What happens to a mobile money user’s funds when he/she passes on?An overview of the National Payment System Bill, 2019.

By: Edwin M. Mugumya

Until a few years ago, payment systems throughout Uganda were conventional and took the form of direct or indirect physical transfer of money, often followed by paper-based records such as receipts and acknowledgments. However, in the mid 2000’s, players in the private sector; mainly multinational telecommunication companies, adopted mobile money schemes, which would subsequently ease transfer of money amongst users.

The mobile money wallet/mobile money account is an electronic money (e-money) account which receives electronic value either after the account holder deposits cash via an agent or receives a payment/remittance from elsewhere. This scheme, and other similar arrangements have been operating in a lightly regulated space and therefore posing threats to the safety of customers’ electronic value. At present, Uganda’s legal regime mainly regulates payment systems undertaken by financial institutions and hardly regulates non-financial institutions providing payment systems in the financial sector. Mobile money is widely used in urban areas, with an estimated daily turnover of Uganda Shillings Two Hundred Thirty Billion.

In 2013, the Bank of Uganda issued the Bank of Uganda (Mobile Money) Guidelines to address mobile money issues, including but not limited to: providing clarity, delineating the approval procedure for parties seeking to engage in the provision of mobile money services, fostering consumer protection and more.

Be that as it may, there remain complaints from mobile money users, for instance, expedient recovery of mobile money when sent to a wrong number, what happens to the mobile funds when one dies and no one else knows their PIN code.

The National Payment System Bill, 2019 attempts to address some of these concerns. It was gazetted on the 11th October, 2019. For context, before a law is passed in Uganda, it must be presented before Parliament as a bill, debated by the Members of Parliament and later passed as an Act of Parliament, which must be assented to by the President of Uganda, to become law. The Bill is intended to apply to operators of payment systems, payment service providers and issuers of payment instruments alike.

The object of the Bill is:

  • to regulate payment systems;
  • to provide for the safety and efficiency of payment systems;
  • to provide for the functions of the Central Bank in relation to payment systems;
  • to prescribe the rules governing the oversight and protection of payment systems;
  • to provide for financial collateral arrangements;
  • to regulate payment service providers;
  • to regulate issuance of electronic money;
  • to provide for the oversight of payment instruments; and
  • for other related matters

Operation requirements under the Bill

Under Clause 7 of the Bill, for one to offer a payment service, operate a payment system or issue a payment instrument, he or she is required to obtain a licence issued by the Central Bank in accordance with the Act. However, this requirement does not extend to payment instruments issued by the Central Bank or payment services offered by the Central Bank or any other payments system operated by the Central Bank.

Eligibility for licensing payment system.

The Bill, under Clause 9 sets down criteria for a payment system to be eligible for licence by the Central Bank. The system must have any of the following objects:

  • clearing of payment instructions between financial and non-bank;
  • settling obligations arising from the clearing of payment instructions;
  • transfer of funds from one account to another using an electronic device;
  • transfer of electronic money from one electronic device to another;
  • provision of technological services to facilitate switching, routing, clearing or data management for or on behalf of a payment system provider;
  • provision of electronic payment services to the unbanked and under-banked population;
  • provision of financial communications networks:
  • ordering or transmitting payment instructions;
  • storing of information on a device for purposes of effecting Payments:
  • fulfilling payment obligations at points of sale, merchant outlets or over the internet;
  • or any other objects as may be prescribed by the Central Bank by regulations

Under subclause 2 thereof, a payment system shall be eligible to be licenced by the Central Bank if that payment system is interoperable with other payment systems in the country and internationally.

Failure to obtain a license by an individual prior to beginning operations is an offence and is punishable, upon conviction to a fine not exceeding Uganda Shillings Fourty Million (UGX 40,000,000) or a term not exceeding four years imprisonment or both. A body corporate that operates sans a valid license is liable, on conviction, to a fine not exceeding Uganda Shillings One Hundred Fourty Million (UGX 140,000,000). Further, a person convicted of such an offence, shall immediately cease to offer payment services and shall be disqualified from acquiring a licence.

Clause 15 provides that a licensee shall pay an annual fee prescribed by the Central Bank on or before the 31st January, every year. Upon failure to do so, the licensee shall pay the Central Bank a civil penalty of Uganda Shillings Two Million (UGX 2,000,000) for each day on which the contravention continues.

Further, the Bill requires a local presence for one to provide a payment service, operate a payment system or issue a payment instrument. A person or entity intending to operate in this industry must therefore incorporate a company in Uganda for such purposes.

Functions and Powers of the Central Bank under the Bill

The functions of the Central Bank are set out under Clause 5 of the Bill and include the following;

  • regulating, supervising, and overseeing the operations of payment systems;
  • regulating and supervising payment service providers and operators of payment systems;
  • approving rules and arrangements relating to the operation of payment systems;
  • considering and granting operation licences in accordance with the Act;
  • monitoring and overseeing cross border payments;
  • providing settlement services to payment systems and settlement of monetary value of securities;
  • co-ordinating payment systems activities with relevant stakeholders;
  • issuing directives, standards, guidelines, orders and circulars regulating the manner in which the objectives of the Act may be achieved;
  • approving rules and arrangements relating to the operation of payment systems including-

Clause 12 of the Bill also empowers the Central Bank to make any directives to the payment service providers to correct any conduct the Bank believes is detrimental.

Clause 20, on the other hand gives the Central Bank powers to issue directives to licensees, which could require the licensees to cease or refrain from engaging in any acts or omissions or course of conduct. Any licensees that fail to follow the directives within 30 days must then show cause as to why their license should not be revoked.

The Bill also gives the Central Bank the mandate to order external auditors to examine 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.

The Central Bank also 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. 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.

The Bill mandates the Central Bank to make regulations, including those relating to prescribed forms, licensing requirements, fees payable, consumer protection requirements, regulation of trust accounts and retention periods for payment system transactions.

In execution of the above mandate, the Central Bank shall be assisted by the National Payment Systems Council which shall comprise representatives of various stakeholders, including the Ministry of Finance, Capital Markets Authority, Uganda Communications Commission and financial institutions.

Consumer Protection under the Bill

The various electronic payment systems have been susceptible to fraudsters, cyber-hacking and other related insecurity. The Bill, therefore, seeks to provide for safeguards to the interests of consumers in the following ways:

Clause 25 of the Bill makes payment instructions or settlements valid and enforceable, and final and irrevocable from the time the payment or settlement is determined under the payment system’s rules to be final.

The Bill further 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. Such account must be opened at a financial institution or microfinance deposit-taking institution to facilitate the issuance of electronic money.

Similarly, financial institutions that intend to issue electronic money shall also be required open and maintain a special account by submitting a notice to the Central Bank in a prescribed form.

Clause 26 of the Bill requires payment systems to keep settlement accounts on the books of the central bank or authorized settlement agent.

Clause 30 requires a payment system to inform the central bank in no more than two hours if insolvency proceedings have been brought against the payment system.

Under Clause 55, the Bill prohibits a non-financial institution electronic money issuer from counting or issuing airtime as electronic money and provides for the need to separate mobile money systems from airtime platforms.

Relatedly, Clause 60 of the Bill requires electronic money issuers to keep 100% of the electronic money held in a trust account or special account respectively in liquid assets.

The proposed law also requires protection of the privacy of participants and non-disclosure of their information unless such disclosure is in accordance with the law, an order of court or consent of the participant or customer as per Clause 59. This requirement is in tandem with the recently passed Data Protection Act, 2019.

Clause 57 provides for a dormant account, which is any registered mobile money account that does not carry out any transaction in nine consecutive months. In such circumstances, an electronic money issuer must notify the customer at least one month before the nine months lapse that his or her account is going to be suspended unless there is a transaction on it. At the expiry of the notice, the electronic money issuer shall block the account and not permit any transactions on it, unless it is reactivated by the customer.

If the account is not reactivated within six months after it has been blocked, the electronic money issuer shall close the account. Upon closure, the trustees shall transfer the balance of the account and identifying information to the Central Bank, which shall refund any unclaimed balances to the account holder. If the account holder is dead, his or her legal representative can make a request for the funds to the Central Bank, within seven years after transfer of the funds to the Central Bank. Upon expiry of that time frame, unclaimed balances are to be transferred to the Consolidated Fund.

Permissible transactions under the Bill

Clause 54 clarifies what electronic money may be used for:

  • domestic payments;
  • domestic money transfers;
  • bulk transactions; including payments of salaries, benefits and pensions;
  • cash-in and cash-out transactions;
  • merchants or utilities payments;
  • cross border payments or transfers;
  • savings products in partnership with an institution licensed to offer savings products or services with the approval of the Central Bank;
  • credit products in partnership with an institution licensed to offer credit products or services, with the approval of the Central Bank;
  • insurance products in partnership with a licensed insurer; or
  • any other transaction approved by the Central Bank.

Prohibited activities under the Bill

An electronic money issuer which is not a financial institution or microfinance deposit taking institution is forbidden from engaging in the following:

  • receiving and taking deposits within the meaning of the Financial Institutions Act, 2004 and the Micro Finance Deposit-Taking Institutions Act, 2003;
  • over the counter transactions unless full identification of the depositor is obtained, recorded and transmitted to the receiver; or
  • any other activities other than an activity which it is licensed to undertake.

Under subclause 2 thereof, an electronic money issuer is prohibited from counting or issuing airtime as electronic money; or using airtime for permissible transactions referred to herein above such as domestic payments, payment of salaries, among others.

Clause 61 further prohibits electronic money issuers from terminating or transferring their license to another person or entity without the written approval of the Central Bank, terminating the business of issuing electronic money without prior approval of the Central Bank, changing their name, controlling interest or ownership without the approval of the Central Bank.

A person who contravenes these prohibitions commits an offence and is liable, on conviction, to a fine not exceeding Uganda Shillings Seven Million (UGX 7,000,000) or imprisonment for term not exceeding two years or both.

In sum, the provisions of the Bill will hopefully remedy the institutional, legal and structural gaps that have existed in payments systems in Uganda, as well as streamline the necessary legal and economic infrastructure to facilitate smart, safer and more efficient financial transactions.

If you have questions regarding this Bill, we invite you to contact Edwin.

This Banking & Finance Law alert provides general information only. It is not intended to provide advice with respect to any specific set of facts, nor is it intended to advise on all developments in the law.