Canada: Registrar's Standards For The Private Retail Sale Of Cannabis: Clarifying The Regulatory Objectives

Last Updated: December 13 2018
Article by Don Bourgeois and Rick Moscone

Introduction:

The Cannabis Licence Act, 2018 and Ontario Regulation 468/18 set out the broad framework of the Ontario regulatory model for the private retail sale of cannabis. This regulatory model has been developed in an unusually quick manner as a result of a substantial change in public policy. The Act and Regulation are discussed in other notes.

The Act authorizes the Registrar to establish standards and requirements in several areas:

  • store premises, equipment and facilities, including surveillance and security,
  • the prevention of unlawful activities,
  • advertising and promotional activities,
  • training related to the responsible use and sale of cannabis,
  • the protection of assets,
  • record-keeping and measures to maintain confidentiality and security of records,
  • compliance with the federal cannabis tracking system.

The use of standards and requirements is consistent with the Alcohol and Gaming Commission of Ontario's shift away from a prescriptive regulatory approach to a risk-based and outcomes-based approach. Since there may be many ways for a licensee to meet the Standards, licensees have the flexibility to determine what works best for their business, thereby strengthening regulatory outcomes without needlessly burdening regulated entities.

What has been inconsistent with the Registrar's Standards for the Private Retail Sale of Cannabis has been the minimal engagement with the sector prior to publishing these standards on December 5, 2018. However, the AGCO notes that the Standards will be reviewed and revised on a regular basis to ensure that they are effective in mitigating risks as the cannabis retail sector matures. Furthermore, given the very short period of time provided by the Government, the AGCO has had little opportunity to engage with the sector and, at the same time, to provide the Standards in a timely manner that would allow potential applicants with the information necessary for them to make decisions about the retail outlets.

There are some matters that are outstanding for licensees to more fully understand their obligations and risks. For example, the training module that is required for those involved in the retail sale of cannabis is expected to be available in early 2019. The list of monetary penalties is also outstanding, as is the related compliance policy statements to be used in making compliance and enforcement decisions.

Of more immediate need is documentation from the AGCO's sibling Crown agency — the Ontario Cannabis Retail Corporation and its wholesale contract. It is understood that the AGCO has worked with the OCRC to ensure that the AGCO's regulatory model and the OCRC's contractual model for supply of cannabis to licensees are aligned and complementary, but proof will be in the documentation and its implementation.

Standards Overview:

The AGCO has taken a materially different approach from that used in other jurisdictions, such as Alberta. The AGCO's approach for cannabis retail is comparable to how it regulates other sectors, such as liquor and gaming in Ontario. The Standards provide greater flexibility to licensees and attempt to avoid dictating to licensees "the how".

An example with respect to physical security is illustrative of this difference. The Alberta Handbook is very prescriptive in how it treats security — for example, just one Alberta requirement is that "A retail cannabis store must secure perimeter entry points against unauthorized access by: a) the use of 1.5 mm (16 gauge) hollow metal doors with 1.9 mm (14 gauge) metal frame and tamper proof hinges at all entry points other than the customer entrance." While this requirement would no doubt also meet the AGCO's Standards, the AGCO is more outcome-based in its approach. It requires the licensee to ensure, amongst other things, that:

All cannabis must be stored securely at all times and be accessible only by staff from receipt of product to point of sale, destruction or return to the Ontario Cannabis Retail Corporation (OCRC) or the Licensed Producer.

While the Alberta Handbook prescribes "the how", the AGCO defines the outcome and leaves "the how" to the licensee.

With greater flexibility comes greater accountability. The licensee is expected to carry out a risk assessment and to use this risk assessment in deciding upon its control measures for "the how" and the physical layout of the premises. While the Alberta approach is more than likely to achieve the outcome, the AGCO approach allows for the licensee to develop its security measures to achieve the security outcomes.

The flexibility in "the how" is not without limitation or consequences. While the Alberta requirements may not be necessary, a simple sign that warns the public "Do Not Enter" is demonstrably far from sufficient. The licensee must carry out a risk assessment for the retail store. Additionally, it may be that what is satisfactory for a retail outlet in a well-lit store adjacent to a police station will not be sufficient for a store in a high-crime area.

Another example is related to minors and prohibited individuals. The Standards provide that the "Licensees must take reasonable measures to ensure that patrons are not purchasing cannabis or cannabis accessories on behalf of individuals under the age of 19." A retail outlet located outside the 150-metre buffer zone but along a route used by high school students would probably be expected to have enhanced measures to comply with this Standard in comparison to a retail outlet located in a shopping area that is targeted at adults and seniors.

The AGCO Standards provide flexibility in a number of other areas. For example, a licensee with two or more retail outlets may centralize inventory in one of the outlets and supply the other outlets from that centralized outlet. This approach could reduce security requirements in the other retail outlets and allow the licensee to supply day-to-day or weekly needs from the retail outlet with the centralized inventory, which is in a highly-secure section. Having said that, the licensee would also need to assess the risks in supplying the other retail outlets from the centralized inventory. While an armoured vehicle is probably not required, it is also readily apparent from the Secure Transportation Standard that the use of the ABC Cannabis Storebranded shopping bag carried by a courier using the subway would not be adequate. The Secure Transportation Standard permits the licensee to transfer cannabis from one retail store to another, but the licensee must "ensure that the transportation of cannabis is secure, and must maintain records of all movements of cannabis between stores."

Areas Addressed by the AGCO Standards:

The AGCO Standards and Requirements are categorized in several areas, including the following:

  • General Standards — these Standards include what are often called "entity level controls" which are intended to ensure that the licensee and those acting for the licensee comply with the law and demonstrate honesty and integrity. The licensee must exercise oversight of the retail operations. Changes to the officers, directors, partners and shareholders require the Registrar's approval. Indeed, the requirement to obtain the Registrar's approval goes beyond a change in shareholders — the wording is the more expansive "acquires a beneficial interest in" and "becomes entitle to any of the profits from the sale of cannabis or cannabis accessories". In addition to ensuring that only individuals of integrity are involved in cannabis retailing, this Standard and its Requirements are also a back-door method to ensure that the licensee remains onside the "affiliate" obligations with respect to licensed producers and the 75-store limit in Ontario Regulation 468/18
  • Physical Store Requirements — this Standard has been discussed above, but the Standards do establish some basic requirements for licensees. For example, the licensee must have in place at all times a secure, high-resolution surveillance system. All points of access to the premises must be secure and protected against unauthorized access — which may have implications with respect to any lease agreement. These Standards also address the use of sensory display containers and similar matters.
  • Destruction of Cannabis — the Standard sets out what needs to be done to destroy product, when it is to be destroyed, surveillance related to its destruction and mitigation of the potential harmful effects of the destruction. Underlying this Standard and Requirements is the need to account for all cannabis.
  • Secure Transportation — noted above, security of transportation is essential. The Standard also provides for the supervision and documentation of the transfer process — again to ensure accountability for all cannabis.
  • Minors and Prohibited Individuals — The licensee must take reasonable measures to ensure that patrons are not purchasing cannabis or cannabis accessories on behalf of individuals under the age of 19.
  • Advertising and Promotions — this Standard re-enforces both federal restrictions on advertising and promotions and those that have been put in place as a matter of provincial public policy. They also address inducements, i.e., the prohibition from inducements.
  • Responsible Use — the licensee must ensure that information related to the responsible use of cannabis is made available to patrons, including Health Canada's Consumer Information — Cannabis materials.
  • Record-Keeping Requirements — consistent with the underlying control of cannabis and the ability to account for all cannabis, the Record-Keeping Standard is the most detailed and prescriptive. While it is expected that this Standard will be aligned with the OCRC's contractual obligations, it will be necessary to review the OCRC's supply contract. Licensees must ensure that very detailed records are maintained and retained for a minimum of three years (or longer as legally required) and are available upon request by the AGCO. The record-keeping requirements are "cradle to grave" in nature, ensuring that the licensee and the AGCO are able to reconstruct all transactions, all movements of cannabis and all who "touched" the cannabis. Furthermore, the licensee must complete a full physical inventory count of all cannabis on a weekly basis and report discrepancies to the AGCO.
  • The record-keeping obligations also include cybersecurity and data security and integrity measures. Licensees must ensure that there are reasonable safeguards around data security and protection of data integrity. Point of sales systems must be certified by a recognized industry certification body or organization (such as the International Standards Organization or ISO) and have logging capability for the purposes of monitoring all system access and system changes. While the AGCO stopped short of prescribing what POS to use, it is clear that the POS must be a very robust one.

The AGCO is expected to engage with the sector in 2019 related to the Standards and Requirements. In the meantime, it is readily apparent that while the AGCO Standards provide significant flexibility to licensees, that flexibility also involves substantial accountability on the part of licensees.

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.

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