Yandraduth Googoolye: Legal aspects on the National Payments
System
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the
Workshop on the Legal Aspects on the National Payments System, in achieving compliance with
Principle 1 of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) organized
by the IMF's Regional Technical Assistance Center for Southern Africa (AFRITAC South), Ebene,
27 November 2017.
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Ms L. Effie Psalida, AFRITAC South Coordinator,
AFRITAC South Delegates from member Central Banks
Learned Resource Persons
Ladies and Gentlemen
Good morning. I extend to you a warm welcome to Mauritius. Thank you for the privilege to
providing the opening for the Workshop, indeed very timely for Mauritius, as we are currently
finalizing our National Payment Systems Legislation and working towards a National Payment
Switch.
I am also delighted to see Ms Onnene Partsch in our midst today. Ms Onnene Partsch has, as
part of the IMF Technical Assistance Mission, provided assistance to the Bank of Mauritius in
reviewing our draft National Payment Systems Bill. I am confident that she, as well as all the
resource persons, will partake their invaluable experience and knowledge with you during this
week.
Amidst its basic traditional functions, a central bank is called to ensure that liquid resources in
the economy are efficiently managed. This function allows for the use of cashless payment
systems by economic agents. Cash payments make economic agents incur costs in terms of
interest foregone and higher security risks. A primary function of a central bank is to conduct
monetary policy, the impulses of which are typically transmitted from banks to the rest of the
economy. The operational features of the transmission, however, rests upon the smooth
functioning of payment infrastructure. If the operation of payment systems is underdeveloped,
these institutions will opt to retain a higher buffer of central-bank money for liquidity management
purposes, with a view to better manage their liquidity. This, in turn, leads to weaker than intended
monetary-policy impulses from the central bank.
Another primary function of the central bank is to ensure stability of the financial system. This
implies that the financial system is robust to systemic risk. Financial stability allows the financial
system to withstand shocks without impairing the processing of payments in the economy, and
ultimately, the allocation of savings to investment opportunities. Accordingly, a robust and
resilient market infrastructure is key to financial stability. The interest of central banks in financial
stability can be traced as far back as late June 1974, when the closure of the Herstatt bank left
transactions half-done due to the time-zone difference between Frankfurt and New York. This
incident led central banks to develop a continuous linked settlement platform, whereby
commercial banks manage settlement of foreign exchange amongst themselves on a payment
versus payment basis.
More often than not, we have tended to underestimate the role of payment systems in an
economy. At one point in time, we even took the payments system for granted, assuming that
transfers will be settled as expected, and that the system will perform as solidly under market
stress as it does under normal conditions. Let me reassure you... central banking is a serious
job and we do acknowledge that payment systems play a critical role in the design of the broad
spectrum of a central bank's policies. Thus, it is in the interest of the central bank to ensure that
the payment system is efficient, as it enables the orderly functioning of the interbank, money and
capital markets. This also reduces the cost of exchanging goods and services, expands
opportunities for commercial and financial transactions, and supports higher investment and
economic activity. Settling payments in accounts at the central bank still provides the link with the
latter's two main tasks, namely monetary policy and financial stability. In sum, a national
payment system is a vital mechanism for ensuring a country's economic development, since
almost all transactions involve some kind of payment and maintain confidence in the domestic
currency both in normal times and during crisis times.
Central banks are also required to nurture the various characteristics that underpin the design
and development of the payment system. Specifically, a central bank has to put forward the legal
framework through the establishment of rules and regulations, standards, and policies that will
govern the nation's payment and settlement services; while facilitating payment finality. It is also
called upon to regulate private agents in the payment system; and to administer payment
services, especially the large-value payment systems that underpin financial activity. Last but not
least, the central bank musty also provide credit for participants in the payment system.
As the lender of last resort, the central bank ought to have the required information and means to
oversee and, if necessary, assist the institutions participating in the payment system. The
central bank has to exercise oversight on the design and the operations of payment
arrangements to improve the speed and reliability as well as reduce financial risk, transactions
costs and the risks of fraud, errors and other major types of risks inherent in the payment
system. A well-developed statutory and regulatory framework for the payment system, thus,
reduces uncertainty and risk, and provides the needed clarity.
Let us recall that payments systems are but one of the five key types of Financial Market
Infrastructures (FMIs). The four others being the Central Securities Depositories, Securities
Settlement Systems, Central Counter Parties and Trade Repositories. FMIs are key
components of the financial system. They play a critical role in the smooth functioning of the
financial market and can be a source of both financial stability and operational efficiency by, inter
alia, establishing and ensuring secure arrangements for the timely clearing and settlement of
obligations between counterparties. To manage the relationships among the various
counterparties and stakeholders and also to mitigate risks, it is imperative for the National
Payment System (NPS) to operate on sound legal premises.
Legal certainty brings confidence, and Principle 1 of the CPSS-IOSCO Principles for Financial
Markets Infrastructures underscores the importance for FMIs to have a well-founded, clear,
transparent, and enforceable legal basis for each material aspect of their activities.
The CPSS-IOSCO Principles further set out the five key considerations in order to fully comply
with the first Principle, which are as follows:
1. the legal basis should provide a high degree of certainty for each material aspect of an FMI's
activities in all relevant jurisdictions;
2. an FMI should have rules, procedures, and contracts that are clear, understandable, and
consistent with relevant laws and regulations;
3. an FMI should be able to articulate the legal basis for its activities to relevant authorities,
participants, and, where relevant, participants' customers, in a clear and understandable
way;
4. an FMI should have rules, procedures, and contracts that are enforceable in all relevant
jurisdictions. There should be a high degree of certainty that actions taken by the FMI under
such rules and procedures will not be voided, reversed, or subject to stays; and
5. an FMI conducting business in multiple jurisdictions should identify and mitigate the risks
arising from any potential conflict of laws across jurisdictions.
A proper understanding of these key considerations is, thus, mandatory for central bankers. I
need not dwell further on these as they would surely be covered by the resource persons in the
Workshop.
The legal framework must accordingly provide explicit and defined authority of Central Banks
over payment systems, including amongst others the powers to license, authorise or designate
payment systems and clearly define their oversight functions. The basis for cooperation with the
regulators of other domestic FMIs as well as foreign FMIs must also be clearly spelt out in the
law.
We must not ignore the regional dimension to this lively subject. Cross-border trade in the region
is rapidly expanding and various initiatives are evolving for the continent. To facilitate payment
transactions, Africa is host to a number of cross-border payment systems: the SADC Integrated
Regional Electronic Settlement System (SIRESS) and the COMESA Regional Electronic
Payment and Settlement Systems (REPSS), West African Monetary Zone (WAMZ), the East
Africa Payment Systems (EAPS) of the East African Community (EAC). I am sure that AFRITAC
member states must be participants to at least one of them. The Bank of Mauritius is itself a
participant in the REPSS and SIRESS.
However, there is currently no harmonised legal and regulatory framework for payments in the
Continent and member states are at varying stages of development of their legal and regulatory
frameworks for their respective NPS.
In the SADC Region, for example, in the absence of an appropriate SADC wide legal and
regulatory framework, Member States participating in the SIRESS have structured the legal
arrangements between themselves through a number of multilateral agreements, in view of
providing for legal certainty. SADC countries have, however, already committed themselves to
harmonise their legal and regulatory frameworks and to establish institutional and organisational
structures conducive to the establishment of an integrated payments market.
Ladies and gentlemen, payment services are considered to be the stepping stone for financial
inclusion. People's demand for ever faster, more convenient and flexible means of payments
has led to a dramatic evolution in the payment ecosystem, especially in the retail payment
services.
Today, the contours of the global financial system are different from what they were, say, a
decade before. Major developments have underscored the implications for payment systems and
financial stability as they have exposed central banks to additional sources of risks. For instance,
the issuance of new financial instruments, the increasing size and complexity of financial
systems, and globalization of financial markets have contributed to generate new areas of risks.
Financial innovations, due to technological advances in information and communications, have
impacted strongly on the speed, variety and costs of transactions. These have increased the
size of the financial sector vis-à-vis the real economy and the number and volume of transfers
that take place through the payment system have magnified significantly. Consequently, the
smooth running of the financial system and the economy is turning out to be very reliant on the
non-stop provision of market liquidity and, obviously, on the orderly functioning of the payment
system.
Fintechs are nowadays the new kid on the block. They are rapidly positioning themselves as the
key players in the financial industry, partly due to some sort of regulatory void in which they have
been operating so far, and partly as some regulators around the world have adopted a somewhat
adaptive approach to regulation in order not to stifle innovation. Since financial companies are
creating faster, cheaper, and more convenient payment systems out of technology, a customer
centric approach for service is emerging with the notion of anytime, anywhere payments. At the
same time, the payment service provider is moving out of the banking domain to the non-banking
one.
The regulatory challenges thrown up by Fintechs can be summarised thus:
i. the need to focus on activity rather than technology and literally educating the consumer
of risks involved;
ii. when an activity is innovative, or embedded within the underlying technology, regulators
need to understand how they work, while allowing such activities to mature at the same
time, the so-called, "Regulatory Sandbox" which enable regulators to address the potential
risks of new technologies without stifling innovation; and
iii. with applications built on the Blockchain technology, regulators are faced with the
challenge of ensuring the right balance between transaction transparency and privacy.
The Basel Committee on Banking Supervision has lately issued a Consultative Document, which
assesses how technology-driven innovation in financial services may affect the banking industry
and the attendant activities of supervisors in the near to medium term. At the Bank, we have
established an internal committee as well as an inter-bank committee on Fintechs and
Distributed Ledger Technologies to study Fintech models and propose the regulatory
frameworks and technological infrastructures conducive to promote an enabling environment for
emerging technologies.
Broadly, central banks have to ensure that they remain in sync with the markets. As they become
more global and interconnected, authorities have to cooperate more closely in their oversight and
operational activities, and towards mitigating risks associated with Fintech. In this rapidly
changing environment, regulators need to show flexibility but, at the same time, they have to
ensure that there is no regulatory arbitrage. As the boundaries between banks and non-banks
involved in financial activities get thinner, regulators need to closely collaborate in order to come
up with smart regulation for the jurisdiction as a whole.
Ladies and gentlemen, I am confident that this Workshop on the Legal Aspects of NPS will
provide the basis to better understand key requisites for devising or revising legislation regarding
the payments system. On this note, I wish you all a fruitful workshop and a pleasant stay in
Mauritius.