The formation of the Task Force for the Payments System Review (the Task Force) was announced by the federal Minister of Finance on June 18, 2010. The Task Force was given the mandate to make concrete, actionable recommendations to the Minister to help guide the future of the Canadian payments system.
The final report of the Task Force, Moving Canada into the Digital Age, together with four policy papers and two additional discussion papers, was published on Friday, March 23, 2012.
Approach and General Themes
The Task Force took a collaborative approach to reviewing the payments system, engaging and consulting with consumers, retail and small business groups, federal and provincial governments, small and large businesses, and new entrants to the payments system. Consultations took a number of forms, including interviews, roundtable discussions, town-hall meetings and discussion papers, all in an effort to spark dialogue across the range of payments system stakeholders. A number of working and advisory groups were also formed to advance specific elements of the Task Force's work.
The following general themes emerge from the final report of the Task Force and the accompanying papers:
- users of the Canadian payments system, including consumers, merchants, small and medium enterprises, and large corporate and government organizations, are discontented with the existing system;
- transitioning to a digital economy is critical for Canada and will require collaboration and co-operation among all stakeholders;
- given the nature of the payments industry, which will be characterized by rapid, discontinuous change, a flexible, adaptable approach is essential;
- the transition to a digital economy will require a new governance model supported by new, principles-based legislation; and
- the payments system itself as well as the new governance model and legislation should be based on the fundamental principles of trust, access and good value.
Transitioning to Digital Payments
The Task Force makes it clear in its final report that transitioning to a digital economy is essential if Canada is not to be left behind in the global economy. In its discussion paper, Going Digital: Transitioning to Digital Payments, the Task Force sets out its views on how to best advance the transition to digital payments and highlights the three key elements of a successful evolution as:
- the implementation of electronic invoicing and payments;
- the creation of a mobile ecosystem; and
- the building of a digital identification and authentication regime to underpin a modernized payments system and protect Canadians' privacy.
In its final report, the Task Force calls on the government to lead the industry by example by implementing electronic invoicing and payments for all government suppliers and benefit recipients. The Task Force states that it is a reasonable goal to reduce cheques by 80% by 2020. With respect to the mobile ecosystem and digital identification and authentication regime, the Task Force acknowledges that advancements are underway across the country and has encouraged the government to work with the private sector to make progress in these areas but does not go on to make more specific recommendations.
The building of a digital identification and authentication regime will be of critical importance in the further refinement of Canada's anti-money laundering laws. Digital identification and authentication would provide an effective mechanism to allow regulated entities to verify and authenticate client identity in a non-face-to-face environment in a more pragmatic manner than the current legislation allows.
The Task Force has been more specific in its proposals to overhaul the governance structure of Canada's payments system and the legislation required to support such a structure. The Task Force recommends a new governance model with the following three key elements:
- a self-governing organization (SGO);
- a public oversight body (POB); and
- a core infrastructure entity, being the Canadian Payments Association (CPA).
The new legislation required to support this model would be focused on function rather than type of institution and would:
- define a discrete payments industry, separate from the banking and financial services industry;
- create the new POB for the payments industry;
- encourage the industry to create a broad-based, collaborative SGO, in which membership would be mandatory for payments system providers and voluntary for users; and
- reinvent the objects, governance, powers, business model and funding of the CPA to enable the CPA to function as the core infrastructure entity that will better serve the payments system.
The most significant of these recommendations is that payment industry participants such as processors, software and hardware manufacturers, acquirers, loyalty points program operators and ATM operators that were not previously subject to specific payments legislation would now be swept up in the definition of "payments system providers" and would be subject to the new proposed payments governance regime.
New Governance Model
The Task Force proposes that the SGO would be composed of two groups of members:
- payments system providers, whose membership would be mandatory, including banks, other financial institutions, other payments service providers (including newer entrants and acquirers), payment card networks (including credit, debit, prepaid and open-loop gift card issuers) and others in the payments value chain such as payments software suppliers, processors and acquirers; and
- payments system users, whose membership would be voluntary, including consumers, merchants, merchant associations, small and medium enterprises, not-for-profit organizations, large corporations and governments.
The SGO would have the ability to set policies, standards and voluntary codes within the framework of the proposed principles-based payments legislation. It would also set the strategic direction of the payment industry in Canada.
Interestingly, the Task Force proposes that the cost of the SGO and POB be passed onto users in the form of a "very small" fee applied to users for each transaction.
The POB would recognize and oversee the SGO and would also maintain oversight of the CPA, which would be overhauled to allow for wider access to more participants. The Task Force proposes that the POB would have the statutory authority to:
- regulate and oversee the payment system and its participants;
- compel payments service providers to join the SGO; and
- offer a recourse mechanism for issues that cannot be resolved within the SGO.
Under the proposed governance model, the Minister of Finance would continue to hold residual power for payments matters and would retain directive power over the POB.
One of the more significant recommendations of the Task Force is to change the mandate of the Financial Consumer Agency of Canada so that it no longer has responsibility for monitoring the Code of Conduct for the Credit and Debit Card Industry in Canada. Rather, the Task Force recommends that this monitoring function be delegated to the SGO.
The governance model proposed in the final report is similar to the governance framework first proposed by the Task Force in its discussion paper The Way We Pay, published in July 2011. In reaction to the discussion paper, a number of stakeholders voiced concern regarding the governance framework, including that it was too prescriptive and added additional layers of regulatory governance rather than reducing regulation in favour of an open industry where competition and innovation can flourish in accordance with market forces. Therefore, support from the industry for the governance model proposed in the final report – and the collaboration and co-operation that the Task Force is seeking from stakeholders – may be lacking.
New Legislation – Defining the Payments Industry
On a review of the existing legislative landscape governing the payments system, the Task Force concluded that it was relatively complete with only a few gaps, the most important one being the lack of oversight of certain new entrants into the industry.
Therefore, the Task Force recommended new federal legislation that will define the payments industry and have authority over all payments service providers, not just over financial institutions or payment networks. It should be principles-based and should reflect the core policy objectives identified by the Task Force of trust, access and good value. It should provide for oversight and regulation, allowing the government to issue regulations on the advice of the POB, also to be used if the SGO was unable to resolve a policy issue. Lastly, the legislation would facilitate the overhaul of the CPA.
The Task Force does not recommend the changing of any existing legislation governing the payments system participants. As such, for regulated entities that are already subject to legislation relating to payments, this proposed governance represents a further layer of regulation.
In terms of legislation, the Task Force recommends that the payments legislation set out criteria for an entity to be subject to the regime based on the functions it performs in the payments system. In this regard, the Task Force has proposed that a "payments service provider" would be defined in the legislation as one that facilitates the transfer of monetary value from one party to another. How directly an entity's activities relate to facilitating the transfer of value should thus be determinative in whether it is a payments service provider for the purpose of the legislation.
The Task Force also recommends that the legislation should provide for a licensing regime administered by the POB, which would compel entities that fell within the legal definition of payments service provider to register as a member of the SGO. The POB would also have the authority to determine whether an entity falls within such definition.
The Regulatory Advisory Group of the Task Force considered the types of organizations that should be included within the scope of the legislation and produced a chart identifying, in its view, which entities should be required to register as licensed members of the SGO, including the following:
- payment card networks;
- balance holders, including banks and other financial institutions, providers of online prepaid/account-based services, prepaid debit cards and potentially open-loop gift cards;
- providers of virtual money and loyalty points programs;
- online payment processors;
- money transfer agents;
- card-processing acquirers;
- bill presentment and payment companies;
- payroll processing companies; and
- ATM operators.
The expanded scope of the types of providers who would be covered by the new federal legislation represents a significant shift from the existing regulatory regime and brings many new payment participants into the regulatory framework.
Credit and Debit Markets
The Task Force, in considering debit and credit card markets, paid particular attention to the Code of Conduct for the Credit and Debit Card Industry and noted that it is successfully providing merchants with more power in their relationships with networks, issuers and acquirers. In this respect, the Task Force recommended that the Code of Conduct be reviewed on a regular basis (every two years, by way of example) to take into account new policy issues and emerging technological changes, such as debit applications residing in cell phones and mobile wallets.
The Task Force recommended four specific amendments to the Code of Conduct, which in its view would provide enhanced disclosure and transparency in credit and debit markets. These four recommendations are as follows:
- payment card networks should ensure that merchants and cardholders are able to identify premium cards and their associated interchange fee or merchant service fee prior to a transaction;
- spending and income levels required to obtain premium cards should be declared by the card networks;
- differential discounts should be allowed among different types in categories of cards from the same network; and
- the Code of Conduct should clarify the merchant's ability to steer customers towards a particular form of payment.
The Task Force also noted that the government should closely monitor developments in the credit and debit card markets and take timely action, if necessary, to ensure the market operates efficiently and that innovation is fostered. Of notable interest, the Task Force expressly recognized that the regulation of interchange fees is problematic and can have unintended adverse consequence.
With respect to its proposal for a federal payments act, in recommending legislation that would simply define the industry and establish governing bodies, the Task Force seemed to implicitly understand the constitutional challenges that would be involved with a recommendation for federal legislation that would govern non-federally regulated entities.
The Task Force makes only brief mention of the issue of the federal government's jurisdiction, in one of the policy papers accompanying the final report. In this regard, the Task Force noted that to achieve full implementation, the governance model and federal legislation may need to be tailored to interact constructively with provincial (and international) legislation. The Task Force then goes on to express "its confidence" that all levels of government in Canada will find it in their respective interests to support the governance model as required and that jurisdictional issues should not be a barrier to implementing the governance model as envisaged.
It remains to be seen whether the Task Force has been too optimistic in anticipating the co-operation of the provincial governments. This is particularly relevant in the wake of the strong opposition of certain provinces to a national securities regulator, which has resulted in the defeat of the federal government's initiative to establish a single national securities regulator on the basis of constitutional issues. It will be interesting to see if some provinces similarly oppose the broad regulation of the payments industry by the federal government.
The Task Force has called on the government to lead the way in transitioning Canada into the digital economy by implementing the necessary legislation to facilitate the new governance model and by collaborating with the private sector to advance the movement to digital payments. The Task Force recognizes that legislation will take time to implement and so it also strongly encourages the industry to begin the collaborative effort that will be necessary to form the SGO. However, in the absence of legislation and a mandatory licensing regime, it is questionable whether currently unregulated payments system providers will be agreeable to collaboration when they may view it as lessening their competitive edge.
The Task Force has said that the transition to a digital economy is critical for Canada, yet it has left the onus on the government to progress the transition without making many specific recommendations, particularly in the areas of creating a mobile ecosystem and building a digital identification and authentication regime. Therefore, the impact of the Task Force and its final report depends heavily on the action of the government.
In response to the final report, the Minister of Finance announced that the government will establish a senior-level advisory committee made up of public- and private-sector stakeholders to meet regularly with Department of Finance officials to discuss emerging payments system issues. The Minister of Finance also announced that the Department of Finance will review the application of the Code of Conduct for the Credit and Debit Card Industry in Canada to emerging mobile payment products and the governance framework for the payments sector, including the CPA, to ensure the continued safety and soundness of the payments system, spur innovation and promote the consideration of user interests. This is a positive response but falls short of a concrete action plan for moving Canada towards a digital economy. We will have to wait to see what steps, if any, the government takes to implement the recommendations of the Task Force and, in particular, whether it moves forward with federal payments legislation.
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