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Digital payments - Revised framework on monetary penalties is a step towards transparency

11 March 2020

by Kumar Panda

Introduction

India has seen rapid advancement in the FinTech industry in the last couple of years leading to increased number of transactions, entry of number of non-banking players, availability of multiple online payment modes, etc. This evolving sector is majorly regulated by the Reserve Bank of India by way of issuance of guidelines, directions, policies, instructions from time to time. For example, an important policy decision of recent times - the storage of payment data in a system only in India was implemented by RBI as a directive dated 06th April 2018. RBI penalises non-compliances of such regulatory directions by levying monetary penalties which in the last 18 months resulted in penalties ranging from INR 0.5 million to INR 30 million on wallet providers, prepaid instrument providers and payment app providers.

Payment and Settlement Systems Act 2007:

RBI derives such powers to regulate payment systems and payment system participants by way of directives, guidelines from the Payment and Settlement Systems Act 2007 ("PSS Act"). Under the PSS Act, the RBI is designated as authority for regulation and supervision of payment systems, payment system participants in the country. Payment systems and system participants regulated by PSS Act include debit and credit card providers, banks, UPI, IMPS, NETC (FASTags), payment gateways, digital wallets, prepaid payment instruments like employee meal vouchers.

Offences and Penalties under PSS Act:

Chapter VII (Sections 26 to 31) of the PSS Act deals with penalties and offences. Section 26 of the PSS Act deals with offences, which are punishable with imprisonment or fine or both. An indicative list of offences by payment systems and payment system participants under Section 26 as provided by RBI includes non-compliance of AML/KYC norms, breaching data localization norms, breach of limits in loading prepaid cards, non-maintenance of minimum net worth, non-maintenance of outstanding balance in an escrow account by a prepaid instrument provider.

In addition to Section 26, Section 30 empowers RBI to impose penalties where payment system provider makes a false statement or wilfully omits to make a material statement or any provision of PSS Act is contravened, or if any default is made in complying with any regulation, order or direction made or given or condition imposed thereunder and in respect of which no penalty has been specified.

In the background, RBI in the year 2016 issued Framework for imposing monetary penalty on Authorised Payment Systems Operators / banks under Payment and Settlement Systems Act, 2007 (“Old Framework”) to offer a procedural guidance on levy of penalties and compounding under the PSS Act. The Old Framework was replaced recently by the RBI vide Circular dated 10th January 2020 (“New Framework”).

Key Highlights of the New Framework:

  1. Introduction of objective methodology to determine the materiality of contravention and determining the amount of penalty: The New Framework introduces an objective methodology to determine the materiality of the contravention which includes the i) severity of contravention in terms of degree of breach of norms/limits; ii) period and frequency of a similar contravention during the past 5 years; iii) seriousness of the contravention; iv) percentage of amount involved in the contravention vis-à-vis total value of transactions handled by the contravener during the period under consideration; and v) Amount involved in the contravention.
  2. Amount of Penalty: The upper limit of Rs. 1 crore for non-quantifiable contravention under the Old Framework has been now brought down to Rs. 5 lakh per contravention.
  3. Requirement of a speaking order: The New Framework makes it mandatory for the designated authority to issue a speaking order while levying penalties by taking into consideration all information and documents submitted by the contravener.
  4. Compounding: The New Framework states that all offences mentioned in Section 26 of PSS Act (except those where a willful wrong statement is made in an application for authorization or in any return) can be compounded. The designated authority is now required to pass an order within a period of 6 months from the date of receipt of the complete compounding application.
  5. Payment of monetary penalty and disclosures: The monetary penalty shall be payable within a period of thirty days from the date of the order. In case of failure in payment of penalty amount, RBI will initiate appropriate action against the contravener as per the PSS Act for recovery of the penalty. The entities are required disclose the details of monetary penalty paid under PSS Act in their Notes to Accounts that are part of Annual Financial Statements for the financial year in which the penalty is levied.

Conclusion

Given the rapid growth in the FinTech industry in the past couple of years, the number of entities that are required to comply with the PSS Act, regulations and guidelines issued thereunder have significantly increased. By issuance of this Framework, RBI has voluntarily clipped its own wings from exercising the wide discretionary powers under the PSS Act which is a welcome move. The New Framework is also a step forward towards transparency in regulatory actions in a sector that is heavily regulated.

[The author is an Associate in Corporate Advisory team, Lakshmikumaran & Sridharan, Hyderabad]