An Overview Of The National Payment Systems Act, 2020 and All Regulations Thereunder

An Overview Of The National Payment Systems Act, 2020 and All Regulations Thereunder

Introduction

Prior to 2020, the law that was in place to regulate payment solutions like mobile money in Uganda was the Mobile Money Guidelines, 2013. According to these guidelines, Bank of Uganda was mandated to issue directives regarding mobile money operations while Uganda Communications Commission was responsible for licensing and supervision of mobile network operators. This created a lacuna in terms of which institution was responsible for regulation and oversight of the payment systems. Due to the above lacuna, the Parliament of Uganda enacted the National Payment System Act, 2020 giving all regulatory and oversight powers to the Central Bank. The Act also gave power to the Minister of Finance in consultation with the Central Bank, by statutory instrument, to make Regulations for the better carrying into effect of the Act. As such, the Minister has made various Regulations including; the National Payment Systems Regulations, 2021, the National Payment Systems (Agents) Regulations, 2021 and the National Payment Systems (Sandbox) Regulations, 2021. Below is an overview of the National Payment Systems Act, 2020 and all Regulations thereunder.

 

THE NATIONAL PAYMENT SYSTEMS ACT, 2020

Introduction

The purpose of this Act is to regulate payment systems, to provide for the safety and efficiency of payment systems, to provide for the functions of the Central Bank in relation to payment systems, to prescribe the rules governing the oversight and protection of the payment systems, to provide for financial collateral arrangements, to regulate payment service providers, to regulate issuance of electronic money, to provide for the oversight of payment instruments and for other related matters.

Regulation of Payment Systems

The Central Bank is mandated to regulate, supervise and oversee the operations of payment systems in order to ensure their safety and efficiency.

Licensing

Section 5 of the National Payment Systems Act, 2020 provides for categories of payment systems in Uganda namely;- payment systems operated by the central bank which include; the Real Time Gross Settlement System, the Automated Clearing House, the Central Securities Depository for Government debt securities and the cross border payment systems plus payment systems operated by another government entity or in partnership with a government entity in public interest plus payment systems operated by private entities including; switches, electronic money systems and aggregators plus any other payment system approved by the central bank.

Section 8 of the Act provides that a payment system is eligible to be licensed by the central bank if it has the following objects; clearing of payment instructions between financial and non-bank, settling of obligations arising from the clearing of payment instructions, transfer of funds from one account to another using an electronic device, transfer of electronic money from one electronic device to another, provision of technological services to facilitate switching, routing, clearing or data management of or on behalf of a payment system provider, provision of electronic payment services to the unbanked and under-banked population, provision of financial communications networks, ordering or transmitting payment instructions, storing of information on a device for purposes of effecting payments and fulfilling payment obligations at points of sale, merchant outlets or over the internet.

Section 11 of the Act provides that an operator of a payment system shall with approval of the central bank develop payment system rules to govern the payment system and these rules shall provide for; access criteria, conditions for suspension or exclusion of participants, rights and obligations of participants deriving from participating in a payment system, the moment from which the transfer order becomes irrevocable, common rules and standardized arrangements for the execution and settlement of transfer orders, risk management and business continuity procedures, jurisdiction or mechanisms for dispute resolution, the time within which to transfer funds to customer accounts, fees charges and penalties payable by participants and persons acting as a point of contact between a payment system and the central bank.

Section 13 of the Act provides that central bank may by notice in writing, revoke or suspend a license if it is satisfied that the licensee; has failed to comply with any provision of the Act or any regulations, has failed to adhere to directives or guidelines issued by the central bank, has failed to commence the operations of a payment system within  six months after the license was granted, has ceased to operate the payment system for a period exceeding thirty days, obtained the license through false or misleading statements or other unlawful means, is operating a payment system which in the opinion of the central bank endangers the stability of the financial system in Uganda, is conducting business in a manner detrimental to the best interest of the public and has entered into insolvency proceedings.

Regulatory Sandbox

Section 1 of the Act defines sandbox as a temporary experiment of innovative financial products, services, business models or delivery mechanisms in the payment systems ecosystem.

Section 16 of the National Payment Systems Act, 2020 gives power to the Central Bank to establish a regulatory sandbox framework for purposes of governing the manner in which a person may obtain limited access to the payment system ecosystem to test innovative financial products or services without obtaining a license under the Act.

Section 17 of the National Payment Systems Act, 2020 provides that any person who wishes to operate a sandbox to apply to the Central Bank for approval to operate a sandbox.

Section 18 of the National Payment Systems Act, 2020 empowers the central bank to grant an approval to an applicant to operate a sandbox.

Oversight of the payment system

Section 19 of the National Payment Systems Act, 2020 empowers the Central Bank to oversee the operations of payment systems in order to ensure their safety and efficiency and in particular, the central bank is empowered to; regulate entry and conduct of participants to payment systems, give directives to participants as may be necessary to ensure the safety and efficiency of payment systems, issue guidelines with respect to payment orders, issue written warnings to operators, service providers or participants in payment systems, cause payment system operators to change any rules or operational manuals of payment systems and cease or suspend payment systems or part of an operation of a payment system.

Section 20 of the National Payment Systems Act, 2020 gives power to the Central Bank to issue directives to licensees in respect of payment systems and in considering whether or not to issue directives, the central bank may have regard to; imposing a civil penalty of one hundred currency points for each day on which the contravention continues or revocation of the license if the contravention continues for more than 30 days.

Protection of Payment Systems

Settlement accounts

Section 1 of the Act defines settlement account as an account in the books of a settlement agent used to hold funds and financial instruments and to settle transfer orders between participants in a system.

Section 26 of the National Payment Systems Act, 2020 provides that every participant in a payment system shall open and maintain settlement accounts in the books of the central bank or an authorized settlement agent, including the maintenance of minimum balances.

Section 27 of the National Payment Systems Act, 2020 provides that the balances on settlement accounts with a payment system shall not be attached, assigned or transferred for the purposes of satisfying any debt or claim.

Securities settlement systems

Section 1 of the Act defines a securities settlement system as a formal arrangement amongst three or more participants, with common rules and standardized arrangements for the execution of securities transfer orders between the participants.

Section 31 of the National Payment Systems Act provides that any securities that are settled in the central bank shall be operated in accordance with the delivery versus payment principle. The securities settlement system shall segregate between the assets of the operator of the securities settlement system and the securities held by the participants of that settlement system for themselves, and for the clients of the participant. The balance of a settlement account held with a central securities depository system shall not be attached or seized, except by a payment system operator or a settlement agent.

Financial Collateral Arrangements

Section 1 of the National Payment Systems Act defines a financial collateral arrangement as an arrangement of transfer of title or a security interest as financial collateral, whether or not the transfer of title or security of interest is covered by an agreement or general terms and conditions, applicable to a financial collateral.

Section 39 of the National Payment Systems Act provides that the payment systems operator shall with the approval of the central bank prescribe the manner in which a participant in a payment system shall reserve adequate liquid assets as collateral for securing or the obtaining funds to facilitate settlement of their payment obligations in that payment system.

Electronic Money and Electronic Transfer

The Act provides for electronic money issuance, circulation, trust, special accounts and its protection, permissible transactions and prohibitions in relation to other available applicable laws like the Anti-Money Laundering Act,2013 and the regulations thereunder;

Section 1 of the National Payment Systems Act defines electronic money as a monetary value represented by a claim on the issuer, which is:-

(a) Stored on an electronic device.
(b) Issued upon receipt of funds in an amount not less in value than the monetary value received.

Section 47 of the National Payment Systems Act provides that a payment service provider licensed as an electronic money issuer shall issue electronic money only after an equivalent amount of cash is deposited in the trust account or special account.

Trust account

Section 49 of the National Payment Systems Act provides that an electronic money issuer shall submit an application to the central bank to open a trust account in a financial institution or a microfinance deposit taking institution to facilitate issuance of electronic money.

Special account

Section 51 of the National Payment Systems Act provides that a payment service provider who is a financial institution or a microfinance deposit taking institution and who intends to issue electronic money shall with the approval of the central bank, open and maintain a special account in its books of account.

Section 55 of the National Payment Systems Act prohibits an electronic money issuer which is not a financial institution or microfinance deposit taking institution not to engage in receiving and taking deposits within the meaning of the Financial Institutions Act,2004, and the Micro Finance Deposit-Taking Institutions Act,2003, count or issue airtime as electronic money among others.

 

THE NATIONAL PAYMENT SYSTEMS REGULATIONS, 2021

Introduction

The purpose of these regulations is to provide for; licensing of operators of payment systems, payment service providers and issuers of payment instruments and provide for operations of electronic money issuers.

Application to operate a payment system or offer a payment service

Regulation 3 provides that an application to operate a payment system or to offer a payment service shall be made to the central bank accompanied by; proof that the objects of the applicant are in accordance section 8 of the Act, a detailed description of the product or service, a list of the substantial shareholders, a business plan, the applicant’s organizational structure, a risk management framework, a certified copy of incorporation documents, at least two recommendation letters, a duly filled fit and proper person form for shareholders, a certificate of good conduct for the shareholders, source of funds, audited financial statements, the tax identification number, proof of payment of fees among others.

Application for license to issue a payment instrument

Regulations 4 provides that a person other than a financial institution or microfinance deposit taking institution that wishes to issue a payment instrument shall apply to the central bank for a license to issue a payment instrument accompanied by; a copy of a license of the applicant, a description of the type of the type of payment instrument intended to be issued, a risk management framework, terms and conditions of issuance of the payment system, a merchant and agent agreement, proof of payment of fees, a pricing policy imposed on the customers among others.

Operations of Electronic Money Issuers

Regulation 13 provides that an application by an electronic money issuer to the central bank to open a trust account shall be accompanied with a list of the proposed names of the trustees that it intends to appoint to manage the trust account and it shall for each trustee submitted indicate the following; the citizenship of the trustee, a duly filled fit and proper person form for trustees, in case of a corporate trustee the date of incorporation and the names and qualifications of the directors, the trustee’s ability to perform the functions of a trustee, a certificate of good conduct for each trustee proposed, a credit reference report, whether the trustee is the subject of any insolvency proceedings in any country among others.

 

THE NATIONAL PAYMENT SYSTEMS (SANDBOX ) REGULATIONS, 2021

Introduction

The purpose of these Regulations is to provide for; application to operate a sandbox, processing of the application, approval of the application, revocation or suspension of approval.

This however, simply provides for the manner in which a person or institution can obtain a limited access level to a payment system’s ecosystem for purposes of testing.

Application to operate a sandbox.

Regulation 3 provides that a person who wishes to operate a sandbox shall apply to the central bank for approval to operate a sandbox and the application shall be accompanied by; a certified copy of the incorporation documents, a certificate of good conduct for each shareholder, manager or director, a credit reference report for each shareholder manager or director, at least two recommendation letter from persons of good repute, a copy of a dispute resolution policy, a description of the innovative concept, a testing plan, a copy of the business plan, a risk management framework, proof of payment of the application fees and an exit plan.

Processing of the application.

Regulation 4 provides that the central bank shall upon receiving the application determine whether it meets the requirements and in doing so, it shall consider; whether the innovation is genuine, whether the sandbox has consumer benefits and safeguards, the readiness for testing and the suitability of the exit plan.

Approval of the application.

Regulation 5 provides that the central bank shall in writing within sixty days approve the application if it is satisfied that it meets the requirements.

Revocation or suspension of approval.

Regulation 6 provides that central bank may revoke or suspend an approval if the applicant; fails to implement any required safeguards, submits false information, contravenes any applicable law, is undergoing or has gone into insolvency, breaches data security and confidentiality requirements, carries on business in a manner detrimental to customers, investors or public, fails to effectively address any defects, flaws or vulnerabilities of the product or service.

 

THE NATIONAL PAYMENT SYSTEMS (AGENTS) REGULATIONS, 2021

Introduction

The purpose of these regulations is to provide for; approval of use of agents, grant of approval, appointment of agents, terms of agency agreement, responsibilities of licensee, agent non-exclusivity among others.

Regulation 2 defines an agent as a person contracted by a licensee to provide payment services on behalf of the licensee. It further defines a licensee as a person issued with a license under the Act.

Approval of use of agents

Regulation 3 provides that a licensee who intends to use an agent shall apply to the central bank for approval and the application shall be accompanied by; a due diligence policy, a copy of the draft agency agreement to be used, a copy of the specifications and detailed description of the technology to be used, a risk assessment report, a copy of a manual with details on anti-money laundering and countering financing of terrorism, a copy of the pricing and revenue sharing structure, a copy of an operational manual and a risk management framework to be followed by the agent among others.

Appointment of agents

Regulation 5 provides that a licensee shall conduct due diligence on a person before appointing the person as an agent and that a licensee shall not appoint an agent unless the agent has; operated an account with a licensed institution that takes deposits or an electronic money account for at least three months prior to the appointment, a national identification card in case of a citizen and a passport for a foreigner, certified copies of incorporation documents in case of an incorporated entity, a recommendation letter from a local authority confirming that the agent is a resident in their area f jurisdiction, secure premises to be used by the agent while performing the agency services.

Terms of agency agreement

Regulation 6 provides that an agency agreement shall include the following provisions; the rights responsibilities and liabilities of both parties, the scope of work to be performed by the agent, the activities the agent is prohibited from engaging in, the safe keeping of all records collected in relation to the agency services, that the agent is bound to complete confidentiality forms regarding the customers and the transactions of the customers, a requirement to comply with the Data Protection and Privacy Act 2019, allows the central bank unrestricted access to internal systems and information, provide that the central bank may direct the licensee to terminate the agreement, providing for termination of the agreement amendment of the agreement and dispute resolution among others.

Responsibilities of licensee

Regulation 7 provides that a licensee shall; put in place adequate and secure technological infrastructure for the operation of the agent services, define a contingency plan to mitigate disruption discontinuity or gaps in the functions of the agent, prohibit an agent from charging fees to customers other than the fees prescribed by the licensee, conduct mandatory onboard training and continuous training of agents, require that the agent complies with the customer protection requirements, compensate agents for the services rendered, provide monthly reports to the central bank on its agent network, monitor the operations of agents to ensure compliance with the provisions of the Act.

Agent non-exclusivity

Regulation 8 provides that an agent may provide agency services for two or more approved licensees provided that the agent has; entered into an agency agreement with each licensee for the provision of agency services and the capacity to manage the transactions for the different licensees and a licensee is prohibited from signing an exclusive agreement with an agent.

Conclusion

The National Payment Systems Act, 2020 and the regulations thereunder cater for the safety and efficiency of the payment systems, functions of the central bank in relation to payment systems, oversight and protection of payment systems, regulation of issuance of electronic money and also help in the provision for financial collateral arrangement among others.

Following the enactment of the National Payment Systems Act, 2020 and pursuant to Section 9 of the Act and Regulation 3 of the National Payment Systems Regulations, 2021, Bank of Uganda has so far issued licenses to MTN Mobile Money Uganda Limited and Airtel Mobile Commerce Uganda Limited.

In addition, Bank of Uganda approved M/S Wave Transfer Limited to operate under the Regulatory Sandbox framework.

 

Written by Andrew Wambi & Mwosi Daniel.

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Andrew Wambi,
Partner, Springs Advocates,
Head Natural Resources & Dispute Resolution Department.

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Mwosi Daniel,
Legal Assistant, Springs Advocates.