RBNZ to tighten payment regulation

The Reserve Bank of New Zealand has announced plans to toughen its currently light-touch regulation of large and systemically important payment systems to ensure they are efficient and prepared for a crisis.

RBNZ deputy governor Grant Spencer detailed the banking regulator's thinking about the rapidly changing world of retail and wholesale payments systems at the Payments New Zealand conference in Auckland.

Spencer said international regulators had become more concerned about the growth in the complexity and volume of payments on payment and settlement systems known as Financial Market Infrastructures.

He said operational lapses in large or highly connected payment systems could disrupt the wider financial system and economy.

"The regulator has a much stronger interest in the safety and efficiency of such systemic FMIs," Spencer said, adding that many national regulators had recently strengthened their regimes around such systems.

The RBNZ has been relatively non-intrusive in the past and only those FMIs seeking designation under the Reserve Bank and Financial Market Authority (RMA) rules had to have their own rules approved by the bank and the FMA.

"However, this regime is voluntary and, for FMIs not choosing to be designated, the Bank must rely on suasion and industry engagement to promote its stability and efficiency objectives," Spencer said.

The bank would like to see its requirements extended to all systemic FMIs.

"In this regard we believe there is a case for some strengthening of the current regulatory framework. Our concern relates to situations where our objectives for the safety and efficiency of systemic FMIs cannot be achieved through suasion alone," Spencer said.

Spencer referred to a case on Anzac Day in 2012 when retail payments through the SWIFT network were disrupted, causing significant delays that would have been worse on a normal working day.  He said the industry had informally asked for the RBNZ's leadership that day, but the bank now wanted to formalise that role.

"The Bank is currently looking to establish an enhanced oversight regime based around systemically important FMIs with attention given to crisis management powers," Spencer said.

"Our approach will be aligned with international principles and, while remaining near the non-intrusive end of the international spectrum, will focus on the core objectives for a sound and efficient payment system."

Elsewhere, Spencer said the central bank had not taken a position in the current debate within the industry over the future of EFTPOS in a world where contactless credit and debit cards were growing quickly.  He said the bank would not prescribe the shape of the payment system or the direction of innovation, which was in contrast with the stronger industry positions taken by the Reserve Bank of Australia and the Payments System board.

"In our own case, we often express views on industry direction, particularly if there are implications for systemic risk, but we prefer to see market-based solutions," he said.

Spencer said the bank acknowledged the arguments for keeping a strong EFTPOS system to compete with card schemes from the likes of Visa and Mastercard.

He noted the popularity of scheme debit cards given their ability to be used online and overseas.

"It may be that the cost of re-investing in the domestic product to provide comparable functionality is too high," he said.