Introduction
Payment systems are an integral part of commercial and financial transactions in Uganda and they include Real Time Gross Settlement System (RTGS) for interbank transfers, Automated Clearing House (ACH) system for clearing cheques and the Electronic Funds Transfers (EFTs) as well as securities settlement systems such as the Central Securities Depository (CSD) operated by the Bank of Uganda and the Securities Central Depository System operated by the Uganda Securities Exchange.
There are certain laws in place which are relevant to the regulation of payment systems and these include: the Bank of Uganda Act (Cap 51) which provides for the establishment of the central bank of Uganda; the Financial Institutions Act (2004); the Electronic Transactions Act (2011) which governs the use, security, facilitation and regulation of electronic communications and transactions; the Contracts Act (2010); the Electronic Signatures Act (2011) and the Anti-Money Laundering Act (2013). These laws do offer some protection however, they are not comprehensive in terms of regulating payment systems across the board.
The National Payment Systems Act, 2020 (the “Act”) seeks to bridge this gap by providing for the safety and efficiency of payment systems; the regulation of payment systems, payment service providers and the issuance of electronic money, among others. Below is an overview of the Act.
Scope of the Act
The Act applies to the following persons: (i) to an operator of a payment system; (ii) a payment service provider; and (iii) an issuer of a payment instrument. The Act does not apply to securities deposited or held in the Securities Central Depository established under the Securities Central Depository Act, 2009 and traded at the Uganda Securities Exchange.
Regulation of Payment Systems
The Act provides for the central bank as the regulator, supervisor, and overseer of the operations of payment systems in order to ensure their safety and efficiency. As the authorized regulator, the central bank shall exercise various functions which include the following:
- regulation and supervision of payment service providers and operators of payment systems;
- consideration of applications for licenses;
- monitoring and oversight of cross border payments;
- providing settlement services to payment systems and settlement of monetary value of securities; and
- approving rules and arrangements relating to the operation of payment systems including (i) netting arrangements; (ii) risk-sharing and risk control mechanisms; (iii) finality of settlement and finality of payment; and (iv) other matters relating to systemic
It should be noted that in relation to the securities settlement system, the Act limits the central bank’s functions to: (i) the issuance, redemption, and settlement of debentures, stocks, shares, treasury bills and bonds issued or proposed to be issued by Government; and (ii) the transfer of monetary value for debentures, stock, shares, bonds or notes issued or proposed to be issued by a body corporate.
Categorisation of Payment Systems
The Act categorises payment systems as follows:
- payment systems operated by the central bank which include: (i) the Real Time Gross Settlement System; (ii) the Automated Clearing House; (iii) the Central Securities Depository for Government debt securities; (iv) cross border payment systems; and (iv) any other payment system established by the central bank;
- payment systems operated by another government entity or in partnership with a government entity in public interest;
- payment systems operated by private entities, including: (i) switches; (ii) electronic money systems; (iii) aggregators or integrators;
- and any other payment system approved or licensed by the central bank
Licensing Requirements
According to the Act, a person shall not offer a payment service, operate a payment system or issue a payment instrument without a license issued by the central bank. However, the requirement to have a license will not apply to payment instruments issued by the central bank, payment services offered by the central bank or payment systems operated by the central bank. The Act also provides that a system is eligible to be licensed by the central bank if it has any of the objects prescribed therein. These objects include:
- clearing of payment instructions between financial and non-bank;
- settling of obligations arising from clearing of payment instructions;
- transfer of funds from one account to another using an electronic device;
- provision of electronic payment services to the unbanked and under-banked population; or
- fulfilling payment obligations at points of sale, merchant outlets or over the
Subject to the above objects, a payment system is eligible to be licensed by the central bank if that payment system is interoperable with other payment systems in the country or internationally.
Establishment of a Regulatory Sandbox
The Act provides that the central bank may establish a regulatory sandbox framework for purposes of governing the manner in which a person may obtain limited access to the payment ecosystem to test innovative financial products or services without obtaining a license. The regulatory sandbox framework must prescribe the criteria and minimum requirements for operating a sandbox and the manner in which to conduct the sandbox.
According to the Act, a person who wishes to operate a sandbox should apply to the central bank for approval to do so within the established regulatory sandbox framework. It should be noted that the Act defines a sandbox as “a temporary experiment of innovative financial products, services, business models or delivery mechanisms in the payment systems ecosystem.”
Oversight of Payment Systems
In terms of oversight, the Act confers certain powers and responsibilities on the central bank for purposes of ensuring the safety and efficiency of payment systems. These include:
- the power to issue directives to licenses in respect of payment systems or payment instruments;
- appointment of an external auditor or directing an external auditor of a service provider, a participant or an operator of a payment system, to examine that service provider, participant or operator of a payment system in respect of matters as may be specified by the central bank; and
- inspection of operations of a payment service provider or an operator of a payment
Protection of Payment Systems
The Act provides for certain matters relating to the protection of payment systems such as:
- The finality and irrevocability of settlement of payments:
According to the Act, a payment instruction or settlement shall be valid and enforceable by and against a payment system operator or participant, and shall be final and irrevocable from the time the payment instruction or settlement is determined under the rules of that payment system to be final. However, a payment system operator or payment service provider shall with the approval of the central bank, prescribe the manner of recovering an equivalent amount of transfer arising from a payment instruction or, settlement made in the case of fraud, mistake, error or similar vitiating factors.
- Settlement accounts:
The Act provides that every participant in a payment system shall open and maintain settlement accounts in the books of the central bank or an authorised settlement agent, including the maintenance of minimum balances, on such terms and conditions as the central bank or payment system operator may specify. Where a participant is unable to maintain a settlement account, the participant shall appoint another participant who has opened a settlement account as a settlement agent to: (i) settle all obligations due from the first participant to any other participant; or (ii) receive all claims from the first participant from the other participant.
It should be noted that the balances on settlement accounts with a payment system shall not be attached, as- signed or transferred for the purposes of satisfying any debt or claim.
- The effect of insolvency proceedings:
The Act provides that insolvency proceedings commenced against a license or participant shall not have retrospective effect on the rights and obligations of a license or participant arising from, or in connection with the participation of that license or participant in the payment system before the commencement of the insolvency proceedings.
It should be noted that notwithstanding the commencement of insolvency proceedings, the following transactions are valid, enforceable and binding against third parties, including a liquidator:
- cash or securities transfer orders, when entered into a payment system in accordance with the rules of that payment system prior to the commencement of the insolvency proceedings, even if the payment or securities transfer took place after the commencement of the insolvency proceedings; and
- the netting of cash or securities transfer orders, and of the debts and obligations resulting from a transfer order where the cash or securities transfer orders were entered into a payment system in accordance with the rules of that payment system prior to the commencement of the insolvency proceedings, even if the netting took place after the commencement of the insolvency
Principles of Securities Settlement Systems
According to the Act, 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.
Collateral Arrangements
Under the Act, a payment systems operator can, with the approval of the central bank, prescribe the manner in which a participant in a payment system shall hold adequate liquid assets as collateral for securing or obtaining funds to facilitate settlement of their payment obligations in that payment system. The collateral shall be used for fulfilling an obligation of a participant as a result of failure to settle its obligations; and protected against insolvency proceedings. Financial arrangements shall be in writing and may contain a right to withdraw the financial collateral by substitution with a financial collateral of substantially the same value.
With respect to validity, a financial collateral arrangement shall be valid and enforceable against third parties including the liquidator and shall take effect in accordance with the terms of the arrangement of the possession if the financial instruments is transferred to the collateral taker.
The Act recognizes the non-retrospective effect to insolvency proceedings on collateral arrangements. It provides that the provision of financial collateral may not be declared void or reversed on account of the commencement of insolvency proceedings if the financial collateral was provided at the latest, on the day of the commencement of insolvency proceedings and at a time when the collateral taker was unaware of the commencement of insolvency proceedings.
Electronic Money and Electronic Transfer
The Act provides that a payment services provider licensed as an electronic money issuer shall, among other things, issue electronic money only after an equivalent amount of cash is deposited in the trust account or a special account opened in accordance with the relevant provisions. It should be noted that under the Act, electronic money means a monetary value represented by a claim on the issuer which is: (i) stored on an electronic device; (ii) issued upon receipt of funds in an amount, not less in value than the monetary value received; (iii) accepted as a means of payment undertakings other than the issuer; and (iv) prepaid or redeemable in cash.
According to the Act, a licensed electronic money issuer is required to submit an application to the central bank in the prescribed form to open a trust account in a financial institution or a microfinance deposit-taking institution to facilitate issuance of electronic money. A payment service provider who is a financial institution or 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.
An electronic money issuer shall be required to keep one hundred percent of the electronic money held in a trust account or a special account in liquid assets. The liquid assets shall remain unencumbered and shall be in form of cash balances held on a trust account or special account maintained with a financial institution or a micro finance deposit-taking institution on accreditation basis and withdrawable on demand, treasury bills and bonds or any other liquid asset as may be determined by the central bank. For purposes of the above, the central bank may place a lien over the liquid assets.
Some of the permissible transactions for which electronic money may be used are: (i) domestic payments; (ii) domestic money transfers; (iii) bulk transactions including payments of salaries, benefits and pensions; (iv) merchants or utilities payments; and (v) cross border payments or transfers.
Consumer Protection
The Act provides for the protection of customer information by imposing a duty on the license and the central bank to protect the privacy of a participant and customer information and not to disclose information of a participant or customer unless the disclosure is made in compliance with the law, an order of a court or with the express consent of the system participant or customer.
The Act also requires a payment service provider to comply with the requirements of consumer protection as may be prescribed by the central bank. Furthermore, a payment service provider may not mislead a consumer in any advertisement or purport to offer a service that is not approved in accordance with the Act.
Corrective Actions
Under the Act, the central bank is empowered to take certain corrective measures against a payment service provider in circumstances that do not warrant the revocation or suspension of a license. These corrective measures are: (i) conducting a special investigation of the payment service provider and issuing directives; and (ii) removal of senior management and appointment of a statutory manager.
