On May 25, 2018, the Department of Finance Canada issued a consultation paper on the review of the Canadian Payments Act (the “Consultation Paper”), seeking comments on various aspects of the Canadian Payments Act (the “CP Act”).
This review is being undertaken in the context of (1) the 2015 amendments to the CP Act (the “2015 Amendments”) which amended Payments Canada’s governance structure, (2) the proposed retail payments oversight framework and (3) Payments Canada’s current payment modernization project, which will create a three-system end state consisting of (a) a new high-value system (Lynx) to replace the current Large Value Transfer System (“LVTS”), (b) a batch system (Settlement Optimization Engine (“SOE”)) to replace the current Automated Clearing Settlement System (“ACSS”) and (c) a new real time system (the Real-Time Rail (“RTR”)) for real-time delivery of low value payments. In particular, the payment modernization project contemplates access to the RTR by both prudentially regulated financial institutions and non-financial institutions (such as payment service providers (“PSPs”)).
2015 amendments
The Consultation Paper seeks comments on whether the 2015 Amendments have been successful in better enabling Payments Canada to meet its mandate to promote the efficiency, safety, and soundness of its systems while taking into account the interests of users; and whether there are other aspects of Payments Canada’s governance structure which could be improved.
Associate membership and access to real-time rail
The Consultation Paper also seeks comments on how to structure membership in Payments Canada in light of the changes proposed by the payment modernization project including in particular, the proposed expansion of access to its systems beyond prudentially regulated financial institutions. The Consultation Paper asks whether the Government should create an associate membership class to facilitate access to the RTR or if alternate approaches should be considered; whether the registration and regulation under the proposed retail payment oversight framework should be a pre-condition for associate membership; and how Payments Canada’s governance structure could be adapted to take associate member views into account in Payments Canada’s decision-making process.
The Consultation Paper proposes an “associate membership” framework, under which PSPs, upon becoming regulated under the proposed retail payment oversight framework, could apply to become associate members of Payments Canada via an application process to become eligible to participate in the RTR system. Associate members would have a separate set of rights and obligations from existing members and would be subject to Payments Canada’s compliance and enforcement standards and any system specific requirements of Payments Canada. Associate members would also have to meet requirements set by the Bank of Canada to obtain an RTR settlement account.
The Consultation Paper queries how Payments Canada and its members can best draw from associate members’ expertise and vice versa, whether associate members should participate at the Payments Canada board level, how they can be incorporated into Payments Canada’s voting structure, and how Payments Canada could limit liability risk resulting from the new associate membership framework.
A bylaw under the CP Act would set out eligibility criteria for member participation in the RTR system, with additional requirements under the Payments Canada rules. The criteria would include requirements relating to operational capacity, such as reporting procedures, testing, message format, routing requirements and cybersecurity requirements. Payments Canada will be consulting on its framework in respect of access to the RTR and will develop risk-based participation requirements.
The Consultation Paper also notes that a modified funding model providing for fees and potentially dues to be paid by associate members will be required and should be designed with the intent that such funding model would not create barriers to entry to the RTR.
The Bank of Canada is developing minimum requirements for access to settlement accounts for each of Lynx, the SOE and the RTR, balancing the benefits and risks associated with broadening access to its settlement accounts.
Access to Settlement Optimization Engine (ACSS successor)
The Consultation Paper states that consideration is being given to whether associate members should also be eligible to directly or indirectly, exchange electronic payment items on the SOE exchange networks (which will replace the current ACSS) should they meet Payments Canada’s access criteria. Associate members would not be eligible to settle items exchanged in the SOE; rather they would have an arrangement with an SOE settlement member. Payments Canada will consult on its overall policy framework for participation on the SOE and will develop risk-based participation requirements.
Access to Lynx (LVTS successor)
The Consultation Paper seeks views on whether and how Payments Canada membership should be broadened to include systemically important financial market infrastructures (as designated by the Bank of Canada) (such as the Canadian Derivatives Clearing Service (CDCS), CDSX (the system operated by the Canadian Depository for Securities Limited), CLS Bank and SwapClear), which membership would then provide such infrastructures with direct access to Lynx (which will replace the current LVTS).
Conclusion
Comments on the Consultation Paper was due by July 24, 2018. The Government will thereafter produce a report reflecting feedback received on the Consultation Paper.
By Ana Badour and Nancy J. Carroll
McCarthy Tétrault LLP
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