Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services, April 2010
On April 16, 2010, the federal government released the new "voluntary" Code of Conduct for the Credit and Debit Card Industry in Canada (the Code). The Code was created to address the concerns of merchants regarding some of the business practices of credit and debit card networks, issuers and acquirers. Although the Code resulted from extensive consultations with both merchant and consumer associations, it is evident from reviewing the Code that merchants are the primary beneficiaries.
The stated purpose of the new Code is to:
- ensure that merchants are fully aware of the costs associated with accepting credit and debit card payments, thereby allowing merchants to reasonably forecast their monthly costs related to accepting such payments;
- provide merchants with increased pricing flexibility to encourage consumers to choose the lowest-cost payment option; and
- allow merchants to freely choose which payment options they will accept.
The Code is intended to work through adoption by the payment card networks, which will, in turn, impose the requirements of the Code on their participant issuers and acquirers.
Although adoption of the Code is stated to be voluntary, in the House of Commons debates on April 16, 2010, the Parliamentary Secretary to the Minister of Finance made it clear that compliance with the Code is not really intended to be voluntary. The Parliamentary Secretary said "The credit and debit card industry has until May 17, 2010 to adopt this code voluntarily or our government is prepared to take action and regulate them through the legislative process". Once the Code is adopted, the industry will have an additional 90 days to implement most of the provisions of the Code. Issuers will have up to one year to re-issue cards already in circulation that contravene policy element 6 (ban on competitive co-badged debit cards, which are debit cards that have access to more than one debit network system for the same type of debit payment transaction) or policy element 7 (equal branding requirement for permitted co-badged debit cards).
In introducing the Code, the government referred to the new Payment Card Networks Act included in Bill C-9, which gives the Minister of Finance the authority to regulate the market conduct of the credit and debit card networks and their participants. (See our recent Blakes Bulletin on Financial Services: Update on Financial Institutions Legislation.) We expect that the government will use this legislation to regulate payment card networks if it is not satisfied with the industry's adoption or implementation of the Code.
Bill C-9 also includes amendments to the Financial Consumer Agency of Canada Act (the Act) that will add, as new objects of the Financial Consumer Agency of Canada, "to monitor the implementation of voluntary codes of conduct that have been adopted by payment card network operators and that are publicly available" and "to promote public awareness about the obligations of payment card network operators under a voluntary code of conduct". Because the Code is a voluntary code of conduct, these amendments to the Act will provide the Financial Consumer Agency of Canada with the authority to monitor compliance with the Code by all industry participants.
The Code sets out 10 policy elements, some of which have been added or changed from the original draft of the Code released in December 2009. The 10 policy elements are as follows (note that the Code imposes some additional requirements or guidance in respect of some of the principles, not all of which are set out in this bulletin):
1. Increased Transparency and Disclosure by Payment Card Networks and Acquirers to Merchants
In this regard, payment card network rules will ensure that merchant statements include the following information:
- effective merchant discount rate – basically, total fees divided by total sales volume – for each type of payment card from a payment card network;
- interchange rates and, if applicable, all other rates charged to the merchants by the acquirer;
- the number and volume of transactions for each type of payment transaction;
- the total amount of fees applicable to each rate; and
- details of each fee and to which payment card network they relate.
Similar to disclosure rules that apply to credit card agreements with consumers, this information must be presented in a manner that is clear, simple and not misleading. The Financial Consumer Agency of Canada has published Clear Language and Presentation Principles and Guidelines for consumer documents, which may also be useful for merchant statements and agreements.
2. Payment card network rules will ensure that merchants will receive a minimum of 90 days' notice of any fee increases or the introduction of a new fee related to any credit or debit card transactions. Payment card networks will provide at least 90 days' notice to acquirers for rate and/or fee changes and at least 180 days' notice for structural changes.
The Code provides that "notification is not required for fee changes made in accordance with pre-determined fee schedules, such as those based on merchant sales volume, provided that the schedules are included in the merchant's contract". Changes to the schedules themselves will require the 90-day notice.
3. Payment card network rules will 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.
This cancellation right must be exercised within 90 days of receiving notice of the fee increase or the introduction of a new fee.
As in policy element 2, the Code addresses fee increases made in accordance with pre-determined fee schedules, such as those based on merchant sales volume, which do not give rise to this cancellation right provided that the schedules are included in the merchant's contract.
4. Payment card network rules will ensure that merchants who accept credit card payments from a particular net-work will not be obligated to accept debit card payments from that same payment card network, and vice versa.
5. Payment card network rules will ensure that merchants will be allowed to provide discounts for different methods of payment (e.g., cash, debit card, credit card). Merchants will also be allowed to provide differential discounts among different payment card networks.
The Code requires that any discounts be clearly marked at the point-of-sale. This requirement will have to be imposed on merchants by their acquirers.
6. Competing applications from different networks shall not be offered on the same debit card. However, complementary applications from different networks may exist on the same debit card.
Note that this prohibition only applies to debit cards. (Policy element 8 prohibits combined debit/credit cards.)
7. Payment card networks will ensure that co-badged debit cards are equally branded.
When read together with policy elements 6 and 8, this rule applies only to debit cards, and the co-badged applications must be complementary, not competing.
8. Payment card network rules will ensure that debit and credit card functions shall not co-reside on the same payment card.
9. Payment card network rules will require that premium credit and debit cards may only be given to consumers who apply for, or consent to, such cards. In addition, premium payment cards shall only be given to a welldefined class of cardholders.
10. Payment card network rules will ensure that negative option acceptance is not allowed.
This prohibition is directed against automatic (negative option) acceptance by merchants of new payment card services.
The adoption and implementation of the Code by industry participants 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. In the event that the government is not satisfied with the industry's progress, further regulation will likely follow.
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.