On March 23, 2012, the Minister of Finance released the final report of the Task Force for the Payments System Review, titled Moving Canada into the Digital Age, together with four supporting policy papers and its last two discussion papers.1The report responded to the questions that the Minister posed to the Task Force on June 18, 2010. Interestingly, while the Minister "welcomed" the report, he did not indicate whether, or to what extent, it would be implemented. Rather, he indicated that the government would establish a senior level advisory committee made up of private and public stakeholders to continue the positive dialogue. This group would meet regularly with the Department of Finance to discuss emerging payment issues.
The Task Force gave the current payments system failing grades on most of the questions and proposed an ambitious overhaul of the payments industry in Canada. The Task force indicated that unless Canada develops a modern digital payments system, Canadians will be unable to fully engage in the digital economy of the 21st century, leading to a lower standard of living across the country and a loss in international competitiveness. We expect that these proposals will likely be controversial both for the existing regulated players and for the unregulated players in the industry.
In particular, the Task Force concluded that consumers and merchants were not being served well by the domestic payments system, and that there was a lack of innovation and insufficient competition in the industry. However, the Task Force was very positive on the safety and soundness of the system but concluded that these aspects were achieved at the expense of competition and lack of innovation, and that there were too many barriers to entry. The Task Force suggested that the reliability and stability of Canada’s banking system will mean little if Canada’s banks, governments and businesses are unable to conduct simple transactions swiftly and efficiently according to international standards. In fact, the report blamed the stagnation on the evolution of the industry on Canada’s major banks and all the key institutions whose interests are best served by keeping new entrants (that would provide the innovation) on the sidelines.
The Task Force also concluded that in the absence of a healthy competitive environment, government needed to create demand for a modern digital payments system. Such a system must put the needs of users first, protect the public interest and encourage all stakeholders to collaborate and innovate now and into the future. In particular, the Task Force called on the Canadian government to do the following:
- Implement electronic invoicing and payments for all government suppliers and benefit recipients. This would include all steps of the purchase-to-pay and the order-to-receive cycles: sending and receiving invoices; dispute handling; acceptance, payment and collection; reconciliation and archiving.
- Partner with the private sector to create a mobile ecosystem. The transformative power of a mobile ecosystem that combines payments, commerce and government services can be harnessed to tip the scales toward broad adoption of such a system.
- Propel the building of a digital identification and authentication regime to underpin a modernized payments system and protect Canadians’ privacy.
- Pass legislation to define a discrete payments industry and create a public oversight body to ensure effective governance of the industry; amend the Canadian Payments Act by overhauling the governance, business model and powers of the Canadian Payments Association; and, most important, transform the payments infrastructure so that it can innovate to meet the evolving payments needs of Canadians in a digital economy. This is discussed in more detail below.
In its search for a suitable governance model for the Canadian payments industry, the Task Force was particularly interested in countries whose models recognized the important role that collaboration played in the industry; as a result, it focused mainly on models implemented in the United Kingdom, the European Union, the United States and Australia.2
The Task Force borrowed from, and built on, these existing regimes and recommended that the deficiencies in the payments system be remedied, to the extent possible, by the stakeholders themselves through a self-governing structure that would include not only the payments industry but also representatives of its users.
The Task Force proposed that, to achieve this, the government introduce legislation to accomplish the proposal outlined below:
1. Define a Discrete Payments Industry
Define a discrete payments industry, establish the basis on which its members would be recognized and establish the principles and objectives of the new governance model.
These principles should include trust, access and good value.
2. Create a Public Oversight Body
Create a new public oversight body (POB) for the Canadian payments system to protect the public interest.
In protecting the public interest, through an approach based on the principles of trust, access and good value, the POB would
- assess the level of risk, competition and innovation in the payments system, monitor the implementation of changes in the payments system and propose or require adjustments where necessary;
- ensure that it continues to meet the public interest by providing effective access to the payments system for all Canadians;
- recognize and oversee a self-governing organization (SGO) for the payments system;
- provide guidance, where necessary, when industry cannot agree on a solution and provide a recourse process for unresolved conflicts at the SGO; and
- take action if private sector behaviour is no longer consistent with the public interest as determined by the legislation.
Under its power to recognize the SGO, the POB would delegate much of its regulatory mandate (including its registration, licensing and regulatory authority) to the SGO, while maintaining directive power over it. The POB would also retain the right and requirement to ratify strategies of the SGO and review its performance. Specifically, the POB would review and approve any important SGO and Canadian Payments Association (CPA) membership policies and operational processes, as well as any SGO codes of conduct, policies and standard or CPA rules that could reasonably affect the public interest.
3. Create a Self-Governing Organization
Encourage industry to create a broad-based and collaborative association to serve as the SGO to develop and implement strategy and standards for the payments system.
The SGO would comprise
a. mandatory membership for recognized participants in the payments industry;3and
b. voluntary involvement for user groups (consumers, businesses and government) and other interested parties.
It is important to note, however, that the recent judgment of the Supreme Court of Canada in the federal securities law reference may pose hurdles for the federal government to unilaterally mandate membership of many of the non-bank participants.
While the POB and the private sector would ultimately determine the mandate and form of the SGO, in the Task Force’s proposed model, the SGO would
- set the strategic direction for the payments industry in Canada and facilitate competition and innovation, as well as monitor the evolution of the payments system in a global context;
- develop and enforce industry-wide policies and standards that further the strategic direction to make Canada’s payments industry accessible, transparent and accountable, meeting the needs of users;
- ensure that appropriate safeguards exist with respect to the soundness and integrity of the payments system and services;
- lead industry efforts to promote interoperability with foreign payments systems, and cooperation among payments and other industries regarding common technologies (e.g., digital identification and authentication);
- provide a universal forum for meeting challenges and balancing the diverse interests of networks, payments service providers and the varied users of the payments systems; and
- promote public understanding of payments in Canada.
In providing a universal forum for the interests of stakeholders, the SGO would leverage member expertise and resources to collaboratively address collective challenges and opportunities in the payments system and develop policies and standards to support its mandate. To achieve this, the SGO would organize its work through a number of permanent and ad hoc committees or working groups, and would develop four user advisory councils (consumers, retailers, small and medium-sized enterprises and large corporations/government) that would be involved in all stages of the SGO’s policy-making and decision-making processes. The SGO would also provide a transparent and fair appeals mechanism regarding its decision-making and enforcement activities.
As mentioned above, the intention is that, once appropriately established, this entity would be formally recognized by the public oversight body as the self-governing organization for the Canadian payments system and that much of the authority of the public oversight body would be delegated to it, always subject to oversight and potential direction.
4. Reform the Canadian Payments Association
Reinvent the objects, governance, powers and business models of the CPA through legislation and oversight from the POB.
Originally created in legislation, the CPA owns and operates much of the core infrastructure that is vital to our payment system, and is currently the only body focused on the operations and governance of the shared payment system. In its review of the current infrastructure regime, the Task Force is of the opinion that the fundamental principles of trust, access and good value are not currently being upheld and, as key systems are aging, investments to develop the concept of immediate funds transfer (IFT) are not being made at the CPA; moreover, new entrants face major barriers to access.
The Task Force also concluded that, in addition to the existing payments system’s goals of efficiency, safety and soundness, three new objectives must be added: access,4 interoperability5 and support of the government’s operational requirements.6
The reformed CPA would operate in the public interest by providing a safe core infrastructure for retail and wholesale payments clearing and settlement that maintains the trust of Canadians; operating a cost-efficient payments infrastructure that provides enough competitive space to allow payment service providers to differentiate themselves; developing through a consultative process a strategic business plan to innovate its networks in response to stakeholders needs and market opportunities; and allowing open access to its networks for qualified participants to bolster competition.
In considering possible ownership models for the CPA, the Task Force reviewed the current ownership regimes for other payment infrastructure entities. After reviewing the alternatives, though, the Task Force concluded that the current model of the CPA, which has no shareholders and exists to serve the objectives set out in the Canadian Payments Act, was the appropriate model.
The reformed CPA would become a non-share capital corporation with no shareholders. Participants would include payment service providers who qualify for access, but would not have a vote in decision making. Such decision-making power would be vested solely in the board, which would have a fiduciary duty to the interests of the CPA and be chosen through a nomination process outlined in the legislation. To ensure stakeholder input – but independence from the influence of any one stakeholder or class of stakeholders – the Task Force recommended that the board be composed of nine members: three federal government appointees, three participant appointees and three independents, one of whom would serve as chair. In addition, the Bank of Canada would sit on the board in an observer capacity.
Other specific recommendations for amendments to transform the CPA Act into a public core infrastructure entity included the following:
- implementing a measurable objective to ensure that the CPA is meeting its mandate;
- allowing the CPA to have the ability to access debt financing and to charge transaction fees based on full cost recovery;
- defining allowable activities to give the CPA flexibility to acquire and divest related businesses; and
- setting objective and transparent minimum criteria for new entrants and direct clearers.
Rather than waiting for the legislative process to be completed, the Task Force further recommended that the Minister of Finance request that all of the principal players work together with the CPA to develop a plan by April 2012 to do the following:
- facilitate electronic invoicing and payments, and integrate the debit network and cheque processing into the technology platform;
- replace the Automated Clearing Settlement System with a multilateral small payments clearing and settlement system; and
- begin work on an IFT system to be in place by 2020.
In response to the report, the Minister indicated that, in addition to establishing a senior level advisory committee, the government will
- review, in close consultation with stakeholders, the application of the Code of Conduct for the Credit and Debit Card Industry in Canada to emerging mobile payment products so that the Code’s principles of transparency, fairness and competition will also guide the evolution of mobile payments in Canada; and
- review the governance framework for the payments sector, including the Canadian Payments Association, to ensure the continued safety and soundness of the payments system, spur innovation and promote the consideration of user interests.
1 The four policy papers are (i) Users and Their Discontent; (ii) Stakeholders and Their Disconnect; (iii) Establishing the Payments Industry; and (iv) A Reinvented Canadian Payments Association.
The remaining two discussion papers were (v) Going Digital: Transitioning to Digital Payments; and (vi) Credit and Debit Card Markets.
Two other discussion papers were released earlier: (vii) The Way We Pay: Transforming the Canadian Payments System (July 2011); and (viii) Scenarios for the Future of the Payments System (July 2011). .
2 Each of these jurisdictions has a body formed by industry participants that plays a central role in coordinating the interests of stakeholders and tackling common opportunities and challenges.
3 For example, mandatory members under payments legislation would include large and small banks, credit unions and other regulated financial institutions, non-financial institution payment service providers, networks (including credit and debit card networks such as Visa and MasterCard), clearing and settlement systems (e.g., CDS) and others in the payments value chain, including some e-billing firms and IT companies.
4 Clearing and exchange networks must be accessible at a fair price to all participants who meet transparent minimum criteria.
5 Canada’s economic success depends on our payments systems being interoperable with those of our trading partners.
6 Infrastructure needs to be upgraded to support government leadership on electronic invoicing and payments, as well as partnering with the industry to create a mobile ecosystem.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2021 by Torys LLP.
All rights reserved.