In 2009 and 2010, Canada's payments systems underwent remarkable scrutiny and was the subject of a host of changes. Parliamentary and senate hearings were held; the Competition Commissioner considered credit card duality in Canada; the Competition Bureau considered competition in Canada's debit landscape; and the federal government implemented regulatory measures and a voluntary code of conduct to address disclosure and other practices in Canada's payment systems and launched the Task Force for the Payments System Review (the "Task Force").
After the dust settled, relatively little change occurred in 2011. The Task Force's release of its July 2011 discussion papers was merely a precursor to its final report, which was submitted to the federal government in December 2011 and was released to the public on March 23, 2012.
THE FINAL REPORT: THE TASK FORCE RELEASES ITS FINDINGS
Much like the discussion papers released in July 2011, the Task Force's final report, entitled Moving Canada into the Digital Age calls for an overhaul of Canada's payments systems and suggests that Canada is falling behind and will continue to fall further behind if steps are not taken to ensure Canada can participate in the digital economy of the 21st century.
Concurrently with the release of its final report, the Task Force also published two additional discussion papers entitled Going Digital: Transitioning to Digital Payments and Credit and Debit Card Markets and four policy papers covering: (1) users and how the current system fails to meet their needs and expectations; (2) a proposed new governance model; (3) the existing legislation and proposed changes; and (4) changes to an aging infrastructure.
The voluminous materials are available to read at the Task Force's website, available here.
THE MINISTER'S RESPONSE
Despite the dramatic recommendations made by the Task Force, in an announcement welcoming the findings of the Task Force, the Honourable Jim Flaherty, Minister of Finance, announced a much more reserved plan. In a March 23, 2012 statement, Minister Flaherty noted that the Government intends to establish a senior-level client update committee made up of public and private sector stakeholders that will meet regularly with Department of Finance officials to discuss emerging payments system issues. The statement also disclosed that the Department of Finance will review the application of the Code of Conduct for the Credit and Debit Card Industry in Canada in connection with the evolution of mobile payments in Canada. Interestingly, although the statement did note that the Government would review the governance framework for the payments sector, including the Canadian Payments Association (the "CPA"), to ensure the continued safety and soundness and efficiency of the payments system, spur innovation and promote the consideration of user interests, the Minister did not fully endorse the Task Force's recommendations for a complete overhaul of the system in this statement.
BUSINESS AS USUAL: UPDATE ON REGULATORY CHANGES
Meanwhile, the federal government continues to focus on a variety of regulatory measures seemingly designed to protect consumers' interests. Many of the recent amendments and new regulations that have been announced have centred on the payments industry. The patchwork of legislation that continues to govern Canada's payments system includes the following recent stitches:
- Proposed Amendments to restrict credit card cheques – draft amendments to the Credit Business Practices Regulations announced in the March 10, 2012 Canada Gazette propose to restrict federally-regulated financial institutions ("FRFIs") (and the affiliates they control or agents of such financial institutions or affiliates) from providing credit card cheques without first obtaining the borrower's express consent. The proposed amendments do not permit the simple use of a credit card to constitute express consent, which is consistent with the existing regulations. In addition, if a borrower's consent is obtained verbally, the institution must provide written confirmation of such consent in writing or electronic form by the date of the borrower's next statement of account. A 30 day comment period has been provided to all interested parties. These regulations will come into force once registered.
- Negative Option Billing Regulations – the regulations scheduled to come into force on August 1, 2012 will require FRFIs (and the affiliates they control or agents of such financial institutions or affiliates) to offer most new retail products and services on an opt-in basis only. Customers must first be provided with certain prescribed information in a manner that is clear, simple, and not misleading, and thereafter must provide their express consent before the product or service is provided. Once again, the simple use of a product or service does not constitute express consent. These regulations prescribe a 30 day written notice requirement for any changes in the terms and conditions that govern the optional product or service and mandate certain disclosure in connection with promotional, preferential, introductory or special offers. Other than as provided in connection with a credit agreement, FRFIs will be required to specify certain cancellation rights that customers have in connection with ongoing products and services in any disclosure statement made in relation to such products and services and, once a notice of cancellation is provided, return to the customer a portion of any paid for products and services that were unused based on the formula set out in the regulations.
- Regulations regarding hold periods – the regulations scheduled to come into force on August 1, 2012 apply to paper-based cheques and other instruments deposited in Canada that are encoded to allow for character recognition, are readable, and are drawn on domestic institutions. These regulations will formalize the existing hold period policies some FRFIs have already implemented. With some limited exceptions for circumstances where a material increased credit risk arises, banks, authorized foreign banks, retail associations and trust and loan companies will be required to make funds deposited by such instruments by retail customers and small businesses available within four business days where the amount does not exceed $1500 and otherwise within seven business. Additionally, such institutions will be required to make the first $100 of all funds deposited by such instruments on any one day to a retail deposit account available immediately if deposited at a point of service or on the following business day if deposited in any other manner.
- Amendments to Canadian Payments Association By-Law No. 3 – four sets of proposed amendments to Bylaw No. 3 made under the Canadian Payments Act were published in the Canada Gazette on March 24, 2012. These proposed amendments demonstrate that there is a continued commitment to the safety and soundness of the payment systems administered by the CPA. These amendments include: removal of the unwinding provisions upon the default of a CPA member financial institution; the removal of the group clearer guarantee (currently a group clearer is required to give 30 days' notice to the CPA before ceasing to act for entities belonging to its group, while direct clearers can immediately cease to act as a clearing agent if they believe it poses a legal, financial or operational risk to the direct clearer); technical amendments to remove outdated or duplicative provisions; and amendments to provide additional flexibility to indirect clearers such that provincial centrals will be permitted to hold settlement accounts and loan facilities for local credit unions. Following approval by the Minister of Finance, By-law No. 3 will be sent to all CPA member institutions.
FUTURE DIRECTION
Since 2009 the federal government has made Canada's payments systems a priority on its agenda, showing that it is willing and able to change market conduct through regulation and other measures. We anticipate that the federal government will continue with an incremental approach, revising the existing framework where appropriate, and creating new measures where gaps exist. BLG will continue to monitor the developments in Canada's payments system as we move forward into the digital age.
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