On July 7, 2017, the Department of Finance Canada (the Department) proposed a new federal oversight framework for retail payment systems (the Oversight Framework) in a consultation paper titled, “A New Retail Payments Oversight Framework”. The Department is accepting comments on the proposed framework until October 6, 2017.
Purpose of the Oversight Framework
Given the rapid pace of innovation in the retail payment space, the government believes that a new oversight framework is required to ensure that the retail payments ecosystem is reliable, safe and conducive to the development of faster, cheaper and more convenient methods of payment.
In particular, the Department is motivated by the need to protect end users from various risks that the Department has identified in the current fragmented regulatory environment where payment service providers (PSPs) are subject to uneven oversight. These risks include operational risks, financial risks, market conduct risks, anti-money laundering (AML) risks, and efficiency risks.
Scope of the Oversight Framework
In order to protect end users, the Department has adopted a functional approach to retail payments oversight. The proposed regulatory regime would apply to a PSP that provides one of the following five core payment functions in the context of an electronic fund transfer (EFT) ordered by an end user:
- Provision and maintenance of a payment account: Provides and maintains an account held in the name of an end user(s) for the purpose of making EFTs;
- Payment initiation: Enables the initiation of a payment at the request of an end user;
- Authorization and transmission: Provides services to approve a transaction and/or enables the transmission of payment messages;
- Holding of funds: Enables end users to hold funds in an account held with a PSP until it is withdrawn by the end user or transferred to a third party through an EFT; and
- Clearing and settlement: Enables the process of exchanging and reconciling the payment items (clearing) that result in the transfer of funds and/or adjustment of financial positions (settlement)
The proposed Oversight Framework would cover transactions, such as credit and debit card transactions, online payments, pay deposits, pre-authorized payments and peer-to-peer money transfers. Accordingly, various financial technology companies and new entrants in the retail payments ecosystem that were previously not subject to federal regulatory oversight would likely be captured by the new framework.
However, the Department has proposed excluding certain types of transactions that pose a limited risk to end users, including (i) cash-only transactions; (ii) closed-loop card transactions (e.g., store cards); (iii) ATM transactions; and (iv) the clearing and settlement of transactions made through systems designated under the Payment Clearing and Settlement Act. At this time, the Oversight Framework would also only apply to fiat currencies (legal tender). The Department will continue to monitor the use of virtual currencies in retail payments to determine if adjustments to the regulatory framework are required.
Proposed measures and requirements
The Department is proposing to impose the following measures on PSPs:
- End user fund safeguarding: Impose fund safeguarding requirements on PSPs;
- Operational standards: Require PSPs to establish an operational risk-management framework to identify, monitor and manage operational risks;
- Disclosures: Require PSPs to provide end users with information on the key characteristics of the service or product (e.g., fees, functions, limitations, security guidelines, etc.) in a clear, timely and accessible manner;
- Dispute resolution: Require PSPs to implement a mechanism to handle consumer complaints that meets certain requirements;
- Liability: Require PSPs to refund end users for losses resulting from errors or unauthorized transactions;
- Registration: Require PSPs to register with the designated federal retail payments regulator; and
- Personal information: Require PSPs to comply with relevant privacy legislation e.g., PIPEDA.
The proposed regulatory measures seek to ensure that end users are provided with sufficient information to make informed choices, that end users’ funds and personal information are protected, and that end users have effective redress mechanisms.
In order to promote innovation, competition and market entry, these measures would be applied commensurate to the risk posed by each PSP. This would be accomplished through three mechanisms:
- Principles-based requirements;
- The tiering of measures; and
- The recognition of equivalent requirements under other legislative frameworks.
Next steps - consultation
As noted above, the Department is accepting comments on the proposed Oversight Framework until October 6, 2017. The consultation process is expected to be comprehensive with multiple opportunities for comment.