Payments and System Settlement Act 2007- Settlement of disputes and dishonor of electronic payments.

In continuation to my previous post posted on 17th February 2013, which aims at providing the insights of Payments, their clearing and settlement in India, in this post, I am giving the insights on how the settlements and disputes like dishonor of electronic payments shall be handled. The PSS Act of 2007 has been intelligently framed to address all kinds of disputes possible in case of electronic payments. The act has also laid down clear and strict guidelines for all the parties involved in a payment life cycle. 

To start with, I would like to detail some terms that will I have used as they have been used in PSS Act 2007.

System Participant:

It refers to any person or organization that has initiated the payment or is a beneficiary of the payment initiated. To illustrate, merchants accepting online or card payments, both end parties in case of NEFT or RTGS shall be treated as system participants.

System Providers:

All the parties and agencies that cater the payments services shall be treated as System providers. This shall involve all the banks catering electronic payments services, card issuing agencies like Visa or Master cards, RBI itself, all payment processing service providers like pay pal.

I would also like to address a question; does the PSS Act 2007 deal with netting and settlement finality? To answer, the PSS Act 2007 defines “netting” and legally recognizes settlement finality. It states that a settlement, whether gross or net, will be final and irrevocable as soon as the money, securities, foreign exchange or derivatives or other transactions payable as a result of such settlement is determined, whether or not such money, securities or foreign exchange or other transactions is actually paid. In case a system participant is declared insolvent, or is dissolved or is wound up, no other law can affect any settlement which has become final and irrevocable and the right of the system provider to appropriate the collateral contributed by the system participants towards settlement or other obligations.

This Act also legally recognizes the loss allocation among system participants and payment system, where the rules provide for this mechanism.

The PSS Act, 2007 lays down the duties of the system provider. The system provider is required to operate the payment system in accordance with the provisions of the Act and the Regulations, the terms and conditions of authorization and the directions given by the Reserve Bank from time to time. The system provider is also required to act in accordance with the contract governing the relationship among the system participants and the rules and regulations which deal with the operation of the payment system.  

The Act requires the system provider to disclose the terms and conditions including the charges, limitations of liability etc., under the payment system to the system participants. The Act also requires the system provider to provide copies of all the rules and regulations governing the operation of the payment system and other relevant documents to the system participants. The system provider is required to keep the documents and its contents, provided to it by the system participants, as confidential and is prohibited from disclosing the same, except in accordance with the provisions of law.

Under the PSS Act, 2007, dishonor of an electronic fund transfer instruction due to insufficiency of funds in the account etc., is an offence punishable with imprisonment or with fine or both, similar to the dishonor of a cheque under the Negotiable Instruments Act 1881. Subject to complying with the procedures laid down under the PSS Act, 2007, criminal prosecution of defaulter can be initiated in such cases.

The Act lays down an elaborate mechanism for settlement of disputes between system participants in a payment system, between system participant and system provider and between system providers. The Act requires the system provider to make provision in its rules or regulations for creation of a panel to decide disputes between system participants. Where any system participant is dissatisfied with the decision of the panel, or where disputes arises between system participant and system provider or between system providers, such disputes are required to be referred to the Reserve Bank for adjudication, whose decision shall be final and binding on the parties.  

In cases where the Reserve Bank, in its capacity either as a system participant or system provider, is itself a party to the dispute, then there is a provision for referring such cases to the Central Government  for adjudication. 

To conclude the post, I would like to introduce the readers with a new kind of crime that is gaining ground in electronic payments. RBI is continuously receiving complaints of fraud and illegal payment systems in the market. We need to understand that any payment system that is not authorized by RBI under the PSS Act 2007, no prosecution of defaulter can be initiated. However, to avoid such illegal systems, under the PSS Act, 2007, 

• Operating a payment system without authorization
• Failure to comply with the terms of authorization
• Failure to produce statements
• Returns information or documents or providing false statement or information
• Disclosing prohibited information like balances, credit limits and contact details
• Non-compliance of directions of Reserve Bank violations of any of the provisions of the Act, Regulations, order, directions etc.

They all are offences punishable for which Reserve Bank can initiate criminal prosecution. Reserve Bank is also empowered to impose fine for certain contraventions under the Act. 

I hope that readers will definitely gain confidence in new advanced electronic payment systems as they are secure, fast and innovative. In my next post, I will introduce the innovations that are taking birth across the globe in Payments and Banking.

Thanks

H. Sanguri