Framework of monetary penalty on Payment System Operators/ Banks

Prabhat Nigam

10 Sep, 2022

In the past few years the payment landscape has undergone rapid developments with increased adoption of technology, dis-intermediation, availability of payment products, significant surge in turnover, entry of non-bank players etc. With a sea change in payment system landscape, it is encumbent on the part of the government to ensure safe and secure environment and ensure that various stakeholders confirm to the regulatory environment. As a consequence to that, the Reserve Bank of India (RBI) has decided to revise the levy of penalty on payment system operators.   

What is the legal framework of penalty on Payment System Operators/ Banks?

RBI regulates the activities of Payment Systems and Payment Systems Operators/ Banks by way of directives, guidelines issued under Payments and Settlements Systems Act 2007. The entities regulated by Payment Systems and systems participants include credit and debit card providers, IMPS, UPI, digital wallets, payment gateways, prepaid payment instrument like employee meal vouchers etc.

A framework was issued by RBI in the year of 2016 which imposed monetary penalties on Authorised Payment Systems Operators/ Banks under Payment and Settlement Systems Act, 2007 (referred as the old framework) offering procedural guidance on levy of penalties and compounding under the Payment and Settlement Systems Act. A few years back, RBI has replaced the old framework with a new framework by issuing a circular dated 10^th January, 2020.

Offences and Penalties under Payment and Settlements Systems Act

Sections 26-31 of Chapter VII of the Payment and Settlement Systems Act, 2007 cover the provisions related to the offences and penalties which are punishable fine and/ or imprisonment. Some of the offences committed by the payment systems and payment systems operators under section 26 include acts such as non-compliance of Anti-Money Laundering/ KYC norms, breach of limits in leading prepaid cards, breach of data localisation norms, non- maintenance of minimum net worth etc.

Section of 30 of the Payment and Settlement Systems Act provides for imposition of penalty on payment system operators on making of a false statement or wilfully omitting to make a material statement or contravention of any provision of the act, or defaulting in complying with any regulation, order or direction and also against those provisions where no penalty has been provided.

Highlights of the New Framework: 

• Introduction of an objective methodology to determine the materiality of contravention and determining the amount of penalty on payment system operators: The new framework has introduced an objective methodology to determine the materiality of the contravention. This includes the following:

1. With how much severity contravention of the norms/ limits has been done
2. What has been the period and frequency of a similar contravention committed by the contravener in the past 5 years
3. What has been the seriousness of the contravention
4. What percentage of amount has been involved in the contravention in relation to the total value of transactions handled by the contravener during the period under consideration
5. What has been the amount that is involved in contravention

• Decrease in the upper limit of penalty on payment system operators: In the old framework the upper limit of penalty to the tune of Rupees 1 crore for non-quantifiable contraventions have now been brought to Rupees 5 lakh per contravention.
• Mandatory issuance of speaking orders: The new framework mandates the designated authority to issue a speaking order at the time of levying penalties after taking into consideration all the information and documents furnished by the contravener.
• Compounding of offences: The new framework allows all the offences mentioned under section 26 of the Act can be compounded except those cases where a willful wrong statement has been made in an application or any return. In furtherance of the compounding order, the designated authority has been mandated to pass the order within a period of 6 months from the date it receives the complete compounding application.
•  Payment of monetary penalty in 30 days: The monetary penalty imposed on the contravener has to be submitted within a period of 30 days from the date the order has been passed. In case of failure in making the payment of complete penalty amount within the stipulated period, then RBI will initiate appropriate action provided under the Payment and Settlement Systems Act, 2007^[1] for the recovery of the penalty amount. The entities are further required to disclose the details of the monetary penalty paid under the Payment and Settlement Systems Act in their notes to Accounts that form part of the Annual Financial Statements of the company for the financial year in which the penalty is levied.

Conclusions 

Given the broadening of the landscape of the fintech industry and more and more players making their way in, compliance with the provisions of the Payment and Settlement Systems Act, 2007 has also increased significantly. By issuing the new framework of penalty on Payment System Operators/ Banks, RBI has itself curtailed a wide range of discretionary powers entrusted on it. This has been seen as a welcome move from the industry as it is expected to increase transparency in the in the regulatory actions in a sector which is heavily regulated. 

Read our Article:10 Major Digital Payment Methods available in India