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.
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.
Stephen's practice focuses on financial institutions and corporate finance. Kashif is a partner in the firm's Financial Institutions Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.