CG-10 Code of Conduct for the Credit and Debit Card Industry in Canada – Increased Disclosure in Sales and Business Practices and Cancellation of Contracts without Penalty
On February 13, 2013, the Commissioner of the Financial Consumer Agency of Canada (FCAC) issued guidance addressing three issues related to compliance with the Code of Conduct for the Credit and Debit Card Industry in Canada (Code). This latest guidance (Commissioner’s Guidance) is directed to payment card network operators (PCNOs), broadly understood to include the proprietary credit card networks, card issuers, acquirers, independent sales organizations and service providers such as those engaged in processing and the leasing of point-of-sale terminals. The FCAC is the federal regulatory agency that administers consumer provisions in federal financial institutions legislation, such as the Bank Act. Among other things, the FCAC has statutory responsibility to monitor compliance with voluntary codes adopted by a financial institution or a PCNO.
The Code applies to credit and debit card networks (referred to as payment card networks) and their participants (card issuers and acquirers). It contains 10 policy elements intended to promote fair business practices and assist merchants in understanding the costs and benefits associated with credit and debit cards. Payment card networks and participants have committed to the Code and, consequently, the FCAC monitors adherence to the Code.
The Commissioner’s Guidance relates to two of the core elements of the Code. Element 1 requires payment card networks, acquirers and other participants to ensure transparency in their merchant contracts with easily understood disclosure of information, such as discount rates, interchange rates, other fees and transaction volumes. Element 3 requires payment card network rules to ensure merchants are permitted to cancel their contracts without penalty within 90 days following notification of a fee increase or the introduction of a new fee.
Guidance re sales and business practices
The FCAC has investigated complaints and identified sales practices involving merchant-acquirer agreements that do not promote increased transparency and are inconsistent with Element 1 of the Code, such as:
misrepresentation of contractual terms, and promising rates that cannot be honoured;
unilateral changes to processing agreements;
inconsistencies between the merchant-acquirer agreement and the merchant’s monthly statements; and
failure to provide merchants on a timely basis with complete copies of the merchant-acquirer agreement or any terms incorporated by reference.
The Commissioner’s Guidance directs PCNOs to work with their participants to address these sales and business practices in a timely manner and to apply appropriate remedies, where applicable, including amending or voiding contracts entered into using such sales practices.
Guidance re disclosure to merchants in multiple provider agreements
The FCAC has also investigated complaints that merchants often find it difficult to understand agreements with multiple service providers, due in part to complexity involving interconnected payment services, and the merchants are challenged when trying to make reasonable and informed decisions about the service contracts.
The Commissioner’s Guidance calls for PCNOs and their participants to provide clearer disclosure before the merchant enters into agreements with multiple service providers. Information about the effective date of the agreement, expiry and renewal terms, applicable fees and rates for each participant, cancellation terms and fees, and the complaint-handling process, among other things, is considered key and is required to be disclosed with clarity, in a consolidated manner, so that it may be easily located and understood by the merchant. The Commissioner’s Guidance provides an “information summary box” template and “strongly encourages” participants to adopt the template format as a cover page to their disclosure.
Guidance re multiple contract cancellation penalties, costs or fees
The FCAC has investigated situations in which merchant-acquirer agreements with a participant were later found by the merchant to contain related service contracts with different cancellation provisions and associated penalties and costs. Then, following a fee increase, although the merchant may have been able to cancel the agreement with the participant without penalty, as provided in Element 3 of the Code, the merchant often faced additional costs or penalties to terminate the related service contracts. The Commissioner concluded that such contractual arrangements undermine Element 3 of the Code.
The Commissioner’s Guidance states that Element 3 should apply to merchant-acquirer agreements and to any related service contracts with service providers. Where there is a business connection (e.g., holding company or affiliate) between the participant and the service provider, the services should be considered to be related and to be one service package.
Further, merchants should be permitted to cancel the merchant-acquirer agreement and all related service contracts without penalty, as set out in Element 3 of the Code, provided however that where a merchant enters into a separate agreement with unrelated service providers, such agreements should be treated as separate agreements (and may not even be subject to Element 3 of the Code).
The FCAC expects PCNOs to commit publicly to the Commissioner’s Guidance and to incorporate any required amendments into their operating rules within 90 days of February 13, 2013. All participants are expected to comply and incorporate any required changes to their documentation or processes within 180 days of the date that any PCNO operating rules are amended (at the latest by November 12, 2013). The Commissioner’s Guidance complements previously issued guidance.
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