange digital payment tokens in Singapore are considered digital payment token services

The other four payment services activities subject to the licensing regime in the Bill are already subject to some form of regulation.

  • cross-border money transfer services: providing inbound or outbound remittance services in Singapore. This activity is currently regulated under the MCRBA.
  • Money-changing services: buying or selling foreign currency notes in Singapore. This is also currently regulated under the MCRBA.
  • merchant acquisition services: providing merchant acquisition services in Singapore. This is where the service provider contracts with a merchant to accept and process payment transactions, which results in a transfer of money to the merchant. Usually the service includes providing a point of sale terminal or online payment gateway. There are some regulations in place for designated payment systems under the PSOA.
  • money issuance services: e-money refers to electronically stored monetary value that is denominated or pegged to any currency, which the end user has paid for in advance to the issuer. The e-money represents a claim on its issuer, but is accepted by a person other than the issuer. Under the Bill, an e-money issuer requires a licence. There are some regulations in place for stored value facilities under the PSOA.

Exemptions from licensing

Notably, there are two main exclusions from the licensing framework under the Bill:

  • limited purpose e-money: e-money that is intended to be used only in Singapore as payment of goods or services provided by the issuer; the issuer's franchise group and/or its related corporations; and/ or any person in physical premises owned or managed by the issuer or its related corporation, where the stored value cannot be withdrawn or refunded to the end user in any currency. Possible examples include Starbucks gift cards, kopitiam cards and Kinokuniya vouchers.
  • limited purpose digital payment tokens: this includes non-monetary customer loyalty or reward points, in-game assets, and any other digital tokens that cannot be returned to the issuer, transferred or sold in exchange for money. Possible examples include credit card reward points, store loyalty points, and in-game currency.

The designation framework

The designation framework in the Bill allows MAS to designate critical payment systems for regulation, even if they would not ordinarily fall within the scope of the licensing framework. Payment systems may be designated by the MAS as such if any of the following apply:

  • disruption of the payment system will cause disruption to the payment system or affect public confidence in the financial system of Singapore;
  • the payment system is widely used in Singapore and the designation is necessary to ensure efficiency or competitiveness of the services provided by the payment system's operator;
  • designation is in the interests of the public.

Obligations of licensees and designated payment systems

Licensees and designated payment services are subject to a number of obligations under the Bill. These vary depending on the type of licence businesses have, or whether they are operators of designated payment systems.

  • permanent place of business, or registered office in Singapore: this requirement applies to all licensees - money-changing licensees, standard payment institution licensees and major payment institution licensees, as well as designated payment systems.
  • obtain MAS approval for substantial shareholders, change in shareholding and appointments of CEO/ directors, in accordance with MAS's fit and proper persons criteria: all licensees require MAS approval for shareholdings greater than 20% for entities incorporated in Singapore, and for CEO and director appointments for all entities. Designated payment systems require MAS approval for shareholders and indirect controllers, for all operators, greater than 5%.
  • notify MAS of certain events , such as legal proceedings, irregularity or change in operations, and change in director or CEO: all licensees and designated payment systems are subject to this requirement.
  • limitations on exchanging e-money for Singapore currency: this applies to all licensees, but not designated payment systems
  • provide information and reports to MAS upon notice: all licensees and designated payment systems are subject to this requirement.
  • provide security to MAS for the performance of obligations to end users: this obligation applies to major payment institution licensees only
  • safeguard moneys received from end users: this obligation applies to major payment institution licensees only
  • annual audits: all licensees and designated payment systems are subject to this requirement.
  • create access regimes to limit end users' access (if required by MAS): this obligation applies to designated payment systems only.

Implications of the proposed Bill

The Bill is intended to replace the current regulatory framework with a single regime. Depending on the type of payment service activity and the amount of payment transactions processed, entities incorporated or operating in Singapore may need to be licensed under the Bill as a money-changing licensee, standard payment institution, or major payment institution.

Notably, MAS has indicated in its guide to digital token offerings that all entities licensed or designated under the Bill will be required to put in place anti-money laundering and counter-terrorist financing processes to address money-laundering and terrorism financing risks.

MAS has also provided for transitional arrangements to ease the change in regulatory framework. Existing approved stored value facility holders under the PSOA and licensed money-changers and remittances businesses under the MCRBA will not have to apply for a payment services licence under the Bill. Payment systems that have been designated under the PSOA will also be deemed to be designated payment systems under the Bill.

The Bill is expected to commence in late 2019. This will give relevant entities sufficient time to review their existing and proposed business activities and consider whether there are any licences or exemptions that may be applicable when the new regime comes into force.

Bryan Tan and Bernice Tian are experts in contracts at Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law.com.