The Canadian government has announced the launch of a consultation on a comprehensive financial consumer code and the final publication in the Canada Gazette of Prepaid Payment Products Regulations increasing protection of consumers using prepaid cards.  Following publication of proposed Regulations on October 27, 2012, comments were received from a wide range of stakeholders representing financial institutions, payment network operators, consumer groups, and industry associations. These views were taken into consideration in the development of the final Regulations. Overall, stakeholders supported regulations to protect consumers of prepaid products. Comments recommended fine-tuning of the Regulations in order to achieve high standards of consumer protection and preserve consumer choice. The Regulations are expected to come into force on May 1, 2014 and apply to all federally regulated financial institutions that issue prepaid payment products.

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. Relatively new to the Canadian market are payment network–branded prepaid products (prepaid payment products) which are used to access funds that a customer has prepaid to a financial institution. The funds are accessed by the cardholder to make purchases or withdraw funds via a payment network such as American Express, MasterCard or Visa. While a credit product is a pay later product and a debit product is a pay now product, a prepaid product is a pay before product. Some prepaid payment products are available through financial institution branches; others, although they are issued by financial institutions, are sold at retail commercial outlets.

Existing Canadian federal and provincial laws, as well as Codes of Conduct, have provided a comprehensive framework of rules and protection in regards to many types of payment products, except prepaid payment products.  The new Regulations were issued in light of concerns regarding some features of prepaid payment products issued by federally-regulated financial institutions, such as the terms, conditions, fees and limitations associated with some products.

The new Regulations will require, among other rules, that fees for prepaid payment products, which allow consumers to make purchases or cash withdrawals using funds that have been pre-loaded onto a card, be disclosed to consumers in an information box displayed prominently on the product’s exterior packaging.

The Regulations will also require that other information be provided prior to issuing the card or payment product and in a manner that is clear, simple and not misleading. Technical changes were made to fine-tune some elements of the Regulations. These include changes that remove duplicative disclosure requirements when both the initial disclosure and additional disclosure documents are received simultaneously. Changes were also made to further clarify the type of product restrictions required to be disclosed, namely, those restrictions that could reasonably be expected to have an impact on a consumer’s decision to acquire a card.

In addition, the Regulations limit certain business practices that could be harmful to consumers. For example, they generally prohibit pre-loaded funds from expiring. They also prohibit federally regulated financial institutions from imposing dormancy fees or maintenance fees for one year on simple purchase products. Some stakeholders requested a clarification regarding the expiry of physical prepaid cards. While funds loaded onto a prepaid card cannot expire, this prohibition does not prevent a physical prepaid card from expiring for security purposes, as is the case with credit cards.

Other broader issues were raised that fall outside the scope of the Regulations. These include applicability of Canada Deposit Insurance Corporation insurance and applicability of the unclaimed balances provisions to prepaid products issued by federally-regulated financial institutions.

Canadians will have the ability to comment during the Consumer Code consultation over the next 12 weeks and provide feedback for roundtable discussions across Canada in 2014. The consultation will seek to establish high-level principles for a financial consumer protection framework leading to a Code that will streamline the existing and dispersed mix of legislation and regulations, and take into account the needs of vulnerable Canadians including seniors.

The Financial Consumer Agency of Canada (FCAC) is responsible for enforcement of the Regulations, and already administers the consumer provisions in the federal financial institutions statutes, using its existing compliance tools, including notices of violations, compliance agreements and administrative monetary penalties.  The Consumer Code consultation paper makes specific reference to the FCAC and asks what additional tools and authorities the FCAC may need in order to effectively carry out its supervisory role in a principles-based financial consumer protection environment.

The announcement came today from Ottawa by the Minister of Finance, Minister of Small Business and Tourism, and Agriculture and the Commissioner of FCAC. If you require assistance with analyzing the impact of these new Regulations on your business, or with submitting a response to the Consumer Code consultation, please contact any member of our Payment Solutions Practice Group.