The Canadian federal government has announced proposed Prepaid Payment Products Regulations (the “Regulations”) in connection with its mandate to protect consumers when using payment products and improving consumer awareness on these forms of payment. The Canadian federal government has had the power and statutory opportunity to regulate prepaid cards for some time, but, until now, was silent on such products. During the development of the Regulations, the Department of Finance consulted with some key stakeholders. However, the Regulations will likely come as a surprise to some industry participants, but what is even more surprising, in our view, is what is not covered or clarified by the Regulations.
- Defining the scope of application – As drafted, the Regulations apply to “prepaid payment products” that are issued in Canada by any federally regulated financial institution (“FRFI”). The Regulations define prepaid payment products as meaning “a payment card, whether physical or electronic, that is – or can be – loaded with funds and that can be used by the card holder to make withdrawals or purchase goods or services.” However the term “payment card” continues to be undefined. The issue with the definition of “prepaid payment product” is that, as drafted, it may extend to products other than those than it appears was intended.
Currently, the term “pre-paid card” is most commonly used in the industry to refer to those payment card products under which there is no extension of credit, but rather which are pre-loaded with funds to allow purchasers to make purchases through a payment network, such as American Express, MasterCard or Visa. Typically, these cards are marketed as gift cards that can be used at any location where the applicable payment network is supported (including ATMs for the purposes of withdrawals if the card permits this). The Regulatory Impact Analysis Statement (the “Impact Statement”) accompanying the Regulations and other background materials released by the Department of Finance in connection with the Regulations are each written in a manner that focuses on these types of purchased products and on ensuring that the purchaser is fully informed of the terms, conditions, fees and limitations prior to the purchase.
However, as drafted these Regulations could also apply to the payment product that is commonly referred to as a “secured credit card”. Secured credit cards require the applicant to deposit a sum of money with the credit card issuer with a credit limit established that is based on such sum. These products also typically have service fees and other fees associated with them. It is unclear whether secured credit cards are intended to be included in or excluded from the Regulations as drafted. Is the deposit provided to the issuer “funds” that are “loaded” on such a card? Or, are these truly credit cards where credit is extended because of a deposit that is held by an issuer (either as security or with a right of set off or both)? In this connection, it is important to note that the Regulations are drafted in a manner that requires certain disclosure to be made in connection with a person applying to the FRFI for the product (in addition to disclosure required on any packaging or other pre-issuance documents), and interestingly, a specific provision is included regarding disclosure in the event a person is applying for such a product by telephone. Additional disclosure obligations are created upon issuance of the product. Accordingly, it would seem reasonable to conclude that the former disclosure obligations must be intended to include secured credit cards, since the pre-paid cards that are otherwise sold in various locations are not “applied for” by the purchaser. However, secured credit cards are not referenced in the Impact Statement or other background materials released by the Department of Finance, which we otherwise would have expected, since the consumers targeted for such cards are typically more vulnerable consumers for whom increased consumer protection may well be merited.
The Regulations do not carve-out prepaid payment products issued to natural persons for business purposes. In addition, Section 6(2) of the Regulations requires a FRFI, upon issuance of a prepaid payment product, to disclose certain information to persons that are not natural persons. Interestingly, under Section 8, certain fee increase prohibitions only apply to prepaid payment products issued to natural persons. Previously, regulations promulgated by Parliament have taken care to exclude in certain situations credit cards issued to and credit agreements with (i) natural persons for business purposes and (ii) non-natural persons. Accordingly, it is unclear why the federal government is taking a different approach under the Regulations and this is an area where commercial card issuers may wish to make comments to the Department of Finance requesting clarification or changes.
- Regulating the Practise – In our recent update entitled A Further Handicap or Levelling the Playing Field, we highlighted the proposed amendments to the Code of Conduct for the Credit and Debit Card Industry in Canada, which, once implemented, will expand such Code to mobile payments, and we commented therein on the need for any regulation of the payments industry to be applied equally such that all players would be operating under the same parameters. We echo these comments in connection with the Regulations as well, which only apply to FRFIs and would not apply to others operating in this space. However, as the Regulations are to be promulgated under legislation applicable only to FRFIs, any such expanded regulation applicable to other industry participants would have to be addressed under further voluntary codes of conduct or other applicable federal legislation, for example legislation applicable to payment networks. In addition, we note that the Canadian federal government’s continued approach to layer additional regulations on FRFIs is a marked departure from the Task Force for the Payments System Review’s call to overhaul the regulatory approach taken in the payments industry, as discussed in our update entitled Focus on Canada’s Payments System Heats Up, and instead implement a new legislative framework that is better able to regulate payments practises instead of focusing on the participant itself.
- Clarifying Provincial and Federal Responsibilities – In the Impact Statement, the Department of Finance states: “It is desirable and is in the national interest to provide for clear, comprehensive, exclusive, national standards applicable to banking products and banking services offered by banks. The Constitution confers on Parliament exclusive jurisdiction in relation to banking and the incorporation of banks. In this regard, the Bank Act constitutes the complete and exclusive charter applicable to each bank and its products and services.” [Emphasis added.] The Impact Statement further acknowledges the existing consumer protection measures that have been implemented stating: “Existing legislation, regulations and public commitments afford a framework of consumer protection for consumers of other payment products. However, many of these existing protections do not apply to prepaid payment products.” In light of the first statement, this second statement cannot be viewed as referring to provincial requirements and must be interpreted as referring to federal requirements.
However, provincial consumer protection legislation and regulations promulgated thereunder have recently focused on regulating certain features of gift cards. It is clear in some of the provincial acts and regulations that they do not apply to the prepaid payment products that are the subject of the Regulations. However, not all of the consumer protection legislation and regulation is clear in this regard, particularly where the definition of “gift card” is drafted broadly enough to capture prepaid cards. In light of certain recent developments in the courts, without an express exemption for FRFIs from such provincial legislation and regulation, it could be argued that both the federal and provincial legislation and regulation could apply to FRFIs. In our view, this would create an additional regulatory burden on FRFIs. Accordingly, before moving forward with the Regulations, it would be useful if the federal government were to engage in discussions with the appropriate legislatures to request appropriate measures are taken to clarify that FRFIs (and/or the prepaid payment products) are exempt from the provincial legislative and regulatory obligations in this regard.
Proposed Regulations for Prepaid Payment Products
To summarize the proposed Regulations, they would apply to all FRFIs and would require:
Certain disclosure to be provided on the exterior packaging, in writing or over the telephone to any person applying to the FRFI for the product before a prepaid payment product is issued, including:
- the name of the FRFI, a toll-free number to call for inquiries on the products terms and conditions, and restrictions on the use of the product imposed by the FRFI;
- all fees imposed by the FRFI, which, unless application is made over the telephone, must be presented in an information box and appear prominently on any exterior packaging or other document that the FRFI prepares;
- where applicable, a statement indicating that the funds located on the product are not insured by the Canadian Deposit Insurance Corporation; and
- a statement that the holder’s right to use the funds will expire (which is only permitted in the case of a promotional product) or that the funds will not expire.
Certain additional disclosure (further detailed in the Regulations) is to be provided upon issuance of the prepaid payment product:
- to a natural person (i.e. an individual or consumer) who is issued or becomes responsible for charges by accepting or using the product; and
- to a person other than a natural person (i.e. a business) that is issued or becomes responsible for charges by accepting or using the product.
- Certain information (further detailed in the Regulations) to be provided directly on the prepaid payment product or, where the product is electronic, by disclosing it electronically if the product holder makes such request.
- All disclosure to be made and presented in a manner that is clear, simple and not misleading.
The proposed Regulations would also limit certain business practices that could be detrimental to product holders. For example, the proposed Regulations prohibit the funds that are loaded on a prepaid payment product from expiring and prohibit maintenance or dormancy fees within the first year of activating the card, unless the product is a promotional product. In addition, where a product is issued to a consumer, advance notice of fee increases or new fees will be required. Finally, the proposed Regulations would prohibit overdraft fees and interest charges in respect of a prepaid payment product without the express consent of the product holder.
This announcement delivers on the federal government’s promise to take action and develop measures to enhance the consumer protection framework with respect to payment network-branded prepaid cards which it made in the Budget 2011. The proposed Regulations were made available in the Canada Gazette on October 26, 2012, for a 30-day comment period.