On February 13, 2013, the Financial
Consumer Agency of Canada (FCAC) released Commissioner's Guidance CG-10 in respect of
the Code of Conduct for the Credit and Debit Card Industry in
Canada (the CDC Code). The new FCAC Guidance addresses three
compliance issues identified by the FCAC: a lack of transparency in
respect of some sales and business practices; a lack of clarity of
disclosures where multiple merchant service agreements are
required; and multiple contract cancellation fees.
The Honourable Ted Menzies, Minister of State (Finance) noted in a statement issued in connection with FCAC Guidance CG-10 that it "will provide better disclosure to small businesses and other merchants, while helping to eliminate inappropriate sales and business practices."
The CDC Code came into effect in August 2010 and is intended to promote fair business practices and ensure merchants and consumers clearly understand the costs and benefits of credit and debit cards. (See our Blakes Bulletin: Code of Conduct for Credit and Debit Card Industry in Canada and Blakes Bulletin: Mobile Payments Subject to CDC Code of Conduct for Canadian Credit and Debit Card Industry.)
FCAC Guidance CG-10 is aimed at
clarifying certain requirements of the CDC Code in respect of
payment card networks that operate in Canada and their
participants, including, for the first time, independent sales
organizations (ISOs) and other service providers (e.g., processors,
terminal lessors). The CDC Code states that it applies to credit
and debit card networks (referred to as payment card networks
(PCNs)) and their participants, giving as an example of
participants card issuers and acquirers.
The three issues addressed by FCAC Guidance CG-10 are discussed in more detail below.
1. Sales and Business Practices
The CDC Code provides for transparency and disclosure to merchants by PCNs and their participants in respect of various fees to which the merchants are subject. FCAC has received a number of complaints related to sales practices that, in FCAC's view, are inconsistent with the requirements of the CDC Code. Such practices include the following:
- failing to provide to merchants in a timely manner a complete copy of the merchant-acquirer agreement or terms incorporated therein by reference (e.g., not providing a copy of applicable transaction and processing fees and rates at the time the merchant enters into the agreement)
- unilaterally altering or 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 PCNs and their 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)
- misrepresenting contractual terms.
In view of the foregoing complaints, FCAC Guidance CG-10 provides that PCNs should 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. FCAC also expects that PCNs 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 and to develop appropriate processes to address such issues within a reasonable time period. In addition, Guidance CG-10 anticipates that PCNs will take remedial action in a timely manner, which may include such measures as amending or even voiding contracts that were entered into through sales or business practices described above.
The primary goal of this element of FCAC Guidance CG-10 is to ensure that merchants are aware of all of the costs associated with their merchant-acquirer agreement and any related agreements. It should be noted that although these agreements are entered into at the merchant-acquirer level, it is the PCNs that are tasked with the responsibility of ensuring fair sales and business practices by acquirers.
2. Disclosure in Multiple Service Provider Agreements
The CDC Code requires that merchant-acquirer agreements include
a sufficient level of detail and be easy to understand. FCAC has
found through its oversight role that where there are multiple
service provider agreements in the context of acquiring
arrangements (for example, a terminal lease agreement, in addition
to a merchant services agreement), merchants find it difficult to
understand the interrelation between these payment services.
In light of this, FCAC Guidance CG-10 provides that PCNs will work with their participants to improve the clarity of disclosure to be provided to merchants before they enter into multiple ISO/service provider agreements. In particular, FCAC expects that PCNs and their participants will provide all key information to merchants in respect of their services agreements in a consolidated fashion. This obligation to provide consolidated disclosures only applies where there is a "business connection" between the participant and the ISO/service providers in each case. Guidance CG-10 requires specific information to be disclosed to merchants. FCAC strongly suggests the use of an information box to provide such information. The information to be provided to merchants in these circumstances is as follows:
- name, co-ordinates, contact information of each service provider and the nature of the services being provided by each
- effective date of each agreement
- information on the expiry and renewal (e.g., whether the contract automatically renews if not cancelled before a specific date) for each agreement
- detailed information on any applicable fees and rates for each participant
- information on how statements will be provided to merchants (e.g., on paper or online)
- cancellation terms of each agreement entered into with the merchant, including specific information on any cancellation fees that could apply
- 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
- complaint-handling process for each participant, including how a merchant can contact the complaints department of each.
In respect of what constitutes a "business connection", FCAC indicates that there will be a "business connection" where there are contractual arrangements between the parties or business linkages (such as holding company or affiliate relationships) or where "financial incentives and/or payments" can be confirmed through the PCNs and their participants. The latter part of this interpretation is quite open-ended and it is unclear exactly what relationships are intended to be included or excluded by this definition. It is also difficult to see how PCNs will be able to effectively monitor the "business connections" of their acquirers, especially where there is no privity of contract or other relationship between the PCN and these other service providers. The extension of the CDC Code to ISOs and other participants in the payment landscape is a significant extension of the CDC Code to unrelated parties over whom the PCNs have no control. It will be interesting to see if this results in restructuring business arrangements so that there are no "business connections" between participants.
3. Multiple Contract Cancellation Penalties, Costs or Fees
Element 3 of the CDC Code provides that PCN rules should ensure
that, following notification of a fee increase or the introduction
of a new fee, merchants will be allowed to cancel their contracts
without penalty. FCAC, in monitoring compliance with the CDC Code,
has encountered situations where merchants have signed a
merchant-acquirer agreement to later discover that they had
actually entered into more than one contract for related services
with different parties and that each contract contained different
cancellation clauses and related penalties. In these circumstances,
when a merchant sought to cancel their merchant-acquirer agreement
following a fee increase, as permitted under Element 3 of the Code,
the merchant often faced additional costs or penalties to terminate
the related service contracts.
To address this concern, FCAC provides that Element 3 of the CDC
Code should not apply only to the merchant-acquirer agreement, but
also to any related service contracts with service providers.
Further, FCAC notes that in situations where there is a
"business connection" between the participant and the
service providers, services should be considered as a single
service package, (except where a merchant, on its own initiative,
enters into separate contractual arrangements with unrelated
service providers). Accordingly, on the basis of this view, where
there are related service contracts and there is a "business
connection" between the parties, in the event that a merchant
has the right to cancel one of the agreements due to a fee increase
by the service provider, a merchant should be entitled to terminate
all related service contracts without penalty. The
implementation of Element 3 of the CDC Code seems problematic where
several service agreements are entered into by a merchant with
various service providers, even if the service providers have a
"business connection". If one service provider determines
to increase their fees as a result of increased costs (for example,
a terminal lessor), it would provide a merchant with the right to
cancel all service agreements with all other service providers even
though such providers had no involvement in the fee increase. In
this regard, it is submitted that utilizing the concept of a
"business connection" to allow multiple contracts to be
terminated may be difficult if not impossible for PCNs to enforce,
especially where the PCN has no direct relationship with all
FCAC expects that all PCNs will publicly commit to Guidance
CG-10 and will incorporate the required amendments into their
operating rules within 90 days of the publication of the
In addition, FCAC expects that all participants will comply with
Guidance CG-10 and will incorporate any required changes to improve
documentation, processes or approaches within 180 days of
the date that PCN operating rules are amended.
FCAC will, as per its usual practice, conduct ongoing monitoring to determine compliance. The introduction of this guidance will have far-reaching implications for both PCNs and their acquiring relationships. Network rules will require amendments to address this Guidance. Moreover, acquirers and PCNs will be left to determine where they have any "business connections" and to ensure they adopt proper disclosure procedures.
The adoption and implementation of the new guidance in the time-frame allotted will likely prove challenging for the industry and may give rise to a host of unforeseen compliance, legal and practical issues.
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.