A bill has been introduced to the House of Commons that, if passed into law, will create a new regime that will directly regulate payment network operators and their commercial practices, impact card issuers and card acquirers, and affect any party involved in Canada's payments systems.
The Road to Regulation
Payment network operators and their commercial activities have been the subject of much discussion over the past year. It began with questions posed in parliamentary hearings conducted by the House of Commons and the Senate throughout 2009, in which Interac, MasterCard and Visa each had an opportunity to present evidence about their businesses and respond to questions from Members of Parliament. It continued with the new Credit Business Practices Regulations and the amendments to the Cost of Borrowing Regulations that were promulgated on September 30, 2009. Subsequent to this, the federal government proposed a Voluntary Code of Conduct (the "Proposed Code").1 The circulation for comment of this Proposed Code in November 2009 was a twist that surprised many industry insiders. Most recently, the Competition Bureau announced on February 12, 2009 that it would not support an application by Interac to vary the 1996 Consent Order that prevents Interac from restructuring into a for-profit entity. This announcement has been viewed by some as a blow to the ability of Interac to successfully compete against the debit products being launched by Visa and MasterCard. Now, the first reading of Bill C-9, which was introduced to the House of Commons by the Minister of Finance, Jim Flaherty, on March 29, 2010, provides a preview of what new federal government action may be just around the corner.
At a Glance: the Payment Card Networks Act (the "PCNA") and related amendments to the Financial Consumer Agency of Canada Act (the "FCAC Act")
As drafted the PCNA appears to be a framework that provides the Financial Consumer Agency of Canada (the "FCAC") with extensive powers to supervise payment network operators and provides the Governor in Council (i.e. federal Cabinet) with broad powers to make regulations "respecting payment card networks." The powers of regulation bestowed by the PCNA would open the door to the federal government to require payment network operators to abide by certain rules that it may prescribe from time to time.
The proposed PCNA provides insight into what the federal government's immediate concerns may be. Among other things:
- The proposed PCNA hints that regulations may be forthcoming that would require network operators to disclose interchange fees.
- The proposed PCNA would enable the federal government to expressly regulate the "Recommended Policy Elements" that were the subject of the Proposed Code.
- The proposed amendments to the FCAC Act reveal that voluntary codes will still play a role in this regime and that FCAC will monitor the implementation of voluntary codes of conduct adopted by payment card network operators and any related public commitments.
- The proposed amendments to the FCAC Act also provide the FCAC with the power to penalize payment card network operators with fines up to $200,000 for a designated violation of the PCNA.
The proposed PCNA would provide a framework that would enable the federal government to act on the specific recommendations by the Senate issued in their June 2009 report entitled "Transparency, Balance and Choice: Canada's Credit and Debit Card Systems." However, given the federal government's response to date, it appears that their regulatory goals do not necessarily parallel the Senate's suggested remediation. While the Senate has specifically called for action to regulate interchange fees, the proposed PCNA illustrates the federal government's preference to require disclosure of rates rather than outright regulation of interchange fees.
On the Horizon: Involuntary reaction or the latest development?
When the federal government published the Proposed Code in November 2009, they invited comment on the Code for the 60 days that followed. In light of the proposed amendments to the FCAC Act, it will be interesting to review the final form of the code, which was released on April 16, 2010, and surmise what comments the federal government received from industry stakeholders. We will send a separate alert shortly on the final form of the code.
The Competition Bureau's announcement in February that it would not support an application by Interac to vary the 1996 Consent Order may have also prompted the federal government to take steps to expressly regulate payment networks. Interac has suggested that if the restrictions contained in the 1996 Consent Order are not removed, it cannot remain competitive with Visa and MasterCard who are already active in the debit market without any similar restrictions. However, the Competition Bureau did not agree.
Interestingly, the proposed PCNA permits the Minister of Finance to exempt a payment card network operator from any of the provisions of the PCNA or the regulations. Some industry insiders think the ability of the Minister to grant such an exemption may be a mechanism to provide the Minister with the flexibility to address Interac's concerns and exempt Interac from certain requirements to which other payment card network operators would be subject.
Since these proposed amendments were included in the legislation to implement the 2010 Federal Budget there is little doubt that passage will occur in the coming months. We anticipate that as Bill C-9 proceeds through the parliamentary process more insight will become available as the effect of the Bill is considered and it is refined. BLG will continue to monitor these developments and alert our clients to further developments.