By Brian Kalule Monday, December 03, 2018

Uganda’s legal framework currently regulates payment systems undertaken by financial institutions and does not regulate non-financial institutions providing payment systems in the financial sector.

Other payment solutions such as mobile money are lightly regulated through guidelines. There are also payment solution platforms that fall completely outside the financial and telecommunication sectors and are not regulated at all.

The National Payment System Bill is expected to bridge this gap, applying to operators of payment systems, payment service providers and issuers of payment instruments alike.

New Council to assist Central Bank

Clause 3 of the Bill provides for the Central Bank to regulate operators of payment systems, payment service providers and issuers of payment instruments. In this, the Central Bank shall be assisted by the National Payment Systems Council in an advisory role. The Council shall comprise representatives of various stakeholders, including the Ministry of Finance, Capital Markets Authority, Uganda Communications Commission and financial institutions.

Under clause 10, the Bill provides that no person should be able to operate a payment system or issue a payment instrument without a licence from the Central Bank. However, this requirement does not apply to payment systems or instruments operated by the Central Bank, financial institutions or micro finance deposit institutions.

Wide powers to issue directives

In implementing its mandate, the Central Bank may issue various directives on the application of the provisions of the Bill in respect of payment systems or payment instrument. For example, a directive may be issued to cease or refrain from engaging in the act, omission or course of conduct. A person may also be directed to perform an act necessary to remedy the situation, or to comply with a directive. Thirdly, a directive may be issued requiring the recipient to provide the Central Bank with specified information and documents about the matter concerned.

In addition, the Central Bank may require a service provider or payment system operator to furnish information and data on its operations. This must be made available at such times and in such form as the Central Bank may prescribe for the proper discharge of its functions. Failing to do so makes the service provider or operator liable to a fine.

Under Clause 59, the Bill requires protection of the privacy of participants and non-disclosure of information unless such disclosure is in accordance with the law, an order of court or consent of the participant or customer.

Local presence required

In order to provide a payment service, operate a payment system or issue a payment instrument, a person or entity must have incorporated a company in Uganda,[1] and display their rules of payment in a conspicuous place.[2]

In short, local presence is required to operate a payment system or issue a payment instrument in Uganda.

The Bill also gives the Central Bank the mandate to order external auditors to examine the service providers, operators of payment systems and participants in these systems. The Central Bank has the authority to specify when and what matters the auditors must examine. The entity being scrutinised must carry the auditing costs[3].

The Central Bank further has the authority to inspect the operations of a service provider or an operator of a payment system to ensure the safety and efficiency of the system.[4] Failure of a director to provide any requested information or document concerning the affairs of the operator or service provider will render the director an unfit and improper person, who shall cease to be a director.

Question mark over limitation of court powers

Under the Bill, payment instructions or settlements shall be valid and enforceable by and against an operator or participant of a payment system. These shall be final and cannot be revoked, reversed or set aside by any person or by any court.[5] There is reason to doubt the legality of a provision that seeks to limit the power of court. We think that in appropriate cases, the court has inherent power to set aside or reverse any transaction.

The Bill requires all service providers except financial institutions such as banks to hold a trust account where the electronic money issued is equal to the cash deposit held in a trust account.[6] Such account must be opened at a financial institution or microfinance deposit-taking institution to facilitate the issuance of electronic money.

On the other hand, financial institutions that intend to issue electronic money shall open and maintain a special account[7] by submitting a notice to the Central Bank in a prescribed form.[8]

It seems that the trust accounts referred to in the Bill are intended to keep customers’ money separate from that of the licensee in the event of liquidation.

Impact of insolvency proceedings

Insolvency proceedings arising from or connected to the licensee or participant’s participation in the payment system shall not retroactively affect their rights and obligations before the commencement of the insolvency proceedings. In effect, this clause nullifies the ‘relation back’ clauses that are so typical in insolvency.

Finally, to effectively implement its mandate, the Central Bank shall have the power to make regulations, including those relating to prescribed forms, licensing requirements, fees payable, consumer protection requirements, regulation of trust accounts, retention periods for payment system transactions, and so on.

The Bill is a milestone in the regulation of payment systems and it seems to be comprehensive enough to plug at least some of the regulatory loopholes now prevalent among payment systems in Uganda. 

[1] Clause 11 (3)(a)
[2] Clause 14
[3] Clause 20 (1) National Payments Systems Bill, 2018.
[4] Clause 21 (1)
[5] Clause 24
[6] Clause 36 (1) & (2);
[7] Clause 38 (1)
[8] Clause 38 (2) (a)