This article originally appeared on the NCFA website.
In its budget released in March, the Canadian federal government confirmed that it plans to introduce legislation in 2019 to implement a new retail payments oversight framework. It is proposed that the Bank of Canada will would oversee this regulatory framework. This is a significant development as it will mean that a number of payments industry participants that are currently unregulated, including many FinTech companies, will now be regulated.
In its budget released in March, the Canadian federal government confirmed that it plans to introduce legislation in 2019 to implement a new retail payments oversight framework. It is proposed that the Bank of Canada will would oversee this regulatory framework. This is a significant development as it will mean that a number of payments industry participants that are currently unregulated, including many fintech companies, will now be regulated.
While the recent federal budget provided few details about the proposed regulatory framework, we expect that it will be based on a 2017 discussion paper released by the Department of Finance. The discussion paper noted a number of problems in the way retail payments are regulated, most notably that regulated financial institutions, such as banks, are subject to detailed regulation with respect to their retail payments businesses, while other payment service providers (referred to as PSPs) are not subject to a comprehensive regulatory oversight framework.
The Department of Finance is concerned that this will create risks and confusion for consumers who might expect similar levels of protection, regardless of who their PSP is. The new legislation (which has yet to be developed) will presumably attempt to shift the regulatory framework away from an "institution-based" approach, where an entity is regulated based on the type of institution it is, towards a "functional" approach, where entities are regulated based on the types of activities they engage in - regardless of what kind of institution they are.
According to the discussion paper, the goal of the new oversight framework is "to ensure the retail payments ecosystem evolves in such a way that payment services remain reliable and safe for end-users and the ecosystem is conducive to the development of faster, cheaper and more convenient methods of payment."
Who will be Regulated?
The discussion paper suggests that PSPs that engage in one or more of the following activities in the context of an electronic fund transfer for an end-user will be subject to the new regulatory framework:
- Providing and maintaining a payment account for the purpose of making electronic fund transfers
- Enabling the initiation of a payment on behalf of an end-user
- Providing services to approve a transaction and/or enabling the transmission of payment messages
- Enabling an end-user to hold funds in an account with the PSP until the funds are withdrawn or transferred to a third party through an electronic fund transfer
- Enabling the process of exchanging and reconciling the payments items (referred to as "clearing") that result in the transfer of funds and/or adjustment of financial positions (referred to as "settlement")
As a result, the discussion paper envisions that the new regulatory oversight framework would apply to a wide array of transactions, including credit and debit card transactions, online payments, pay deposits, pre-authorized payments and peer to peer money transfers. Certain exceptions would apply, including cash transactions and gift cards or shopping mall cards that allow the consumer to make purchases at only one merchant or a limited group or merchants.
Interestingly, the discussion paper proposes that the new regulatory framework would only apply to transactions in fiat currencies like the Canadian dollar, so bitcoin and other virtual currency transactions would be exempt. However, the government does plan to monitor the use of virtual currencies in retail payments, leaving open the possibility that the regulations could apply to virtual currencies in the future.
The New Regulatory Requirements
The discussion paper proposes the following measures:
- Safeguarding requirements regarding the holding of end-user funds by PSPs
- Operational standards for PSPs
- Requirements for PSPs to disclose key characteristics of their products to end-users
- Requirements for PSPs to maintain dispute resolution mechanisms
- Liability rules shielding end-users for losses as result of unauthorized transactions
- Requirements that PSPs register with the regulator
As with any new legislation, the devil will be in the details. However, assuming the new legislation adopts the principles set out in the discussion paper, we would expect that a large number of fintech companies and other previously unregulated PSPs will fall under the new regulatory regime and will, for the first time, need to develop a compliance strategy.