Later this year amendments to the Canadian Payments Act are expected to come into effect which will significantly change the manner in which the Canadian Payments Association (CPA) is governed. The CPA is an association created by statute and operated by its members which has the mandate of running a national payment clearing and settlement system. At present, the payment systems run by the CPA clear and settle the vast majority of payment items in Canada.
When the CPA amendments come into force, the governance structure of the CPA will be substantially altered. Until now, the CPA has been governed by a board of directors, the majority of whom are representatives of its members. Under the new governance structure, the members will continue to elect directors, but a majority of the directors will be required to be independent of the CPA and its members. The principal objective of the CPA will remain the same – namely, to operate a national payment clearing and settlement system – but the governance changes are likely to result in the board's membership becoming significantly more diverse.
How the governance changes will ultimately affect the future of Canada's payment clearing and settlement systems remains to be seen. However, it is clear that a new era of clearing and settlement system governance has been ushered in.
In order to understand the significance of the governance changes, it is useful to review the existing payment clearing and settlement landscape.
The existing structure for the clearing and settlement of payment items in Canada was established in 1980 with the enactment of the Canadian Payments Association Act. The act created the CPA and charged it with the mandate to operate a national clearing and settlement system. Before 1980 the Canadian Bankers Association ran a national clearing and settlement system for its bank members. Other non-bank deposit-taking institutions of the time (eg, credit unions) that wished to participate in the system did so by making arrangements with a bank.
The decision to create the CPA had a fairly long gestation. In 1961 the federal government established the Royal Commission on Banking and Finance to make recommendations for improving the structure and operations of Canada's financial system (the commission is commonly referred to as the Porter Commission after the commission chair, Dana Harris Porter). The commission's report, issued in 1964, recommended that all deposit-taking institutions be required to hold their reserves at the Bank of Canada. The commission saw as a necessary and beneficial consequence of this requirement that the clearing of payments items would take place at the bank. The commission also noted that this change would eliminate the need for non-bank deposit-taking institutions to make arrangements with other banks, which would introduce an element of fairness into the settlement system.
The then-government chose not to act on the recommendation of the Porter Commission. However, in 1972 a report sponsored by the federal Department of Communications observed that the arrival of computing technology was having an important impact on payment systems. In 1975 the Department of Finance and the Department of Communications jointly published further thoughts on the payments system and, in particular, the emergence of electronic payments. The government thereafter sponsored the formation of the Canadian Payments System Standards Group, comprising representatives of the deposit-taking institutions, common carriers and computer manufacturers, to consider further the issues related to the emerging computer technologies.
In a 1976 white paper the government formally stated its intention to form the CPA. The government indicated that the CPA would assume responsibility for running a national payments system. Presumably in recognition of the uncertain impact of the ongoing development of computer technologies, the CPA mandate also included planning for the "evolution of the national payments system".
In accordance with the Porter Commission's earlier recommendation, all banks were to be members of the CPA and non-banks that met specified conditions were also permitted to become members. The newly created CPA was to be governed by a board of directors elected by its members, with banks and non-banks having the right to elect their representatives separately. The Bank of Canada was given the right to appoint one director, and later the minister of finance was given the right to appoint three members to the board. Despite the CPA's mandate to plan for the evolution of the payments system, the computer industry was given no direct representation on the board of the CPA.
When the CPA was first created it had the dual objectives of operating a national clearing and settlement system and planning for the evolution of that system. By 2001 the latter objective was changed to provide that the CPA's mandate was to facilitate the interaction of its systems with other systems and the development of new payment methods and technologies.
Payment Clearing and Settlement Act
In 1999 the CPA launched the Large Value Transfer System to enhance its settlement capabilities with respect to large value transfers. The government introduced the Payment Clearing and Settlement Act in 1996, in part to provide some of the legal framework necessary to support the functioning of the Large Value Transfer System. In addition, the act also provided the Bank of Canada with the authority to regulate payment clearing and settlement systems under the act if the governor of the bank believed that a system posed a systemic risk.
New governance structure
Under the forthcoming amendments to the Canadian Payments Act, CPA members will continue to elect its board of directors. However, seven of the 13 members of the board must be independent of the CPA or its members. Only three of the directors will be elected by the direct clearers (principally, the large banks). Two directors will be elected by the members that are indirect clearers. The president of the CPA will also be a director. Neither the Bank of Canada nor the minister of finance will appoint members to the board.
To ensure further that the seven independent members are independent, all nominees will be identified by a nominating committee of the board comprising a majority of independent members. Draft regulations have been released that elaborate further on the meaning of 'independence'. Notably, there is a three-year cooling-off period for individuals who were previously associated with the CPA or one of its members. There is also a three-year cooling-off period for individuals who have had contractual or business relationships with the CPA or one of its members if the nominating committee believes that the relationship could interfere with the director's independent judgement.
Clearly, the amendments are intended to change the voices at the board table as the deposit-taking institutions that comprise the membership of the CPA will no longer be in a majority position on the board. The changes also address the perception that the CPA was being run for the benefit of its members rather than a broader list of stakeholders, including Canadian businesses and consumers.
At the same time, the government attempted to mitigate some of the risks that may arise in a more liberal regulatory environment. The Payment Clearing and Settlement Act amendments expand the Bank of Canada's power to designate payment systems for regulation: in addition to the existing power to designate systems that pose "systemic risk", systems can now be designated if they pose "payments system risk". While 'systemic risk' is defined in terms of the potential for the disruption or failure of a system to transmit financial problems through the system, 'payments system risk' is defined as arising where the failure or disruption of a system would impair the ability of individuals or businesses to make payments or result in a general loss of confidence in the overall payments system. Essentially, this expanded concept of risk gives the government (with the assistance of the Bank of Canada) much greater control over the development of unregulated payment systems.
There are likely to be interesting times ahead. Much has been written about the interest that technology companies and other innovators have expressed in payments. For now, it appears that these innovators are content to develop technologies that run off existing payments systems. Only time will tell whether the existing payments structure will survive.
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