As many involved in the payments ecosystem are aware, Payments
Canada is in the process of modernizing the Canadian payments
system and is also updating certain of its rules as part of that
effort. In furtherance of the foregoing, in November of 2021,
Payments Canada released a consultation paper proposing a revised
framework for the pre-authorized debit (PAD) rule (Rule
H1). Payments Canada is accepting comments on the proposed
changes until January 14, 2022.
The PAD rule requires organizations that accept payments by means of debiting a person's Canadian bank account (payees) to comply with prescribed procedures and to document the authorization of the paying party to allow the payee to withdraw funds from the payor's Canadian bank account. Specifically, Rule H1 requires that a pre-authorized debit or PAD agreement with prescriptive requirements be entered into by the payor and payee prior to the payee initiating any debits to the payor's bank account.
The PAD rule has not been updated since 2008 and as such does not take into account how the Canadian payments landscape has since evolved and how the payments market has advanced technologically. As such, many of the changes being proposed to the PAD rule are intended to reflect the fact that most PAD agreements are entered into electronically.
What follows is an outline of the more material changes proposed to the PAD rule:
Removal of the Three Days' Notice Requirement
One of the most significant changes proposed to the PAD rule is the removal of the requirement to provide three days prior notice before a payee is entitled to make any debit to a bank account where a PAD agreement has been entered into electronically. Currently, the PAD rule does not properly contemplate "real time" debits to a person's bank account because the rule requires three days prior notice to be provided to a payor before their account can be debited. The proposed change to the rule provides that as long as the payor receives a copy of the PAD agreement, a debit can be made immediately thereafter. This is a welcome change and more in keeping with a digital payments framework.
In respect of PADs used for one-time payments, the PAD rule does not currently require a PAD agreement that supports a one-time payment to automatically terminate once the payment has been completed. As such, the consultation paper proposes that a new definition of a "One-Time" PAD be added and clarify that a "One-Time" PAD cannot be used for any subsequent PAD transaction. As such, any subsequent PAD transaction would require a newly authorized payor PAD agreement and all one-time PAD agreements would be required to state that the PAD is a "One-Time" PAD and cannot be authorized for any subsequent PAD transaction. While the underlying policy intent of this provision is understandable, this requirement would appear to remove the flexibility of allowing a person to keep their banking information at a payment service provider or other organization on file and then authorize a PAD on a transaction-by-transaction basis, similar to where a person keeps their credit card information on file at a payment service provider. Instead, it would require a new PAD agreement to be entered into for every transaction setting out all of the required elements and all of the banking information each and every time. This may prove to be cumbersome for some payees and require system changes for others. It would seem that a solution that allows for the structuring of a master PAD agreement that contemplates One-Time PADs on a case-by-case basis could work for both payors and payees.
The proposed changes to the PAD rule remove the difference in treatment between "paper" and "electronic" agreements. Now, all PAD agreements will be subject to the same rules. This is a welcome change.
Purchases of Goods and Services
The proposed changes to the PAD rule provide that if a customer
has an agreement with a payee for the purchase of goods and
services that is separate and distinct from the PAD agreement, that
the PAD agreement must provide that if the goods
and services agreement has been cancelled by the customer, it will
result in the automatic termination of the payor
PAD agreement in accordance with the current cancellation
requirements set out in Rule H1. The proposal then goes on to
provide that this would not absolve the payor of any remaining
financial or other contractual obligations of the goods and
services contract, which would be handled outside of the
The problem with this provision, using a buy now pay later service as an example, is that in the event that a person cancels their agreement for goods and services with a payee but does not return the goods purchased, the payee will no longer have recourse to the PAD agreement for payment, even though the customer received the goods and services. Instead, the payee will be required to pursue the payment owed to it through other measures, leading to inefficiency and increased costs. As an alternative, it is recommended that a payor's right to cancel a PAD agreement where there is a separate agreement for goods and services should be subject to the requirement that the payor return the goods purchased or to pay for the services already provided.
Payment Service Providers
The proposed changes to the PAD rule address payment service providers in a more granular way. Presently, the PAD rule requires that where a third-party payment service provider is involved in the PAD process, the PAD agreement must include a statement that a third party will be administering the PAD and a provide the name of the third-party/payment service provider. It is proposed under the new rule that where a third-party/payment service provider is acting on behalf of an ultimate payee in administering the PAD, that specific provisions will be required to be included in the PAD agreement. In addition, the rule will require that the name of the ultimate payee be displayed as the debiting party on the payor's banking records (e.g., online or mobile banking applications).
The consultation paper proposes that cancellation rights for PAD
agreements also be provided to payees, similar to the current payor
As a reminder, the comment period closes on January 14, 2022. Comments can be submitted to firstname.lastname@example.org.
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