The Code, introduced in April 2010, is meant to help promote greater transparency for Canadian merchants and consumers who use credit and debit cards. The Guidance is meant to help merchants, payment card network operators, card issuers and acquirers better understand their obligations under the Code.

The Guidance focuses on three major issues identified by FCAC through its supervisory work: 

1. inappropriate sales and business practices;
2. disclosure to merchants in multiple provider agreements; and 
3. multiple contract cancellation penalties, costs or fees.

Sales and business practices

The Guidance notes that the FCAC has received a number of complaints related to sales practices that did not promote increased transparency and as such are not in accordance with the Code. Examples of the types of practices include:

• failing to provide merchants with complete copies of the merchant-acquirer agreement in a timely manner (e.g. not providing a copy of applicable transaction and processing fees and rates at the time the merchant enters into the agreement); 
• unilaterally modifying a merchant-acquirer agreement governing payment card transaction processing without providing advance notice (e.g. 30 days or more before the changes);
• sales representatives advertising and promising rates and fees that participants are not able to honour;
• inconsistencies between the information disclosed in the merchant-acquirer agreement and the merchant’s monthly statements (i.e. different terminology used to describe fees and rates or different fees / rates in agreement and statements); and 
• misrepresenting contractual terms.

In order to address these complaints, the Guidance notes that the following actions should be taken by PCNOs:

• PCNOs will work directly with their participants to promptly address sales or business practices within their networks that are inconsistent with the requirement to provide clear and simple disclosure to merchants or that may be misleading to merchants.
• PCNOs will work with their participants to establish appropriate time frames within which to address concerns raised by merchants in connection with sales or business practices within a participant’s network and to develop appropriate processes to address such issues within a reasonable time period. PCNOs will also work with their participants to ensure that appropriate remedies are implemented in a timely manner, including amending or voiding contracts that were entered into through such sales practices.

Disclosure in Multiple Service Provider Agreements

The Guidance notes that merchants often find multiple service provider agreements opaque and difficult to understand in part because of the many different but interconnected payment services they require. Therefore, it is difficult for merchants to make reasonable and informed decisions. In order to address this issue, the Guidance notes that the following actions should be taken by PCNOs:

• PCNOs will work with their participants to improve the clarity of disclosure to be provided to merchants before they enter into a multiple ISO / service provider agreement or agreements where there is a business connection between the participant and ISO / service providers, by requiring that key information be presented in a manner that is easy for merchants to find and understand.
• Specifically, PCNOs and their participants will work together to ensure that the following information is provided to merchants, in a consolidated fashion, such as a cover page to the multiple service provider agreement or agreements, before they are entered into by the merchant: (a) the name, coordinates, contact information of each service provider and the nature of the services being provided by each; (b) the effective date of each agreement; (c) information on the expiry and renewal (e.g. whether the contract automatically renews if not cancelled before a specific date) for each agreement; (d) detailed information on any applicable fees and rates for each participant; (e) information on how statements will be provided to merchants (e.g. on paper or online); (f) the cancellation terms of each agreement entered into with the merchant, including specific information on any cancellation fees that could apply; (g) if point-of-sale services are offered to a merchant, general information on buying, leasing or renting options of point-of-sale hardware to enable merchants to make an informed decision; and (h) the complaint-handling process for each participant; including how a merchant can contact the complaints department of each.

The Guidance notes that participants are strongly encouraged to adopt an “information summary box” cover page format in their disclosure (the Guidance includes a sample of such disclosure).

Multiple Contract Cancellation Penalties, Costs or Fees

The Guidance notes that the FCAC has encountered situations where merchants, who have signed a merchant-acquirer agreement with a participant, later discover that they had actually entered into additional contracts for related services (related service contracts) that each contained different cancellation clauses and related penalties, fees or costs. When a merchant sought to cancel the merchant-acquirer agreement without penalty following a transaction fee increase or the introduction of a new fee, as permitted under the Code, the merchant was able to cancel the contract with the participant without penalty, but often faced additional costs or penalties to terminate related service contracts. In some cases, the merchant did not exercise its right to cancel the merchant-acquirer agreement without penalty because of these penalties under the other contracts. As a result, these penalties undermine the rights granted under the Code. In order to address this issue, the Guidance notes the following:

• The principal of Element 3 of the Code relating to merchants’ right to cancel without penalty under certain circumstances should not only apply to the merchant-acquirer agreement, but also to any related service contracts with service providers. In situations where there is a business connection between the participant and the service providers, services should be considered related and as a single service package.
• PCNOs will work with their participants to ensure that, consistent with Element 3 of the Code, merchants will be permitted to cancel the merchant-acquirer agreement and all related service contracts without penalty, following notification of any new or increased fees by any participant or related service providers.
• The only exception is in a situation where a merchant, on its own initiative, enters into separate contractual arrangements with unrelated service providers. In such situations, the contract(s) with the separate service provider(s) should be treated as separate agreement(s).
• If the participant or one of the related service providers introduces or increases a fee, the merchant may terminate the contracts with the participant and any related service providers without penalty, in accordance with Element 3 of the Code. However, any agreement separately entered into between the merchant and an unrelated service provider would not be covered by Element 3 of the Code, and as such, the merchant could be subject to a cancellation penalty if it wished to cancel this contract.

Implementation and Timing

The Guidance notes that the FCAC expects that (a) all PCNOs will publicly commit to this Guidance and incorporate the required amendments into their operating rules within 90 days of the date of the Guidance, and (b) all participants will comply with the Guidance and will incorporate any required changes to improve documentation, processes or approaches within 180 days of the date that PCNO operating rules are amended.

This entry was written by Stephen D.A. Clark, Kashif Zaman and Victoria Graham.

A copy the Consultation Paper and proposed Addendum to the Code, together with Backgrounder issued by the Department of Finance can be accessed through the following links:

• Consultation Paper/Addendum
• Backgrounder

The proposed Addendum clarifies that the rules relating to payment cards will apply at the payment application level and not the mobile device itself, and provides specific guidance in relation to four key elements of the Code, stated as follows:

• Element 4 ensures that merchants have choice in the type of payments they accept: a merchant who accepts credit card payments from a particular network will not be obligated to accept debit card payments from that same payment card network, and vice versa. The Addendum clarifies that merchants who accept credit and debit card payments through a mobile device from a particular network will not be obligated to accept all products in that payment network’s mobile wallet.
• Element 6 provides that competing domestic applications from different networks shall not be offered on the same debit card. The Addendum clarifies that competing domestic debit applications can reside on or be accessed by the same mobile device provided they are represented as separate mobile payment apps.
• Element 7 provides that co-badged debit cards are equally branded. The Addendum clarifies that equal branding applies to all virtual or electronic representations of payment applications. It also clarifies that establishing default preferences for payment should be done by consumers based on a clear and transparent process and users should be able to easily change default settings.
• Element 8 provides that debit and credit card functions shall not co-reside on the same payment card. The Addendum clarifies that separate credit and debit applications may reside on the same mobile device provided they are represented as separate mobile payment apps.

The proposed Addendum also specifically seeks comments on:

• whether the amended Code should apply to other entities enabling mobile payments (the Code currently applies to credit and debit card networks and their participants (e.g., card issuers and acquirers)); and
• whether express consent should be required from merchants to accept debit or credit  payment applications through a mobile device where there are no changes to fees and no new infrastructure purchases are required.

The proposed Addendum could impact mobile payment projects that are currently being in the process of being developed. Industry participants wishing to comment must do so within the 60 day comment period. Comments can be submitted to codeconsult@fin.gc.ca.

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.

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.