Managing Potential Conflicts of Interest Arising from the Bank's Commercial Activities

This document sets out the Reserve Bank's policies for dealing with potential conflicts of interest arising from its roles as the principal regulator of the payments system and as provider of banking services to the Australian Government.

1. Background on the Bank's Roles and the Potential for Conflicts of Interest

The Reserve Bank has a number of distinct areas of responsibility in the Australian payments system:

• It owns, operates and participates in Australia's real-time gross settlements (RTGS) system, the Reserve Bank Information and Transfer System (RITS). This system was put in place in the late 1990s with the objective of reducing the systemic risk posed by the build-up of interbank settlement obligations under the then existing net deferred arrangements. RITS also settles batches of transactions where the underlying payments are netted, or settled simultaneously, and it provides access to Exchange Settlement Accounts for approved holders. RITS includes the Fast Settlement Service (FSS), which settles transactions submitted via the New Payments Platform (NPP) feeder system on an RTGS basis 24 hours per day and 7 days per week. Payments Settlements Department has responsibility for this function.
• It is a provider of transactional banking services to the Australian Government and its agencies. Banking Department has responsibility for this function. The Bank's activities in this role are pursuant to the Reserve Bank Act 1959, which provides for the Bank to serve as the government's banker insofar as it is required by the government to do so. The Bank provides the government with access to a broad range of different payment and collection services. The Bank participates in clearing systems coordinated by the Australian Payments Network (AusPayNet), is a member of AusPayNet and appoints a director to its Board, is a member of BPAY, a Participant in the NPP, and offers card-based services including American Express, eftpos, MasterCard and Visa. Where required by the government's guidelines and regulations, the Bank's transactional banking services are offered on a commercial basis in line with the principle of competitive neutrality.^[1]
• It is the principal regulator of the payments system through the Payments System Board. In this role, the Bank has formally designated various payment systems using its powers under the Payment Systems (Regulation) Act 1998 (PSRA) and has imposed various standards and access regimes for those systems. The Bank has also approved RITS as an ‘approved RTGS system’ exercising its powers under the Payments Systems and Netting Act 1998 (PSNA) and approved certain clearing systems coordinated by AusPayNet as ‘approved multilateral netting arrangements’ under the PSNA. It has made a determination under s 70A(4) of the Cheques Act 1986 in relation to the Australian Paper Clearing System. The Board is responsible for the oversight of RITS and conducts assessments of RITS against international standards in a broadly similar way to its assessment of other systemically important infrastructure. Payments Policy Department has responsibility for providing advice to the Payments System Board.

This combination of functions is not uncommon internationally. The operation of the high-value payments system is a core central banking function in most major economies. In addition, central banks in advanced economies typically have regulatory responsibilities for the payments system (though the breadth of mandates varies) and most also provide banking services to government.

Such a combination of functions can yield significant advantages, with the provision of policy advice to the Payments System Board benefiting from the expertise in the Bank's operational areas. However, while the various functions are conceptually distinct, their existence may give rise to concerns about actual or perceived conflicts of interest. For example, in the absence of measures to prevent it, staff in the Bank's Banking Department might conceivably obtain information from Payments Policy Department about payment networks in which the Bank participates, or about participants in those networks, that could provide a commercial advantage to the Bank over other participants. Alternatively, concerns might arise that the Banking Department's participation in one particular payments system might lead Payments Policy Department to make policy recommendations to the Payments System Board which favour that system over other systems, or which favour the Bank's position in that system relative to that of other participants.

The Wallis Report, which underpinned the 1998 payments system reforms, recognised the potential for conflicts of interest to arise in these areas, and notwithstanding its ongoing operational roles, recommended that payments system regulatory powers should reside with the Bank.^[2] To ensure appropriate management of such conflicts of interest, the Wallis Report recommended the establishment of a separate Payments System Board within the Bank, with a majority of independent directors.

The Payments System Board and the senior management of the Bank take very seriously the possibility of any perception that the Bank's policy and operational roles may be conflicted, especially since this could undermine public confidence in the regulatory and policy process. Accordingly, the Bank has policies in place for avoiding conflicts and dealing with them when they do occur. The main way this is achieved in the Bank's organisational structure is through the separation of Payments Policy Department from the operational departments. The Board has formally adopted a policy on the management of conflicts of interests, which is stated below.

2. Policy for Dealing with Conflicts of Interest and Duty between Banking Department and Payments Policy Department

The intention of this conflict of interest policy is to address any actual or perceived conflict between the duties of the Reserve Bank as ‘regulator’ under the PSRA and the interests of the Bank as a provider of transactional banking services to the government and/or as a participant in any payment system that is regulated (or could potentially be regulated) by the Bank. The broad goal is to ensure that the Bank's actions in the policy sphere do not give any undue advantage to the activities of its Banking Department and to ensure that the operational activities of the Bank do not result in any biases for its policymaking role. The means by which these goals are achieved are set out below.

2.1 Access to documents and other information

The following safeguards apply to the circulation of information between departments:

• Banking Department will not receive non-public information on the payments system collected or compiled by Payments Policy Department. This applies to any information about any system in which the Bank participates, or any competitor system, or any member of any of these systems.
• Banking Department and Payments Policy Department will both ensure that their documents and records (both paper and electronic) containing sensitive material are not accessible by staff of the other department.
• Banking Department may draw public interest issues to the attention of Payments Policy Department, where those issues do not directly or indirectly affect the commercial business of Banking Department. In the case of issues with potential commercial implications, Banking Department will not make any private submissions or representations directly to Payments Policy Department, including in response to a consultation paper; any such submissions will be made publicly or through the relevant system/network of which it is a member.
• Banking Department will not disclose to Payments Policy Department any information it receives as a member of a system. In the event that staff from Payments Policy Department wish to receive such information about a system or its members, a request shall be made directly to that system.

2.2 Procedures for internal policy meetings

• Banking Department staff will not attend any meeting where there will be discussion of issues of payments policy that may present a potential conflict for the Bank and shall not receive any papers relating to such meetings.
• The Assistant Governor (Business Services) may attend meetings on issues of payments policy and participate in discussions on those issues. Where issues arise that present a potential conflict for the Bank, he or she shall bring these issues to the attention of the Bank's Executive Committee to be dealt with appropriately.
• At the start of any internal discussion on payments policies, the Chair will ask attendees if there are any conflicts of interest. Where attendees believe they may be conflicted in relation to certain items, they will leave the meeting during discussion of those items.

2.3 Procedures for other internal meetings

• During the course of any discussion between Payments Policy Department and Banking Department, staff from Payments Policy Department will not disclose any information on industry participants, payment systems or payment service providers, or on prospective policy actions that may affect Banking Department, either directly or indirectly, unless that information is in the public domain. With the exception of meetings involving other departments on issues of broader interest to Bank staff and meetings of, or relating solely to, a working group of the sort referred to in section 3.2, all meetings involving both Banking Department and Payments Policy Department will be minuted.
• Subject to the measures articulated above on access to documents, data and information, Banking Department may disclose information about its current and future activities, market developments or operational arrangements that are relevant to Payments Policy Department's understanding of the payments landscape. Should this information bring to light any possible conflict of interest, it will be explicitly noted in any advice prepared for the Payments System Board.

3. Arrangements for Reserve Bank participation in external payment systems, initiatives, etc

3.1 RBA participation in industry initiatives and payment systems

The Reserve Bank participates in a number of industry committees and in cooperative systems, such as the clearing streams operated by AusPayNet. The Bank's Payments Settlements Department and Banking Department participate in the governance committees of a number of AusPayNet clearing streams and exercise the Bank's rights as a member of those systems. The Bank has the right under the AusPayNet constitution to appoint a director on the AusPayNet board and has appointed the Head of Banking Department.

Where Banking Department participates in a commercial payment system/network (such as the NPP, BPAY or eftpos systems owned by Australian Payments Plus, or an international card scheme), either indirectly through a third party or directly as a member, the following requirements will apply:

• Where the Bank, through the activities of Banking Department, may be eligible for a seat on the board of a system, it will not take up the position.
• Where the Bank, through the activities of Banking Department, exercises its member voting rights, a record of the vote and the reasons for voting in a particular way will be maintained by the Bank.
• The Bank, through the activities of Banking Department, will not accept financial return from any system of which it is a member, unless the return is a direct result of customer transactions or compensation for a transaction-related error.
• Where the Bank, through the activities of Banking Department, becomes a member of a system, Banking Department will not share with that system, or with other members of that system, any information it has obtained in the past through engagement with Payments Policy Department or participation in internal policy discussions.

3.2 RBA participation in working groups on broader central banking issues

Notwithstanding section 2.1 above, staff from Payments Policy Department and Banking Department may participate together in a domestic or international cross-agency working group on payments or other central banking issues that are of broader relevance to the Bank and to promoting the public interest, provided the mandate and activities of the working group do not relate to:

• the transactional banking services of Banking Department to the Australian Government and its agencies or issues affecting, or potentially affecting, those services or any competitor for those services; and/or
• any payment system subject, or potentially subject, to regulation by the Bank under the PSRA.

The staff involved in any such working group may share relevant information with each other and engage in discussions (including internal discussions) relating to the working group, provided the sharing of information:

• is reasonably necessary to carry out the mandate and activities of the working group;
• does not breach any confidentiality restrictions imposed by the relevant working group or its host organisation; and
• does not involve the disclosure to Banking Department or any of its staff of non-public information on the payments system collected or compiled by Payments Policy Department.^[3]

4. Exception for the winding down of the cheques system

The restrictions in sections 2 and 3 of this policy do not apply to collaboration, information sharing and meetings related to the winding down of the cheques system. Staff from Payments Policy Department and Banking Department may collaborate, share information, meet and participate in internal and external working groups related to the winding down of the cheques system. All meetings related to the winding down of the cheques system that involve both Banking Department and Payments Policy Department will be minuted.

When collaborating with respect to the winding down of the cheques system, staff must remain mindful of the broad goal of this Policy to ensure that the Bank’s actions in the policy sphere do not give any undue advantage to the activities of the Banking Department and to ensure that the operational activities of the Bank do not result in any biases for its policymaking role. If staff have concerns that this broad objective is not being met in the context of activities related to the winding down of the cheques system, they must raise this with the Assistant Governor (Business Services) or the Assistant Governor (Financial System). Should any such concerns come to light, they will be explicitly noted in advice prepared for the Payments System Board.

5. Formalisation, training, monitoring and sanctions

Compliance with this Policy is mandatory for all staff members in affected departments. Any breach will attract appropriate sanctions, consistent with the staff Code of Conduct. All relevant staff members in affected departments are required to participate in training explaining the Policy, and to certify each year that they have read and are aware of the content of the Policy. As per the Code of Conduct, staff members are required to report possible breaches of the Policy to an appropriate senior officer.

Details of the steps taken to achieve compliance with these arrangements, including the minutes of informal meetings between departments, shall be audited every three years by Audit Department with the results presented to the Payments System Board. This Policy is reviewed by the Payments System Board at least every three years; the most recent review of the Policy occurred in May 2022.