The Department of Finance recently published a consultation paper (Consultation Paper) that proposes to expand access to Canadian payment systems and seeks feedback on changes to Payments Canada’s governance structure that were implemented in 2015. The comment period for this consultation ends July 24, 2018.
For anyone new to this topic, the Consultation Paper provides a useful summary of the current and proposed Payments Canada payment systems, in addition to raising the specific questions that are the subject of the consultation.
BROADENING ACCESS TO CANADIAN PAYMENTS SYSTEMS
Currently, Payments Canada membership is limited to banks and authorized foreign banks (mandatory members) and credit unions centrals, cooperative credit associations, trust and loan companies, life insurance companies, securities dealers and money market mutual fund corporations (eligible members). Considerable reliance is placed on the fact that existing members are subject to significant regulatory requirements and oversight.
The Consultation Paper outlines a proposal that could see non-traditional payment service providers (PSPs) participate in the new real-time retail payments system (RTR) and the Settlement Optimization Engine (SOE), which will replace the existing Automated Clearing and Settlement System. The Consultation Paper also proposes to allow direct access to Lynx, which will replace the existing Large Value Transfer System (LVTS), for financial market infrastructures (FMIs) that the Bank of Canada has designated as systemically important. The Department of Finance is seeking views on these proposals and a number of related proposals outlined in the Consultation Paper.
The relative openness of access to each of the above systems will be risk-based and will have to balance the impact that a disruption of each system would have on the financial system and economy against the objectives of efficiency and user interest. Therefore, access to Lynx, which will be a systemically important payment system, will be more restrictive compared with access to the SOE, which will be a prominent payment system. Access to RTR, on which a disruption would pose a relatively smaller impact to the financial system and economy, would be the least restrictive.
Proposed Associate Membership Class
Specifically, the Consultation Paper proposes to create a new class of “associate membership” that would be open to PSPs and would provide eligibility for associate members to participate in exchange and settlement of payment items on the RTR system. The Consultation Paper notes that greater access to the RTR (and perhaps the SOE) may be facilitated by the proposed retail payments oversight framework (Framework), which would subject PSPs to principles-based oversight including security and risk-management practices. Currently, PSPs are generally unregulated, except in limited circumstances. For more information on the proposed Framework, see our July 2017 Blakes Bulletin: Department of Finance Proposes New Oversight Framework for Retail Payments.
PSPs regulated under the Framework would be eligible to apply for associate membership. Like current members, associate members would not automatically be able to exchange, clear or settle payments directly on Payments Canada’s systems. Associate members would have to meet additional system-specific requirements before gaining access to the RTR. It is unclear what those system-specific requirements would be at this point, but the Consultation Paper notes that a consultation on the overall policy framework for participation in the RTR will soon take place. Further, to settle directly through the RTR, associate members would have to meet requirements set by the Bank of Canada to obtain an RTR settlement account. According to the Consultation Paper, the Bank of Canada will provide individual settlement accounts to members and associate members who wish to settle directly, provided that they meet the Bank of Canada’s requirements to do so. The Bank of Canada is currently developing minimum requirements for access to settlement accounts for each of the three new payment systems.
The Consultation Paper also states that associate members would not be eligible to participate in systemically important systems such as the LVTS and, in the future, Lynx; however, associate member access to the SOE is contemplated. Specifically, consideration is being given to whether associate members should be eligible to directly or indirectly exchange electronic payment items on the SOE exchange networks, provided that they meet access criteria for the SOE developed by Payments Canada. Associate members would not be eligible to settle items exchanged on the SOE, but would have to have a settlement member do so for them. Consultation on the overall policy framework for participation in the SOE will also take place shortly.
Currently, members of Payments Canada have the ability to participate in the governance of Payments Canada, either as a member of the Payments Canada board, through the Member Advisory Council, or through the voting right that is afforded to each member. The Department of Finance is considering how associate members should, or should not, participate in governance at the board level, as well as how the role and focus of the Stakeholder Advisory Council (which several PSPs currently participate in) and the Member Advisory Council may need to change to accommodate the proposed new associate membership class. In addition, consideration is being given as to how associate members could be incorporated into the “one member, one vote” voting structure that is currently in place.
The Department of Finance is also considering how Payments Canada’s ability to limit its liability may need to be adapted in response to an increase in the number and types of entities connected to the payments systems. Currently, Payments Canada’s liability and that of its members may be limited for any loss or damage suffered by a member as a result of anything done in accordance with Payments Canada’s bylaws and rules.
Direct Access to Lynx for Systemically Important FMIs
The Department of Finance is also considering whether FMIs designated as systemically important by the Bank of Canada should be eligible for direct access to Lynx for the purpose of effecting settlement. This would allow the operator of designated FMIs to directly send and receive Lynx payments instead of relying on the Bank of Canada as intermediary. Currently, systemically important FMIs are not eligible for direct access to LVTS because they are not eligible for membership in Payments Canada under the Canadian Payments Act.
REVIEW OF 2015 GOVERNANCE CHANGES TO PAYMENTS CANADA
The Consultation Paper also seeks feedback on amendments to the Canadian Payments Act made in 2015 that sought to facilitate greater independent decision-making by the Payments Canada board. The Consultation Paper asks whether the amendments have been successful in enabling Payments Canada to promote efficiency, safety and soundness of Canada’s payment systems while taking into account the interests of users, and whether any aspects of Payments Canada’s governance structure could be improved. This three-year review is mandated by the Canadian Payments Act. Below is a summary of the 2015 amendments.
Greater Board Independence
Since 2015, Payments Canada’s board has shrunk from 16 members to 13, seven of whom are independent (meaning they have no direct or indirect material relationship to Payments Canada or a member). The smaller size of the board is intended to facilitate efficient dialogue and decision-making. There are five non-independent board members: three who hold settlement accounts at the Bank of Canada and two who are drawn from Payments Canada’s remaining members. The CEO and President of Payments Canada serves as an ex officio director. The Minister of Finance no longer appoints any of the board members and the Bank of Canada no longer appoints the chair of the board. Elected directors serve a three-year term, renewable once. In addition, a nominating committee composed of elected directors now identifies potential independent and member-directors to stand for election. The nominating committee is tasked with ensuring that potential member-directors broadly represent Payments Canada’s membership.
Equality of Voting
The 2015 changes were also aimed at ensuring equality of voting among members. Each member of Payments Canada is now entitled to one vote on matters to be decided by members, including election of directors. Prior to this, votes were allotted to members based on the volume of items each member had processed through Payments Canada’s systems during the preceding year.
Oversight by the Minister of Finance
Following the 2015 amendments, Payments Canada must now submit a five-year corporate plan each year, including objectives, strategies and capital and operating budgets, for approval by the Minister of Finance. Payments Canada must also publish a publically available annual report including audited financial statements.
In addition, the Minister of Finance now has broader power to issue a written directive to Payments Canada if he or she is of the opinion that it would be in the public interest to do so. Prior to the 2015 amendments, this power to issue a directive was confined to directing Payments Canada to make, amend or repeal its rules or bylaws.
Member Advisory Council
In 2015, the Member Advisory Council (MAC) was created to complement the already existing Stakeholder Advisory Council. The MAC provides a means for members to engage in Payments Canada governance and provide advice to the board of directors on the operation of, and interaction between, clearing and settlement systems, as well as the development of new technologies.
FURTHER CONSULTATIONS TO COME
In addition to the specific questions set out above, the Consultation Paper refers to future consultations on related issues, including the overall policy framework for participation in the RTR and the SOE. The Consultation Paper does not, however, refer to any consultation in respect of the minimum requirements currently being developed by the Bank of Canada for access to settlement accounts for each of the three new payments systems, which will be key to some levels of participation in those systems.
The comment period for the above issues runs until July 24, 2018. Written comments should be sent to:
Financial Systems Division
Financial Sector Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa ON K1A 0G5
For further information, please contact:
Dawn Jetten 416-863-2956
Ora Morison 416-863-2712
or any other member of our Financial Services Regulatory group.