In the 2010 Budget, the federal Government established a Task Force for the Payments System Review (Task Force) to guide public policy on the evolution of Canada's payments system. The Task Force's report, Moving Canada into the Digital Age (Report), released on March 23, 2012, was informed by a wide-ranging consultation with stakeholders about the quickly evolving digital environment and the challenges created by the existing payments system. Along with the Report, the Task Force published four policy papers that support the Report's key recommendations.
The Task Force recognized that Canada's payments system needs a revised legal infrastructure to fully engage in the digital economy of the 21st century. Canada's outdated payments system has failed to provide digital alternatives to paper cheques, failed to allow electronic invoice processing and payments reconciliation in real time, and lacks the ability to effect mobile payments in a way that protects users. The Task Force states that the existing payments system, with rules and infrastructure controlled by Canadian financial institutions, creates barriers to new entrants, is uncompetitive and has failed to keep up with the current digital environment. Many jurisdictions, including European Union countries and emerging economies, have significantly outpaced Canada's transition to digital payments with negative implications for Canada's global competitiveness and interoperability.
The Task Force states that a modernized Canadian payments system could add as much as two per cent of GDP in productivity gains, or $32 billion in annual savings. It reported that studies carried out by the European Payments Council, Innopay and the European Banking Association suggest that businesses, on average, realize a reduction in costs in the range of one to two per cent of revenue by switching from paper to e-invoicing and automating related supply chain processes. A new governance model for a national payments system is proposed to help realize the benefits of a digital environment.
How may the Canadian payments sector change in the future?
The Report and its four policy papers set out a new principles-based, inclusive governance model that defines the legislation necessary to update the infrastructure for Canada's payments system. If the Government implements the Task Force's recommendations, key initiatives we can expect to see include:
- implementation of electronic invoicing and payments for all Government suppliers and benefit recipients;
- partnering with the private sector to create a mobile ecosystem;
- legislation that will recognize and define the scope of the payments industry and require payments service providers to be members of the proposed governance regime;
- legislation to create a public oversight body (POB) for the payments industry to ensure effective governance of the payments industry, to protect the public interest through principles-based oversight and to provide redress when industry behaviour no longer inspires trust, or enables access, competition or innovation;
- industry collaboration to create a POB-approved self-governing organization (SGO) with broad-based membership, including payments service providers and users, which will establish standards for the industry;
- an overhaul of the CPA, including its objects, governance, powers, business and financial models, and funding;
- revisions to the Code of Conduct for the Credit and Debit Card Industry in Canada to incorporate mobile payments; and
- the creation of a digital identification and authentication (DIA) regime to underpin a modernized payments system and protect Canadians' privacy.
How will the new payments industry be defined and who would qualify as a payments service provider?
The Task Force urges the federal Government to enact legislation that would provide flexibility in defining the scope of a continuously evolving payments industry. It offered the following working definition of a payments system and a payments service provider:
- The payments system refers to arrangements that allow consumers, businesses, governments and other organizations to transfer monetary value from one party to another. It includes the institutions, instruments and services that facilitate the transfer of monetary value between parties in a transaction.
Function within the payments system, not institutional status, would define a payments service provider. The Task Force's Regulatory Advisory Group suggested that payments system providers would include financial institutions, network operators, credit and debit card issuers and acquirers as well as new participants, such as online payment networks. Some participation could be voluntary, such as retail issuers of financial cards for services offered only through their own outlets, and parties that conduct payment services as independent contractors or as agents for payment services providers.
What is principles-based self-governance for the payments industry?
The Task Force envisions a governance model that is flexible and adaptable, offering industry‚ including businesses and innovators of all sizes‚ as much rule-making authority as possible. The Task Force's Consumer Advisory Group identifies three core principles as the foundation for accountable payments system governance: trust of participants, accessibility by participants and good value (Principles). The core objectives of a national payments policy proposed by the Task Force is based on these Principles. For example, trust among participants would be generated by a system that is financially stable and safe from a risk perspective, is operationally robust and is governed in a manner that allowed input from all types of participants. Payment systems should be accessible so that participants could choose among payment mechanisms. Good value would be advanced if the system operates in a way that delivers efficient costs and operates within a regulatory framework that is functionally neutral. These Principles would be recognized in legislation.
The Task Force proposes that the Minister of Finance (Minister) should be accountable for the achievement of Principles-based governance for the payments system. The responsibility, however, would be delegated to the POB and the payments industry.
What is the POB's mandate?
The Task Force recommended the creation of a POB reporting to the Minister with delegated decision-making authority. The POB would further delegate much of its regulatory and policy-making mandate to a payments industry SGO that the POB would recognize and oversee. The POB would:
- assess and report to the Minister on the Canadian payments system and its participants and oversee the industry in a proportional, risk-based manner;
- set the terms and conditions for recognizing an SGO to ensure that all payments service providers are members;
- nominate or approve some or all of the SGO's independent directors;
- delegate registration and licensing authority to the SGO;
- have directive power to ensure that the recognized SGO complies with regulations and establishes practices consistent with the Principles. For example, the Task Force recommended that the POB have the power to stage interventions in the affairs of the SGO;
- provide recourse (an appeal process) for stakeholder conflicts not resolved within the SGO; and
- where there is no effectively functioning SGO, the POB would exercise the regulatory powers granted under legislation.
What is the SGO's mandate?
Membership in the SGO would be mandatory for payments system providers and voluntary for payments system users. The SGO, once recognized by the POB, would develop and enforce codes, policies and standards that are consistent with the Principles or with specific direction from the POB. Licensing and registration for payments system providers would be undertaken by the SGO. The SGO would coordinate the payments industry in determining a strategic direction for the payments system and in setting and enforcing policies and standards. The Report urges industry participants to take the lead in beginning the process of establishing a SGO.
What will happen to the CPA?
The Task Force recommends that the corporate structure of the CPA be re-organized to enable it to serve more effectively as the owner and operator of core payments infrastructure in a digital age. Financial institutions alone would no longer control the CPA. To allow for greater scope of activity in a digital environment, the CPA's governing legislation should be amended to update its governance, objects, metrics, funding and pricing model, and scope of activities. As a payments service provider, the CPA would be a member of the SGO. Thus, the CPA would be subject to oversight by the POB, not the Minister directly, and its activities would be subject to the standards, rules and codes of the SGO.
What are other legislative implications for the creation of a modern payments system?
The Task Force identified a range of other legislative implications that would have to be co-ordinated to create a modern payments system that is relevant in a digital age. For example, the Task Force encouraged the Government to amend the Bills of Exchange Act, which governs cheques and other paper instruments, to make it less technical, to enhance consumer protection and to recognize advances in technology used for payments. The Government should not prolong dependency on the use of cheques in Canada.
The Task Force also recommends that governments at all levels conduct a thorough review of their legislation and regulations to ensure that provisions do not preclude on-line transactions and thereby hamper the transition to a digital economy. As an alternative to requirements in legislation such as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to require individuals to be physically present for identification purposes, the Task Force encouraged the adoption of a DIA regime as a more secure means of verifying identity. A DIA regime would also benefit identification requirements in various digital environments.
To assist with legislative synchronization, Policy paper C released with the Report suggests that an informal public policy forum should be created of senior government officers to ensure that regulatory and policy development is coordinated. Although the paper is not clear about this, it would appear that legislative and policy coordination would require the participation of federal and provincial governments. While much existing legislation that may impact on the payments system is in the federal sphere, such as the Bills of Exchange Act, the Canadian Payments Act, the Payment Clearing and Settlement Act and the Competition Act, provincial legislation may govern emerging payments service providers as well as contract formation and consumer protection issues for participants that are not federally regulated financial institutions.
How will governments and stakeholders respond to the Task Force recommendations?
In the Government's initial response to the Report, it indicated that it would establish a senior level advisory committee with public and private sector stakeholders to inform the Department of Finance's ongoing review of emerging payments system issues and the Task Force's recommendations. The Department will also review the application of the Code of Conduct for the Credit and Debit Card Industry in Canada in consultation with stakeholders to ensure that it is adapted to the evolution of mobile payments in Canada. The Government will review the governance framework of the payments sector, including the CPA, presumably giving consideration to the Task Force's key recommendations.
The Task Force has perhaps assumed a substantial degree of cooperation among the federal and provincial governments in the evolution of a modern payments system on the basis that substantial benefits will emerge from a coordinated and cooperative policy and legislative approach. Federal and provincial governments, however, may have separate roles to play in the creation of a legal framework for a digital payments system. There are no doubt substantial issues of national importance in the creation of a viable Canadian payments system suitable for the digital age where systemic risks are appropriately identified, managed and accountabilities are clear. There may also be a question whether a federal approach to the establishment of a national payments system could be defended as a modern expression of the federal power over bills of exchange. Yet many of the new payments service providers in a digital economy may not be federally regulated institutions as payment instructions may be given not only by payments service providers holding deposit accounts, but also by emerging providers that move monetary value in other ways. Provincial governments thus may also have to act to support the emergence of a new governance model for the Canadian payments system.
The creation of a national payments system suitable for our digital present and future will require a significant degree of cooperation and coordination from all levels of government as well as a broad range of stakeholders – system participants and users alike. The Task Force has clearly identified the need to move forward, the cost of not doing so and has proposed a governance model to achieve the benefits of a modern payments system. Through its consultation process, the Task Force has started the discussion. Governments and stakeholders now need to continue the dialogue and take action.