The federal government has included funding for the Retail Payments Oversight Framework (the Framework) in its 2021 budget, A Recovery Plan for Jobs, Growth, and Resilience, as part of measures to further strengthen Canada’s financial sector.
The federal government plans to invest a total of $160 million in implementing the Framework over the next five years. The government has signaled its intention to work with provincial partners to introduce legislation implementing the Framework, with the goal of promoting growth, innovation, and competition in digital payment services while ensuring these payment services are safe and secure for consumers and businesses. The 2021 budget acknowledged that the COVID-19 pandemic has accelerated the adoption of digital payment and highlighted the need to ensure that digital payment is safe and reliable. Of course, this is not the first time the Framework has been included in the federal budget - the federal government first introduced the Framework in the 2019 budget in response to emerging payment service providers (PSPs) and technologies that are changing how Canadians make payments.
The Proposed Framework
The proposed Framework would require PSPs to establish sound operational risk management practices and to protect users’ funds against losses. The Bank of Canada would oversee PSPs’ compliance with operational and financial requirements and maintain a public registry of regulated PSPs.
The Framework is expected to consist of the elements set out in the consultation paper released by the federal Department of Finance in 2017 titled "A New Retail Payments Oversight Framework". Please refer to our previous summary of this consultation paper, Department of Finance Releases Consultation Paper on New Retail Payments Regulatory Framework.
The Framework would take a functional approach, focussing on the payment function rather than the type of institution providing the service. PSPs providing any of the following services would be subject to the Framework:
- providing and maintaining a payment account for transferring funds electronically;
- initiating payments;
- authorizing and transmitting payment messages;
- holding funds until the end user withdraws them or spends them through an electronic fund transfer; or
- clearing and settling payments.
Credit card transactions, online payments, pay deposits, debit transactions, pre-authorized payments and peer-to-peer money transfers are intended to be regulated by the Framework. The 2017 consultation paper noted that the Framework would be limited to transactions carried out in fiat currency, however, this may be adjusted as the use of virtual currencies in retail payments evolves.
The Framework would aim to strike an appropriate balance between three policy objectives: (i) safety and soundness; (ii) efficiency; and (iii) user interests. It would do so by implementing the following measures:
- measures to safeguard end-user funds, including holding funds in a segregated trust account with a financial institution that is a member of Canada Deposit Insurance Corporation (CDIC) or a provincial deposit insurance regime;
- operational risk-management standards, including a robust operational risk management framework with appropriate systems, policies, processors and controls, physical and information security policies, and a business continuity plan;
- disclosure requirements, including that: (i) information contain adequate and relevant content; (ii) information be provided in a timely manner; (iii) information be presented in clear, simple and not-misleading language; and (iv) information be easily accessible;
- dispute resolution mechanisms;
- liability rules to protect payors for losses due to unauthorized transactions or errors, unless they acted fraudulently or failed to fulfil certain obligations (e.g., to take reasonable care to protect passwords);
- a public registry of regulated PSPs overseen by the Bank of Canada; and
- promotion of PSPs’ compliance with existing privacy laws.
With the funding announced in the 2021 budget, the Department of Finance is developing legislation to implement the Framework. If enacted, the Bank of Canada will then develop guidance for PSPs based on the new rules. PSPs, particularly those that are not currently regulated as financial institutions, should be alert to these forthcoming legislative developments.
Thank you to Heather Whiteside, articling student, for her assistance.