Legislative changes needed for stronger consumer protection and financial stability

Read Payments Canada’s response to FINA’s 2024 pre-budget consultation, calling for change to payment legislation in the 2023 Fall Economic Statement Implementation Act.

Payments Canada has submitted a written response to the House of Commons Standing Committee on Finance (FINA) as part of its 2024 pre-budget consultation. The response focuses on amending the Canadian Payments Act (CP Act) as part of the Government of Canada’s 2024 Fall Economic Statement to expand Payments Canada’s membership eligibility to credit unions, payment service providers and financial market infrastructures. To gain membership, these entities would need to meet regulatory requirements set by the Parliament of Canada in legislation and oversight requirements set by government regulations. 

By supporting broader Payments Canada membership and access to Canada’s national payment infrastructure, the Government of Canada will help to ensure the future of digital payments, which Canadians are increasingly turning to, happens within — not outside — the regulatory system. This will encourage financial stability and protect consumers.

There is significant industry support for CP Act amendments. In order for consumers and businesses to take full advantage of modern payments safely, legislative change is necessary.

Read the submission below.

Payments Canada’s Written Submission to FINA: Priorities for the 2024 Federal Budget

Recommendation

That the Government of Canada amend the Canadian Payments Act to expand Payments Canada’s membership eligibility to:

1. Local credit unions (who are a member of their provincial central);
2. Payment service providers (regulated under the Retail Payment Activities Act); and
3. Financial market infrastructure entities (designated under the Payments Clearing and Settlement Act).

Summary

Payments Canada recommends that the Government of Canada complete its Review of the Canadian Payments Act that was launched in 2018 and amend the Canadian Payments Act to expand Payments Canada’s membership eligibility to include payment service providers who are registered under the Retail Payments Activities Act (RPAA), credit union locals, and operators of financial market infrastructures. Expanded membership will help to ensure that the future of digital payments, which Canadians are increasingly turning to, happens within — not outside — the regulatory framework for payments in Canada. This will encourage financial stability and protect consumers, while enabling safe payment innovation to meet the evolving needs of Canadians and ensure that Canada remains competitive at an international level.

Introduction

Canadians depend on Canada’s payment systems to purchase goods and services, make financial investments and transfer funds from one person to another. Safe, secure payment systems are fundamental to keeping the Canadian economy functioning.

Payments Canada owns and operates Canada's payment systems, including the technology, rules and standards to provide resilient, secure and efficient payments for all Canadians. It is a public-purpose, not-for-profit organization with a mandate, membership and governance set out in the Canadian Payments Act. In 2022, Payments Canada cleared and settled over $119 trillion —approximately $500 billion every business day.

Payments are changing at an unprecedented rate. New technologies and financial services players are transforming the way we pay, and legislation needs to keep pace. By expanding Payments Canada's membership to include RPAA-regulated payment service providers, local credit unions and financial market infrastructures, the Government of Canada will help to ensure that innovation happens within — not outside — the regulatory system. This will enable greater protection for Canadians and financial stability.

Broader access to Canada's payment infrastructure will also encourage competition and innovation. More choices, efficiencies and faster payment options for Canadian consumers and businesses are needed now more than ever to ensure Canada remains competitive at an international level.

Context

A review of Payments Canada’s membership was last undertaken in 2001. Since that time, the way Canadians and Canadian businesses pay has evolved significantly. There has been exponential growth in electronic payments and online commerce. Cash and cheque payments have declined dramatically. Businesses are shifting to digital payment methods to take advantage of the convenience and cost savings that electronic payments provide. There are new technologies and innovative solutions being developed by both incumbents and new players in the payment ecosystem.

For Canadians and Canadian businesses to realize the full benefits of safe modern payments, regulatory changes are required. To date, the federal regulatory framework for electronic payments has not kept pace with global and domestic payment trends. Consumers and businesses lack full protections, and non-traditional payment service providers (PSPs) are challenged to effectively compete with established financial institutions.

In Budget 2021, the Government of Canada took an important legislative step toward enabling modern payment regulation through the introduction of the Retail Payments Activities Act (RPAA). RPAA was first announced in Budget 2019 in response to the rapid pace of innovation in the retail payment space. Implementation of the RPAA will require PSPs to establish sound operational risk management practices and protect users’ funds against losses. We commend the Government of Canada, in particular the Department of Finance, for following through on this Budget 2019 commitment, especially while simultaneously advancing the extraordinary policy making activities necessitated by the pandemic. The combination of RPAA, and the anticipated amendments to the Canadian Payments Act will provide for broader access to Canada’s national payment systems.

Implementation of RPAA is a critical step towards Payments Canada’s ability to safely open our systems for PSPs to participate and compete in Canada’s payment ecosystem. The publication of RPAA regulations in the Canada Gazette Part 1 in February 2023 was an important signal of progress to the payment ecosystem. The next step is for the Government of Canada to introduce required changes to the Canadian Payments Act to support broader Payments Canada membership. As set out in an open letter to the Minister of Finance, stakeholders from across the Canadian payment ecosystem are supportive of these proposed legislative changes.

Recommendation: Amendments to the Canadian Payments Act

As the Bank of Canada proceeds with the implementation of RPAA, it is important that the Government of Canada expand Payments Canada’s membership to enable credit unions, non-financial institution PSPs and financial market infrastructure entities to participate in Canada’s national payment, clearing and settlement systems. These changes have been under consideration for five years. The 2018 consultation demonstrated broad-based stakeholder support for expanding membership.¹

Membership in Payments Canada is currently limited to banks, credit union centrals, and a select few other financial institution types. Only members may exchange, clear and settle payments across our systems. The industry continues to evolve and now includes a range of non-financial institution entities who are driving competition. Payment system enhancements are being made under Payments Canada’s Modernization program that are accelerating the evolution.

The Canadian Payments Act is currently a barrier to providing more open, risk-based access to the core national payment systems for three groups:

1. PSPs who will be regulated under RPAA will seek to become members of Payments Canada and participate directly in our payment systems in order to compete with traditional financial institutions in offering innovative payment services and experiences to Canadians.
2. Credit union locals will seek to access the payment systems to better serve their consumer and small business clients and offer enhanced electronic payment services that can compete with those offered by bigger institutions.
3. Regulated financial market infrastructure entities may wish to access the high-value payment system to directly settle securities, derivatives and foreign exchange transactions, as is possible in comparable jurisdictions.

Since Payments Canada’s membership was last reformed 20 years ago, the credit union marketplace in Canada has become significantly more concentrated, and some local credit unions are now larger than their provincial centrals. The Canadian Payments Act currently prohibits local credit unions that are a member of a provincial central from becoming members of Payments Canada. Credit unions have proven to be important drivers of competition and access to financial services. They also play a particularly important role in rural communities, providing financial services to Canadians from coast to coast to coast. The participation of regulated PSPs and financial market infrastructures can also create opportunities for more efficient payments in Canada.

To ensure that access to Payments Canada’s systems is implemented in a safe, sound and risk-based manner, Payments Canada’s by-laws will establish whether that regulated member is eligible to participate directly in a given system. Each of Payments Canada’s systems have their own system access thresholds that are established to ensure that Payments Canada is meeting its legislated safety and soundness objectives as set out in the Canadian Payments Act and to meet the Bank of Canada’s risk oversight requirements to ensure that our systems are appropriately controlling risk. All direct participants in our systems must follow our various technical, operational and other risk-related requirements that are set out in our rules and by-laws. These requirements are established in consultation with members, stakeholders and regulators to ensure they meet our legislated public purpose and oversight objectives.

These amendments to the Canadian Payments Act are urgently needed to ensure Payments Canada can make necessary changes to its by-laws that govern participation. It is critically important that the government make these changes to support innovation within the regulated financial sector, instead of the current situation where limited innovation occurs outside the framework of by-laws, rules and standards intended to manage risks within the payment system.

Conclusion

Payments Canada is calling for amendments to the Canadian Payments Act to broaden its membership to include RPAA-registered PSPs, credit union locals, and operators of financial market infrastructures who meet the necessary requirements. By making these legislative changes at the earliest possible opportunity, the Government of Canada will help to ensure that innovation happens within — not outside — the regulatory system. It will also support Canada’s competitiveness globally.

About Payments Canada

Payments Canada is a public purpose organization, established through the Canadian Payments Act that owns and operates Canada's payment systems. Payments Canada is responsible for the physical infrastructure and the associated by-laws, rules, and standards that support these systems. It also has a duty to promote the efficiency, safety, and soundness of Canada's payment systems while taking into account the interests of end users. In 2022, Payments Canada's systems cleared and settled over $119 trillion — approximately $500 billion every business day. Transactions that pass through these systems include debit card payments, pre-authorized debits, direct deposits, bill payments, wire payments and cheques initiated and received by Canadians and Canadian businesses. Payments Canada is working closely with the payment ecosystem to modernize Canada's payment systems to ensure Canada and Canadian businesses remain globally competitive.

¹ See the Department of Finance Canada’s Report on the Review of the Canadian Payments Act (2019)