Banking & Financial Services Law : Canadian and U.S. / Cross-Border Credit Market Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm

By Stephen D.A. Clark and Kashif Zaman.

On March 23, 2012, the Task Force for the Payments System Review (the Task Force) released its final report (the Report) entitled Moving Canada into the Digital Age. The Report is supplemented by four policy papers and four discussion papers. In this entry, we summarize the recommendations of the Task Force and make certain observations on a few issues that would be relevant to any overhaul of the Canadian payments system. The full text of the Report is available here.

Background and Mandate of the Task Force

Canada’s Minister of Finance announced the creation of the Task Force on June 18, 2010. In creating the Task Force, the Minister provided the following mandate:

Given the importance of a safe and efficient payments system and the need to ensure that the framework supporting that system remains effective in light of new participants and innovations, the government is appointing this task force to conduct a review of the payments system. Specifically, the task force will:

• identify public policy objectives to be pursued in the operation and regulation of the payments system;
• identify and assess the regulatory and institutional structures best suited to achieving these public policy objectives; 
• assess and report on the safety and soundness of the Canadian payments system; 
• assess the competitive landscape by identifying any potential barriers for new entrants and mechanisms to improve the competitive landscape of the domestic payments system;
• assess the degree of innovation in the domestic payments system and report on the challenges and opportunities to bring new and innovative products to market in Canada; and 
• assess and report on whether consumers and merchants are well served by the domestic payments system.

Recommendations of the Task Force

In order to modernize Canada’s payments system, the Task Force notes that changes will be required in multiple arenas. In the Task Force’s view, because the industry has not implemented the necessary changes due in part to uncertainty and lack of coordination, the Canadian Government should lead the change.

In particular, the Task Force recommends that the Government should undertake the following actions:

• implement electronic invoicing and payments (EIP) for all government suppliers and benefit recipients;
• partner with the private sector to create a mobile ecosystem; and
• propel the build of a digital identification and authentication (DIA) regime to underpin a modernized payments system and protect Canadians’ privacy.

The Task Force also calls on the Government to pass legislation to:

• define a discrete payments industry and require payments service providers to become members;
• encourage industry to create a broad-based, collaborative, self-governance organization including both providers and users to develop and implement strategy and standards for the payments industry; 
• reinvent the objects, governance, powers, business model and funding of the Canadian Payments Association; and
• create a new public oversight body for the payments industry that will:
  • protect the public interest as broadly defined through a principles-based approach;
  • monitor the implementation of changes to the payments system, ensure that it continues to meet the public interest and propose adjustments where necessary; and
  • provide redress, where necessary, when industry behaviour no longer inspires trust, or enables access, competition or innovation.

Observations

The Task Force speaks of what it perceives as a compelling need for a payments system overhaul but in its Report and policy papers that form part of the Report, it barely scratches the surface in terms of some of the major policy issues that confront such a system overhaul, including:

• Consumer Protection – while there is a natural tendency in the Report to focus on the end result of “moving Canada into the digital age,” protection of the funds of consumers should be of significant concern. There is risk to consumers if an entity holding funds fails and such risk is heightened if the entity is not a regulated financial institution.
• Anti-Money Laundering – Canada, like many countries around the world, continues to strengthen its anti-money laundering rules. Compliance with these rules by all players on a “level playing field” will be necessary.
• Systemic Risk – the recent financial crisis has caused the G-20 countries (which includes Canada) to focus on all financial marketplace providers to determine which of them are integral to their financial system, whether or not currently regulated. Changes to the payment system need to take this into account as the financial system and the payments system are becoming more regulated, not less.
• Amendment of Legislation – while one of the policy papers addresses legislation, changes to complex and, in some cases, significantly outdated legislation cannot be undertaken lightly. This legislation interweaves through a number of areas. The constitutional aspects of which level of government has the power will also be relevant.
• Balance – as the Task Force notes, there are a number of players in the payments space – some of which are regulated and many of which are not. It will be a significant challenge to align and balance all of these players so that it is fair to all and competition takes place on a level playing field.If you would like to discuss this Final Report, please contact Stephen Clark or Kashif Zaman or any member of our Banking and Financial Services Team.

If you would like to discuss this Final Report, please contact authors Stephen Clark or Kashif Zaman or any member of our Banking and Financial Services Team.

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This post by Stephen D.A. Clark and Kashif Zaman was originally published as an E-Review available at www.osler.com.

Digital Payments in Canada

Although Canada is one of the most advanced economies of the world, it is surprising (at least to some) that Canadian consumers are not very frequent users of mobile payment systems when compared to consumers in the U.K., Germany, Japan and a number of other developed and developing countries. At the same time, Canada is one of the fastest growing smartphone nations (over 70% of Canadians have mobile phones; 35% of these are smartphones). Canadians are therefore poised to take advantage of the mobile payment systems that are expected to grow in importance and usage in the near future (some of the mobile payments systems currently being used by Canadians include Zoompass and Presto). Perhaps recognizing this trend, on June 18, 2010, the Minister of Finance announced the formation of the Task Force for the Payments System Review (Task Force). The recommendations that will be made by the Task Force will have implications for a broad range of players in the payments industry, including financial institutions, Interac, Amex, MasterCard, Visa, Canadian Payments Association, issuers of gift cards or prepaid cards such as Starbucks, and issuers of digital or eWallets such as PayPal and Zoompass.

Mandate of Task Force for the Payments System Review

The Task Force was mandated to:

• identify public policy objectives to be pursued in the operation and regulation of the payments systems;
• identify and assess the regulatory and institutional structures best suited to achieving these public policy objectives;
• assess and report on the safety and soundness of the Canadian payments system;
• assess the competitive landscape by identifying any potential barriers for new entrants and mechanisms to improve the competitive landscape of the domestic payments system;
• assess the degree of innovation in the domestic payments system, and report on the challenges and opportunities to bring new and innovative products to market in Canada; and
• assess and report on whether consumers and merchants are well served by the domestic payments system.

Discussion Paper Issued by the Task Force

In the summer of 2011, the Task Force released a discussion paper (Paper) in which it shared its views on the current Canadian payments system and identified certain challenges that need to be addressed.

Some of the interesting observations made by the Task Force in the Paper include: 

• Canada is falling behind, especially in mobile payments and electronic invoicing and payments; 
• the ongoing reliance on cheques is problematic: cheques are a slow way to pay, leaving payors and payees uncertain when funds will be available; and, for governments and businesses, delays mean productivity lost and opportunities missed; 
• even online bill payments are hindered by legacy payments systems designed for paper (for example, according to the Task Force, Canadian banks still support online payments with batch-based processing, which means that it can take more than 24 hours to clear a payment).

In the Paper, the Task Force has identified four challenges: 

1. increasing fairness in credit and debit card networks; 
2. updating the regulatory and governance structure of these networks; 
3. improving online authentication, security and privacy; and 
4. transitioning to a digital economy.

The Paper focuses on the second challenge: updating the regulatory and governance structure.  The Task Force expects to address the other three challenges in separate discussion papers later this year.

Updating the Regulatory and Governance Structure for Digital Payments

To update the regulatory and governance structure, the Task Force’s initial proposal has four components:

1. payment-specific legislation, which would be inclusive and functional and would recognize the specific roles of players within the payments system (the Task Force notes that the current legislative framework tends to focus on financial institutions, given their traditional role in payments, rather than on the function of payments);
2. creation of an industry self-governing organization, which would involve mandatory membership for industry participants;
3. upgrades to the current payments infrastructure to support a modern digital economy. The aims of the upgrades would include: reducing concentration of ownership and control of payments networks; providing open access and a platform offering secure clearing and settlement of payments and competition among payment service providers; facilitating funding of investment in infrastructure; and developing a fair user-pay model to sustain and promote the infrastructure; and
4. creation of an independent payments oversight body which would monitor the proposed governance framework and report to the Minister of Finance.

The Task Force notes that currently payments in Canada are governed by a patchwork of legislation. The current legislative framework addresses a number of different concerns: (i) payments rules and standards (e.g., Canadian Payments Act, Bank Act, Payments Clearing and Settlement Act, provincial credit union acts, Bills of Exchange Act); (ii) prudential oversight (e.g., Bank Act, provincial financial institutions acts); (iii) consumer protection (e.g., provincial consumer protection legislation, privacy legislation, Competition Act); and (iv) safety and security (e.g., anti-money laundering legislation). At this time, it is not clear whether the Task Force’s final recommendations will result in consolidation of some of the current statutory obligations or rather amendments to the current statutes.

Comments to the Discussion Paper

The Task Force’s Paper has received a number of comments from various players in the payments system. At a high level, most commentators support the Task Force’s position that the current payments system needs to be updated. However, the commentators have divergent views and interests concerning how the system should be updated (the full text of the Paper and the comments can be viewed at http://paymentsystemreview.ca/). Although it is too early to tell which of the components of the Task Force’s initial proposal will make it to the final recommendations of the Task Force, it is likely that some of the players in the payments industry who so far have been largely unregulated (or very lightly regulated) will become subject to new regulations. We expect to see more clarity in this area early next year. Stay tuned.

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