Following a comprehensive review in late 2007 of the current framework for processing “pre-authorized debits” (PADs) through the Canadian clearing system, the Canadian Payments Association (CPA) implemented new requirements for PADs in June of this year. The CPA is responsible for developing and implementing rules that apply to the clearing and settlement of payments between its member financial institutions. Revised “Rule H1” provides for a more flexible framework for implementing electronic (i.e., over the Internet and telephone) PADs and introduces mandatory elements for Payor’s PAD Agreements that authorize merchants to debit customers’ accounts. Although Rule H1 applies only to CPA member financial institutions (i.e., most Canadian banks), it will apply to a foreign merchant that intends to draw on the account of a Canadian customer held at a CPA member financial institution.
A PAD is defined under Rule H1 as a pre-authorized debit payment item issued by a payee (i.e., a merchant) that is drawn on an account of a payor (i.e., a customer) held by a processing institution. PADs may be for fixed or variable amounts and may recur at set or sporadic intervals. Such payments are only permitted for clearing by the CPA under Rule H1 if supported by an underlying “Payor’s PAD Agreement” with the merchant’s customer as well as a signed “Payee Letter of Undertaking” with the merchant’s financial institution. A Payor’s PAD Agreement provides the merchant a continuing but revocable authority to issue PADs against the customer’s account. A Payee Letter of Undertaking is a written agreement between a merchant and its member financial institution outlining the merchant’s responsibilities and agreement to comply with Rule H1. A sporadic PAD must have the necessary authorization for each and every PAD transaction.
Important Changes to Rule H1
The revised Rule H1 introduces a number of amendments, a summary of which can be obtained on the CPA website. Some of the more substantive changes to Rule H1 include new requirements for payee name changes, assignments and transfers of PADs. The new rules also clarify that re-presentment of an NSF (or a FNC) PAD must be for the same amount as the original PAD. This means that no late fee or NSF charge can be added to the re-presented NSF PAD and that multiple NSF PADs may not be combined as a single PAD for re-presentment.
Further, most PADs are now required to be in electronic format. Specifically, all PADs initiated by non-CPA members were required to be in electronic format by September 2, 2008. All PAD returns must also be electronic as of October 20, 2008. Thereafter, “Returned Items Vouchers” will be eliminated. Additional mandatory elements for Payee Letters of Undertaking have been introduced by Rule H1. More importantly, revised Rule H1 introduces mandatory elements for Payor’s PAD Agreements. It also establishes a more flexible framework to accommodate remotely authorized Payor’s PAD Agreements that mirror equivalent PAD frameworks in several other countries, including the U.S. These provisions are more closely described below.
Mandatory Requirements for Payor’s PAD Agreements
The mandatory requirements for Payor’s PAD Agreements are set out in Appendix II of the revised Rule H1. These requirements apply whether the Payor’s PAD Agreement is established online, over the telephone or in person. In addition, sample Payor’s PAD Agreements have been provided as part of the new Rule. Some of the mandatory elements include the following:
- A statement giving the merchant the authority to debit the customer’s account;
- The amount (i.e., whether fixed or variable) and timing (e.g., weekly, bi-weekly, monthly) of the PAD or whether each PAD is to be triggered by a specified act, event or other criteria;
- The date of the agreement and, for paper agreements, the customer’s signature;
- A statement indicating that the customer may cancel the Payor’s PAD Agreement at any time, subject to a notice period that the merchant is required to specify and that must not exceed 30 days; and
- A prescribed standard statement about the recourse available to the customer if any debit does not comply with the agreement.
Rule H1 also provides for non-mandatory supplemental elements that may appear in a Payor’s PAD Agreement e.g., a clause waiving or reducing the standard pre-notification periods for PADs to be issued at set intervals.
Revised Rule H1 enables PADs to be created online and over the telephone by introducing a more flexible standard of authorization and authentication. Under the previous rule, an electronic Payor’s PAD Agreement required authentication with a Secure Electronic Signature (SES). Based on federal interpretations of what constituted a valid SES, many organizations complained that this standard was rigid and impractical to implement for electronic PADs. Under the revised Rule H1, merchants are now required to employ a “commercially reasonable” security process when verifying the customer’s identity and personal and/or banking information when establishing a Payor’s PAD Agreement electronically. Rule H1 provides some guidance on commercially reasonable methods of verification, including biometric methods such as voice recognition technology.
Other requirements for electronic Payor’s PAD Agreements include pre-authorization from the merchant’s CPA member financial institution to initiate electronic PADs and approval of its proposed electronic forms and/or telephone scripts and processes; submission of a written confirmation to customers at least 15 days (or less, if mutually agreed on) prior to initiating the first PAD; and record retention requirements for a customer’s authorization. Failure to provide the required written confirmation under the prescribed timelines has been added to Rule H1 as another basis on which a customer could dispute a PAD. Reasons, procedures and timelines for submitting a reimbursement claim remain the same.
All new Payor’s PAD Agreements must comply with the mandatory requirements by February 28, 2010. Any Payor’s PAD Agreements in effect before then will be grandfathered and remain in effect; however, if a merchant wishes to modify such agreements after February 28, 2010 it must ensure that the modified Agreement meets the requirements of revised Rule H1. Rule H1 also requires that merchants have their Payor’s PAD Agreements pre-approved by their CPA member financial institutions.
The revised Rule H1 and additional information on implementing PADs can be found on the CPA website at www.cdnpay.ca.