As we approach year-end, the federal government has introduced three items of significance to federally regulated financial institutions (FRFIs). Regulations on prepaid payment products and anti-spam have been finalized and a consultation process has commenced in an effort to develop a consumer code for financial services provided by FRFIs.
In this bulletin, we discuss the new Prepaid Payment Products Regulations and the consultation process for the consumer code.
FEDERAL PREPAID CARD REGULATIONS FINALIZED
On December 3, 2013, the final version of the Prepaid Payment Products Regulations (the Regulations) governing prepaid products issued by FRFIs was announced. An earlier version of the Regulations was released for comment in October 2012, and the government has made some important changes to the original draft, based on stakeholder input. The new Regulations were published in the Canada Gazette on December 4, 2013 and will become effective on May 1, 2014.
The Regulations provide a federal framework for prepaid payment products that are issued by FRFIs (defined in the Regulations as "institutions"). Similar to existing provincial legislation, the Regulations impose disclosure requirements, restrict the application of maintenance fees and prohibit the expiry of prepaid funds.
What is covered: The Regulations will apply to a "prepaid payment product", which is defined as "a payment card, whether physical or electronic, that is – or can be – loaded with funds and that can be used by the card holder to make withdrawals or purchase goods or services". It is interesting that, notwithstanding evolving technologies in the prepaid area such as barcodes, electronic serial numbers and mobile identification numbers, the Regulations still define a prepaid payment product with reference to a card. In this regard, in some ways, the Regulations are already outdated.
Disclosures prior to issuance: Before a prepaid payment product is issued, the issuing institution must disclose specified information in writing in any document prepared by the institution for the issuance of the prepaid payment product, including on the prepaid payment product's exterior packaging, if any. For electronic products, this will require institutions to consider the electronic document provisions of the federal legislation and work in the appropriate consents to electronic disclosures as part of the issuance process.
The same information must be provided to any person who applies for a prepaid payment product. Such disclosure may be oral if an application for the prepaid payment product is made by telephone.
Information box: The fees payable in respect of a prepaid payment product must be presented in an information box displayed prominently on any exterior packaging or other documentation prepared by the institution for the issuance of the prepaid payment product. Unlike the requirements for credit cards, there is no specific format or font sizing requirement for the information box, although, as with all of the disclosure requirements, the required information must be made in language and presented in a manner that is clear, simple and not misleading. The lack of font size and format requirements is of considerable importance as it will allow for institutions to design information boxes that will be functional and compliant in the context of mobile apps.
Disclosures upon issuance: The Regulations provide that, for prepaid payment products issued to individuals, the issuing institution must, on issuance of the prepaid payment product, disclose specified information in writing. The same disclosures must be made on issuance of prepaid payment products to holders other than individuals, but there is no "in writing" requirement.
Disclosures on the product: The Regulations also require specific disclosures on the prepaid payment product. If the prepaid payment product is electronic, these "on-card" disclosures must be disclosed to the product holder electronically upon the product holder's request.
No expiry of funds: Funds loaded on the prepaid payment product cannot expire, except if the prepaid payment product is a promotional prepaid payment product (which is defined as a prepaid payment product that is purchased by an entity and distributed as part of a promotional, loyalty or reward program). However, the prepaid payment product itself (and not the right to use the funds) may have an expiry date. Institutions will need to ensure that they set up a process where, upon expiry of the prepaid payment product, a product holder will be able to receive a replacement prepaid payment product or otherwise have access to any remaining funds.
Restrictions on maintenance fees: The Regulations prohibit maintenance fees on prepaid payment products for at least one year after the prepaid payment product has been activated. The use of the term "activated" as opposed to "issued" requires some consideration in respect of cards that may be purchased but not yet activated. It is also important to note that this prohibition applies in respect of "prepaid product holders", even if the prepaid product holder is an entity.
There are two important exceptions to the maintenance fee prohibition. First, the restriction does not apply in respect of promotional products, as previously defined. Second, the restriction does not apply in respect of reloadable prepaid payment products, provided that the product holder has given their express consent to the imposition of the fee. This second exception is a significant change from the 2012 draft version of the Regulations, which did not distinguish between single-use and reloadable prepaid payment products. As the government's Regulatory Impact Analysis Statement explains, consumer choice would be diminished if the restriction on maintenance fees applied to reloadable products, since such products are personalized and are intended for frequent usage. Therefore, consumers may prefer to pay a flat monthly maintenance fee, similar to a chequing account, rather than pay per-transaction fees for using the reloadable prepaid payment product.
The issue of obtaining "express consent" to the imposition of fees may prove challenging in the context of prepaid payment products purchased on a face-to-face basis. However, given that reloadable cards generally require some type of interaction between the institution and the product holder for "know your customer" purposes, that interface may provide an opportunity to obtain "express consent" and may be easily integrated into an institution's current processes.
There are no restrictions in the Regulations on fees other than maintenance fees, and as such, use, currency conversion, and other types of service fees are permitted under the Regulations.
No new fees or increases without notice: One of the more troubling provisions of the Regulations is the restriction on increasing existing fees or imposing new fees on prepaid payment products issued to individuals. In particular, an institution may not impose new fees or increase existing fees unless the institution sends a 30-day prior notice to the most recent address of the product holder and displays the notice on its website for at least 60 days prior to the effective day of the new or increased fee.
The Regulations clarify that the new fee or the existing fee increase cannot be effected unless (1) the product holder has provided to the institution his or her name and mailing or email address, and (2) the product holder has been given opportunity to modify the address provided.
Significantly, the notice requirement is in respect of the product holder and not of the purchaser of the product. Accordingly, institutions that wish to have flexibility in imposing new fees or increase existing fees will need to establish systems that enable them to obtain information on the ultimate holder of the prepaid payment product. This may pose interesting challenges from an implementation perspective and most certainly where prepaid payment products are given as gifts or for promotional purposes.
No overdraft or interest charges without consent: Institutions may not charge overdraft fees or interest without the express consent of the product holder. Given the Financial Consumer Agency of Canada 's (FCAC) interpretation of "express consent" for the purposes of other regulations, we expect that the use of the product will not constitute express consent under the Regulations.
Coming into force: The Regulations come into force on May 1, 2014. However, the Regulations do not grandfather or address any prepaid payment products that are in circulation prior to the May 1, 2014 timeline. This will likely prove challenging for institutions whose general cards are in circulation at a large number of retailers.
CONSULTATION PROCESS FOR A NEW CONSUMER CODE
On December 3, 2013, the Minister of State (Finance), the Minister of State (Small Business and Tourism, and Agriculture) and the Commissioner of the FCAC announced the start of a 12-week public consultation process for developing a new and comprehensive financial consumer code for institutions. The concept of a financial consumer code was first announced in the federal government's Economic Action Plan 2013, published on March 21, 2013. The newly released Consultation Paper seeks input from the industry and the public at large on new approaches to financial consumer protection regulation in Canada, which, if implemented, will significantly alter the regulatory landscape for institutions. The Consultation Paper is a concepts-based policy document and does not propose specific legislative amendments at this stage. The comment period ends on February 28, 2013.
Three main topics are canvassed in the Consultation Paper: a principles-based approach to market conduct regulation, enhancements to the existing regulatory framework (including the possible introduction of a general duty of fairness that institutions will owe to their customers), and stakeholder engagement in financial consumer protection issues. These topics are discussed in more detail below.
Principles-Based Regulation: Drawing on the G20 High-Level Principles on Financial Consumer Protection, the federal government is seeking consultations on the merits of adopting standards or principles that would underpin the financial consumer protection regulations. The principles would set general expectations for institutions for complying with the legislation and would offer a degree of flexibility in implementation of the legislative requirements. The principles would be supplemented by prescriptive rules and guidelines that would set out more detailed requirements to allow an objective assessment of whether the principles are being met. In this context, the government seeks comments on the following approaches to principles-based regulation:
- Financial institution stewardship of the consumer's interest: Institutions could be required to consider the needs of, and impacts on, the consumer when developing, marketing and delivering a financial product or service. This would require institutions to have policies in place to ensure that employees are sufficiently trained and have access to adequate resources to address consumer needs.
- New disclosures: Institutions could be required to provide information on the benefits, risks and features associated with the offered financial product or service, which goes beyond disclosing the associated charges and borrowing costs.
- Responsible business conduct: Institutions could have a positive obligation to develop financial products and services and adopt practices that are in the interests of consumers, while ensuring that consumers are free to exercise their choice based on a competitive marketplace.
- Access to financial services and adequate redress mechanisms: These concepts are already the focus of financial consumer protection regulation for institutions and could be further enhanced in the consumer code.
Based on the foregoing, the Consultation Paper seeks comments on what should be included in the set of principles that would underlie the regulatory framework in the consumer code and what elements should be set out for each principle to ensure that compliance with the principles are measurable and meaningful.
Possible Enhancements to the Existing Framework: The Consultation Paper is also seeking comments on specific possible enhancements to the existing regulatory framework in the following areas:
- Responsibility of financial institutions to consumers: Based on international experience, the government is considering the merits of introducing a broad standard of fairness for how financial institutions are to treat consumers. Aimed at protecting consumers against mis-selling, a broad duty of fairness could require institutions to know their customer and conduct an assessment of whether certain financial products or services are suitable for the consumer (the Ireland model). Institutions could also be required to make an assessment of whether a credit contract is suitable for the consumer (the Australian model). In addition, regulators, such as the FCAC, could be granted statutory powers to intervene and prohibit or set limits on the design or marketing of certain risky or complex financial products or services (the U.K. model).
- New supervisory powers: The government is considering whether the FCAC should have authority to direct institutions to compensate consumers for contraventions of legislative or regulatory requirements. This could provide a basis for early intervention and an alternative to class action suits.
- Addressing the needs of seniors and vulnerable Canadians: The government is also asking for ways to address the challenges for seniors and other vulnerable groups to accessing financial products and services and making sound financial decisions.
- Disclosures: The government is seeking comments on the types of disclosures that would enable consumers to make informed financial decisions, in addition to the disclosures currently required.
- Access to financial services: The government is asking for examples where access to financial services is difficult or constrained and how these situations could be addressed in the consumer code.
- Innovation: The government is seeking comments on the approach to ensuring that the financial consumer protection framework remains technology-neutral so that consumer protection continues to apply, notwithstanding changes in technology.
- Comprehensiveness: The government is also seeking views on any other elements that could be considered in order to achieve the objective of a comprehensive consumer code.
Engagement: As part of the consultation process, the federal government is considering ways to enhance the effectiveness of stakeholder engagement in financial consumer protection issues. In particular, the government sees the use of an advisory group as a potential approach to facilitate ongoing collaboration between the public and private sectors, including consumer groups.
The consultation process is a key opportunity for institutions to have their input in the policy design of the new consumer code, which may usher in significant changes to financial consumer protection in Canada. Institutions will be considering the consultation paper in detail, but we note that some key issues to consider include:
- Who would be entitled to the protections offered by the new consumer code? As it stands, there are numerous "consumer provisions" that are not limited to business with individuals, but apply to all customers.
- Should there be exceptions to the application of the "consumer provisions" and the new consumer code for sophisticated individuals?
- Would the new consumer code "replace the currently dispersed mix of legislation and dozens of regulations as stated in the Economic Action Plan 2013 or add a principles-based layer to the already complex regulatory framework?
- Would the FCAC be required to develop and implement a rulings process pursuant to which institutions could obtain certainty regarding the compliance of product proposals? This could be particularly important under a principles-based system, which allows greater regulatory discretion in the interpretation of what is compliant.
The federal government will provide a summary of views gained from the Consultation Paper in summer 2014 and input from the consultation process will be used in developing consumer protection policies. No timeline is set for releasing a draft of the consumer code.
Comments on the Consultation Paper can be submitted to the Department of Finance at firstname.lastname@example.org or to the address below. The closing date for comments is February 28, 2014.
Financial Sector Policy BranchDepartment of Finance 140 O'Connor StreetOttawa, OntarioK1A 0G5Facsimile: 613-943-1334