In June 2008, the Canadian Payments Association ("CPA") revised its rules for pre-authorized payment and debit programs. A transitional grace period written into the rules will soon end. The amended rules relate to pre-authorized debit programs entered February 28, 2010 or later. Programs entered prior to that date, under the former rules, will be "grandfathered." These changes will have a direct impact on all companies and financial institutions that use these methods of payment from their customers.
Pre-authorized payment programs – or pre-authorized debit programs – have been used by businesses for many years, and the banks that process and collect the payments are subject to rules governing their use.
The rules are relevant when a customer (the "payor") authorizes a business to withdraw from the customer’s bank account the amount needed to satisfy a regular or sporadic payment obligation owed for goods or services supplied by the business (the "payee"). The payment amount may be fixed (such as with an instalment plan) or variable (such as with an account that varies with the value of services used). In the US, similar purposes are addressed by ACH payments.
In practice, the business that is to be paid (payee) obtains its customer’s bank account particulars and authorization to debit the customer’s account. The payee (business) provides its banker with the payor’s (customer’s) bank account particulars, confirms that the customer has authorized the payment and asks the bank to collect the payment from the payor’s bank. The message sent by the payee’s bank to the payor’s bank is an electronic payment item (called a pre-authorized debit, or "PAD") that is treated as an order to pay (somewhat analogous to a cheque). It is cleared and settled between the banks (and other member financial institutions) following the rules of the CPA.
Under the rules, two agreements are used:
- A letter of undertaking, given by the payee business to its bank – The payee’s bank owes obligations to CPA members, including the payor’s bank, and wants to obligate the payee to use documentation and processes that meet the CPA requirements.
- An authorization agreement from the payor (the "Payor’s PAD Agreement") – The payor authorizes the withdrawal from its bank account in order to make the required payment, by authorizing the payee to initiate the payment while satisfying the payor’s account agreement with its own bank. The Payor PAD Agreement may form part of a purchase or lease agreement, with significant terms found in a pre-authorized payment clause, or it may be set out in a separate agreement.
The CPA’s amendments of the PAD rules simplify the documentation requirements greatly. There has been a lengthy transition period for banks and their payee customers to adopt documentation practices that meet the requirements. The grace period will end February 28, 2010.
Among the changes affecting Payor PAD Agreements:
- Requirements for electronically-formed Payor PAD Agreements have been included. These requirements apply to any such agreement entered by telephone, internet, email or other electronic means, and require an additional step to confirm the authorization before a PAD may be initiated. A Payor PAD Agreement that is in paper form (or printed off a computer) and signed by the payor is not an electronically-formed agreement even if it is then sent to the payee by fax or as a scanned email attachment. (Note that, as before, the payee must retain the authorization, and this may pose additional operational challenges for a business that wishes to rely on agreements formed on a telephone call.)
- The content requirements are simplified, by distinguishing mandatory content and supplementary content that is not mandatory. The mandatory elements are:
- a clear authorization for the payee, through its financial institution, to debit the account;
- a clear statement of the payment amount, frequency and timing;
- a statement whether the PAD is with respect to business, personal or funds transfer purposes;
- a statement that the payor may cancel the authorization at any time, and no more than 30 days prior notice may be required;
- Information about where the payor may obtain a sample cancellation form or further information;
- contact information for the payor’s inquiries; and
- a prescribed statement that all payments are refundable if they are in error, and that advises where the payor may obtain information about recourse rights.
Payor PAD Agreements entered before February 28, 2010 do not need to be updated or revised. However, a Payor PAD Agreement – or pre-authorized payment plan – entered February 28, 2010 or later will be subject to the changed requirements. Businesses should be aware that a letter of undertaking previously given to its banker may require the business to bring its form of Payor PAD Agreement into compliance going forward.
We recommend that businesses review their processes and their form of authorizing agreement in light of the amended requirements, if they have not already done so.