Introduction
There have been a couple of significant changes in the regulatory sphere for financial service providers in 2020 with the introduction of the newly revised Banks and Other Financial Institutions Act (“BOFIA”) and a litany of circulars. This newly revised Act has some far reaching provisions relating especially to the status of Payment Service Solution Providers (PSSPs) and Payment Service/Systems Providers (PSPs). Below is a primer on some of the innovations in the recently released circular on the categorization of PSPs.This article provides an overview of the recent regulatory changes affecting CBN payment service provider licensing in Nigeria.
A long awaited end to the PSP/PSSP confusion
Before now, there has been a lack of clarity as to the use of the terms PSSP (Payment Solution Service Providers) and PSPs (Payment Service/System Providers). Industry players thus used both terms loosely and sometimes, interchangeably. But for the central bank of Nigeria (“CBN”), PSPs are a broader category, encompassing several
players within the Nigerian payments ecosystem beyond the PSSPs. The Circular released on Thursday, 10 December 2020 issued by the CBN provides the much needed clarity on this subject within the framework by redefining the status of these entities.
The circular discloses a new license categorisation for the Nigerian payment system which puts to rest the previous contention as to the scope of each term and delineates the powers of each.. It also prohibits certain activities relating to hedge fraud and other related risks within the payments ecosystem. This new categorisation regime has streamlined payment service providers’ licensing into four categories:
- Switching and processing
- Mobile Money Operations (“MMOs”)
- Payment Solution Services (“PSSs”)
- Regulatory Sandbox.
With the provisions of the newly revised Banks and other Financial Institutions Act (“BOFIA”) 2020, Payment System Providers (“PSPs”) are now recognised as other Financial Institutions (“OFIs”). The implication of this is that all the four categories of payment service licensees are now recognised as OFIs and all the laws and CBN
regulations applicable to OFIs now apply to PSPs. Essentially, PSPs have now been drawn into the same regulatory nets as all laws and regulations that apply to OFIs now apply to them.
Tacit Exclusion of All-purpose Clauses
The regulation has limited the object clauses in the Memorandum and Articles of Association of PSPs to only permissible activities under their respective licensing authorisations. This particular clause effectively restricts PSPs from adding generic and wide clauses to their object clauses at the point of registration and incorporation.
It remains to be seen whether this would be extended to omnibus clauses but from a strictly legal standpoint, the omnibus clause is hardly affected as it is interpreted in line with the specific clauses already stipulated. Thus, the omnibus clause is more likely to be interpreted in accordance with the permissible activities in the licensing authorization as issued.
Central Bank Authorizations for Private Agreements
Previously, a common industry practice is the piggybacking of licenses through private agreements where one party may be operating in the finance sphere vicariously through another licensed one. This practice has now been tacitly ended by virtue of this new circular. The current position is that any such private arrangement can only be done after a no-objection letter from the CBN is sought and obtained. Barring this, such agreements would be illegitimate and in contravention.
It would appear that the rationale behind this is to prevent the circumvention of regulatory requirements, protect consumer interests and enable the CBN gain a stronger foothold and control over the financial ecosystem.
MMOs Power to Hold Customer’s Fund
Another implication of this new licensing regime is that only MMOs can hold customers’ funds. However, this section of the regulation is contradictory as the switching and processing category includes settlement agents. For Settlement agents to effectively run their services, they need to hold funds even if said funds are only
held for a couple of days.
In conclusion, this new licensing categorisation by the CBN is laudable. However, the seeming contradiction with Settlement agents needs to be addressed and the footnote in the document should be removed as it is not necessary.
