On February 13, 2013, the Financial Consumer Agency of Canada (FCAC) issued the Commissioner’s Guidance to clarify three issues related to the Code of Conduct for the Credit and Debit Card Industry in Canada:
- inappropriate sales and business practices;
- disclosure to merchants in multiple provider agreements; and
- multiple contract cancellation penalties, costs or fees.
The effect of the Guidance will be to require additional disclosure, including information box disclosure by Payment Card Network Operators (PCNOs) and participants; to require some participants to amend merchant-acquirer agreements; and to minimize some of the impediments to the termination by merchants of merchant-acquirer agreements and related service contracts.
The Guidance applies to PCNOs that operate in Canada and to their participants, including acquirers, independent sales organizations (ISOs) and other service providers (including providers of processing services and terminal leasing). PCNOs have 90 days beginning on February 13, 2013 to implement the Guidance into their operating rules; participants have until November 12, 2013 to incorporate the Guidance into their documents and processes.
Inappropriate Sales and Business Practices
In response to complaints about sales practices that do not promote increased transparency, FCAC has directed PCNOs to work with their participants to address and end non-transparent sales or business practices such as
- failing to provide merchants with complete copies of the merchant-acquirer agreement or terms incorporated therein by reference in a timely manner (e.g., not providing a copy of applicable transaction and processing fees and rates at the time the merchant enters into the agreement);
- unilaterally altering a merchant-acquirer agreement governing payment card transaction processing without providing notice (e.g., 30 days or more before the changes);
- sales representatives advertising and promising rates and fees that participants are unable to honour;
- inconsistencies between the information disclosed in the merchant-acquirer agreement and the merchant’s monthly statements (i.e., different terminology used to describe fees and rates or different fees/rates in agreement and statements); and
- misrepresenting contractual terms.
The Guidance stresses the need for cooperation between PCNOs and participants to resolve such issues, and to provide adequate remedies – including the amendment or rescission of contracts – within an appropriate time frame.
Disclosure to Merchants in Multiple Provider Agreements
FCAC has noted that it is often difficult for merchants to make reasonable and informed decisions about the payment card network services because of confusion regarding multiple service provider agreements. In part, this confusion results from the many different but interconnected payment services that merchants require.
The Guidance directs PCNOs to work with their participants to provide adequate and easily understandable disclosure to merchants before merchants enter into multiple service provider agreements or agreements where there is a business connection between the participant and ISO/service providers. The term "business connection" is quite broad and includes contractual arrangements between the parties, affiliate relationships, and where financial incentives and/or payments can be confirmed through the PCNOs and their participants.
More specifically, the Guidance requires that PCNOs and participants work together to provide the following information in a consolidated fashion:
- the name, coordinates, contact information of each service provider and the nature of the services being provided by each;
- the effective date of each agreement;
- information on the expiry and renewal of each agreement (e.g., whether the contract automatically renews if not cancelled before a specific date);
- detailed information on any applicable fees and rates for each participant;
- information on how statements will be provided to merchants (e.g., on paper or online);
- the cancellation terms of each agreement entered into with the merchant, including specific information on any cancellation fees that could apply;
- if point-of-sale services are offered to a merchant, general information on buying, leasing or renting options of point-of-sale hardware to enable merchants to make informed decisions; and
- the complaint-handling process for each participant, including how a merchant can contact the complaints department of each participant.
FCAC has suggested that this disclosure should appear on the cover page of the agreements to which they apply, and it has strongly encouraged the adoption of the model “information summary box” that it provides as an appendix to the Guidance (available here).
Multiple Contract Cancellation Penalties, Costs or Fees
The Guidance extends Element 3 of the Code beyond merchant-acquirer agreements to related service contracts as well. If there is a business connection between the participant and the service providers, the Guidance requires services to be considered a single-service package.
This extension was made in response to situations in which merchants have attempted to terminate a merchant-acquirer agreement only to discover that when they had first entered into that agreement, they had also unwittingly entered into related service contracts that each contained different cancellation regimes (triggering penalties, costs or fees).
PCNOs and participants are directed by the Guidance to work together to ensure that merchants will be permitted to cancel or terminate the merchant-acquirer agreement and all related service contracts without penalty if there has been notification of any new or increased fees by any participant or related service provider. This will present a challenge for participants and service providers with a business connection to conduct their respective businesses in a manner that does not provide merchants with the right to cancel all applicable service contracts.
Despite the broad meaning of "business connection," the Guidance does clarify that if a merchant, on its own initiative, enters into separate contractual arrangements with unrelated service providers, the agreements with the separate service providers should be treated as separate agreements. Any such agreements would not be covered by Element 3 of the Code and, therefore, the merchant could be subject to a cancellation penalty if it chooses to cancel the contract.
As PCNOs bring new ultra-premium cards onto the market, it is highly likely that interchange fees will be increased. Given the "honour-all-cards" rule (Rule 5.8) of the Code, merchants choosing to accept credit cards of a particular network appear to have few options for avoiding any higher interchange fees for the new cards; this is, however, subject to the outcome of Competition Bureau decisions on whether merchants should have the right to refuse acceptance of, or to charge fees or provide discounts for, specific categories of cards within a network. In this landscape, there is value in PCNOs and their participants being very transparent about fees and about merchants’ ability to cancel their contracts in the face of fee increases.
For further details, please see Commissioner’s Guidance and the Code of Conduct for the Credit and Debit Card Industry in Canada.