In the past few years, the structure and operation of Canada’s retail payment systems have rapidly evolved in the face of technological advances and emerging services. This evolution has led to significant changes to the Canadian regulatory landscape, which have focused on consumer protection and merchant fairness. This bulletin summarizes the key regulatory developments of 2010, highlighting new elements that payment card network operators, acquirers and issuers will face as Canada’s payment systems continue to develop.
AMENDMENTS TO THE COST OF BORROWING REGULATIONS AND NEW CREDIT BUSINESS PRACTICES REGULATIONS
Many of the amendments to the Cost of Borrowing Regulations that came into force in 2010 were intended to make it easier for Canadian consumers to understand the terms and conditions of credit card agreements. The accompanying new Credit Business Practices Regulations that also came into force in 2010 add protection for consumers by requiring issuers to implement mandatory interest-free grace periods on new purchases, allocate payments in a prescribed manner, refrain from charging over-the-limit fees, obtain express consent prior to credit increases and restrict certain debt collection practices.
CODE OF CONDUCT FOR THE CREDIT AND DEBIT CARD INDUSTRY IN CANADA (THE CODE)
The final form of the Code, which applies to credit and debit card networks and their participants, was released on May 18, 2010. While the Code is technically voluntary, it has been adopted by, and incorporated into the contracts, governing rules and regulations of all payment card networks, major credit and debit card issuers and payment processors operating in Canada. The Code was designed to ensure that merchants are fully aware of the costs associated with accepting credit and debit card payments, provide merchants with increased pricing flexibility to encourage consumers to choose the lowest-cost payment option, and allow merchants to freely choose which payment options they will accept.
The Code requires payment card networks to ensure that merchant-acquirer contracts and monthly statements are sufficiently detailed and comprehensible, post interchange rates on their websites and provide specified notice of rate and fee changes. The Code gives merchants the right to terminate contracts without penalty following notice of a (non pre-determined) fee increase, provide differential discounts for various payment methods/card networks, accept only debit or credit payments from a single network, and refuse to accept new products or services without consent. It is notable that while other countries have opted to regulate and cap interchange fees, the Canadian federal government has chosen instead to empower merchants with the right to choose to terminate contracts where interchange or other fees are increasing in a manner not previously agreed upon.
Finally, the Code prohibits having credit and debit payment functions on the same card and having competing domestic applications from different networks on the same debit card. It also requires co-badged debit cards to be equally branded, and places restrictions on the issuance of premium credit and debit cards.
PAYMENT CARDS NETWORK ACT (PCNA) AND RELATED AMENDMENTS TO FINANCIAL CONSUMER AGENCY OF CANADA ACT (FCAC ACT)
The PCNA, which gives the Minister of Finance the power to regulate the market conduct of payment card network operators, was assented to on July 12, 2010 and is currently in force (save for the regulation and enforcement provisions). Although the regulations have not yet been made, they will likely mandate the policy elements set out in the Code. Notably, the Act gives the Minister the power to exempt a payment card network operator from any of the provisions of the PCNA or regulations. The related amendments to the FCAC Act provide the FCAC with extensive powers to supervise payment card network operators and monitor their compliance with the PCNA and the Code. They also empower the FCAC to penalize payment card network operators with fines of up to $200,000 for designated violations of the PCNA and agreements between the FCAC and payment networks in connection with the Code.
TASK FORCE FOR PAYMENTS SYSTEM REVIEW
On June 18, 2010, the Department of Finance launched a new Task Force for the Payments System Review (the Task Force) to undertake a comprehensive review of Canada’s payments system. The mandate of the Task Force is to identify public policy objectives to be pursued in the operation and regulation of the payments system; identify and assess the regulatory and institutional structures best suited to achieving these objectives; assess and report on the safety and soundness of the Canadian payments system; assess the competitive landscape of the domestic payments system; assess the degree of innovation in the domestic payments system and report on innovation challenges and opportunities; and assess and report on whether consumers and merchants are well served by the domestic payments system. The Task Force’s first call for submissions from the public came to a close in September 2010, and there will be another opportunity for submissions in early 2011.
The Task Force’s final report to the Minister of Finance with recommendations is expected by the end of 2011.
VISA AND MASTERCARD’S ANTI-COMPETITIVE RULES
On December 15, 2010, the Competition Bureau filed an application with the Competition Tribunal to strike down what the Bureau argues are restrictive and anti-competitive rules that Visa and MasterCard impose on merchants who accept their credit cards. The challenged rules include those that prevent merchants from providing differential treatment to customers who present different cards, force merchants to “honour all cards,” and prohibit merchants from applying a surcharge to high cost cards. In its application, the Bureau argues that these rules influence upward (or discourage the reduction of) prices paid by merchants for credit card network services within Canada. On January 31, 2011, Visa and MasterCard both filed responses to the Competition Bureau’s application arguing that the challenged rules are actually pro-consumer and pro-competitive.