Expanding Membership in Payments Canada

1. Overview

Payment systems enable millions of Canadians to transact on a daily basis and play a key role in promoting economic activity. Given the importance of payment systems to the economy, the Government oversees their operations through the stated policy objectives of safety and soundness, efficiency and consideration of user interests.

A range of new innovative service providers and technologies are emerging that are changing how Canadians make payments. In 2021, the Government passed legislation to implement a new retail payments supervisory framework^{Footnote 1}, so that payment service providers (PSPs) can continue to offer innovation in services, while remaining reliable and safe. Under the Retail Payment Activities Act (RPAA), the Bank of Canada will be responsible for supervising PSPs with the aim of building confidence in the safety and reliability of their services while protecting users from certain risks. Among other things, PSPs will have to identify and mitigate operational risks, safeguard end-user funds and register with the Bank of Canada.

This paper sets out the Government's intention to amend the Canadian Payments Act to expand membership eligibility in Payments Canada to new types of entities, namely PSPs registered under the RPAA, credit union locals that are part of a central or cooperative credit association^{Footnote 2} and operators of designated financial market infrastructures (FMIs). It also seeks views on whether governance provisions in the Canadian Payments Act remain appropriate. This consultation builds on the May 2018 Consultation on the Review of the Canadian Payments Act.^{Footnote 3}

2. Background

Canada's payments ecosystem consists of infrastructure, institutions and network arrangements, such as methods, procedures and standards, which allow consumers, businesses, financial institutions and other organizations to transfer value to one another. Payment systems are integral to supporting economic activity in Canada. Ensuring that these systems are fast, secure, reliable and flexible allows consumers and businesses to transfer value safely and efficiently.

Payments Canada^{Footnote 4} owns and operates Canada's core payment clearing and settlement systems. The Canadian Payments Act establishes Payments Canada and sets out its legal requirements, including its mandate, the institutions eligible for membership and the oversight responsibilities for the Minister of Finance. The Bank of Canada also oversees Payments Canada's operations of Lynx and the Automated Clearing Settlement System pursuant to the Payment Clearing and Settlement Act.

Payments Canada's mandate is to:

• establish and operate national systems for the clearing and settlement of payments and other arrangements for the making or exchange of payments;
• facilitate the interaction of its clearing and settlement systems and related arrangements with other systems or arrangements involved in the exchange, clearing or settlement of payments; and
• facilitate the development of new payment methods and technologies.

In pursuing its mandate, Payments Canada must take into account the following public policy objectives:

• Safety and soundness – Given the potential to transmit negative shocks, payment systems and services must be overseen to manage and control risk. Safety and soundness are essential conditions to achieve a stable financial system and a well-functioning economy.
• Efficiency – Includes how effectively the payment exchange, clearing and settlement processes are carried out to meet end-users' needs, as well as ensuring the efficient allocation of resources to deliver services.
• User interests – Payment systems and services should be designed and operated to meet the needs of Canadians and protect end-user interests. These needs include fast and secure payment systems that can process data-rich payments and may serve as adaptable platforms for new and existing use cases. End-user interests are not homogenous and are reflective of a wide range of needs of both businesses and consumers.

Payments Canada operates the two core payment clearing and settlement systems that underpin the vast majority of payments and value transfers in Canada:

• Lynx is an electronic funds transfer system that settles large-value and time-critical Canadian dollar payments in real-time. Other payment networks and financial market infrastructures to effect final settlement.
• The Automated Clearing Settlement System primarily clears retail payments, including direct deposits, paper and imaged cheques, point-of-service transactions, bill payments, direct deposit payroll and ABM transactions.

In 2020, Payments Canada's systems processed over $107 trillion in transactions; more than $420 billion every business day^{Footnote 5}.

Payments Canada has embarked on a multi-year initiative to modernize the core clearing and settlement systems in Canada^{Footnote 6}. In August 2021, Lynx replaced the Large Value Transfer System to enhance the safety, flexibility and resiliency of the system.

Payments Canada is also developing a new payment system that will exchange and settle retail payments in real-time (i.e., the "Real-Time Rail" or RTR). This will better serve the needs of consumers and businesses, and provide a platform for innovation.

The COVID-19 pandemic has accelerated the pace of digitalization of the Canadian economy as people are living, working and spending in fundamentally different ways. There has been a surge in consumer adoption of digital financial services including the processing of payments, loans and financial advice. Specialized new entrants are offering many of these new services, including financial technology firms.

The benefits of digitalization in the financial sector include better and lower cost financial services for consumers and small businesses, which can increase productivity and help support economic growth.

Many other countries have taken similar steps to modernize their core payment systems, generally by developing faster payments platforms, enabling data-rich messaging standards and broadening access to non-traditional financial service providers.

The RPAA will ensure that Canadian households and businesses have safe and efficient access to new innovative payment services.

PSPs are not presently eligible for membership in Payments Canada. In 2018, respondents to the Review of the Canadian Payments Act overwhelmingly indicated that expanding membership in Payments Canada to new entities would help Payments Canada fulfill its statutory mandate^{Footnote 7}. Members of Payments Canada are eligible to participate in its systems as well as be represented in the governance and decision making processes.

3. New Entities proposed for Payments Canada Membership

The Bank of Canada, banks and federal credit unions are required to be members of Payments Canada. In addition, the following types of entities are eligible to become members: 

• Provincial credit union centrals and locals that are not part of a central that take deposits transferrable by order and whose deposits are insured or guaranteed by a provincial authority;
• Trust and loan companies that take deposits transferrable by order which are insured by a provincial or federal authority;
• Provincial Crowns, including agents, that accept deposits transferable by order;
• Life insurance companies;
• Securities dealers registered by the Investment Industry Regulatory Organization of Canada or the Bourse de Montreal;
• Trustees of qualified trusts; and
• Qualified corporations on behalf of their money market mutual funds.

The Government intends to enact legislative amendments to make additional entities eligible for membership in Payments Canada including PSPs registered under the RPAA, credit union locals that are part of a central and operators of designated FMIs.

3.1 Payment Service Providers

To ensure that the Canadian retail payments ecosystem evolves in such a way that payment services remain reliable and safe for end-users, the Government is implementing the retail payments supervisory framework. Under the framework, PSPs would be required to register with the Bank of Canada. PSPs would also be required to establish sound operational risk-management practices^{Footnote 8} and to have measures in place to protect end users' funds against losses.

The Bank of Canada would supervise the PSPs' compliance with those requirements and maintain a public registry of regulated PSPs. The PSP would also need to meet the operational, technical, security and other requirements set out in Payments Canada's by-laws and rules.

Under the RPAA, a PSP is an individual or entity that performs one or more of five listed payment functions as a service or business activity that is not incidental to another service or business activity^{Footnote 9}. The five payment functions are:

• providing and maintaining a payment account for transferring funds electronically;
• holding funds on behalf of an end user until an end user withdraws or transfers them through an electronic funds transfer;
• initiating an electronic funds transfer as requested by an end user;
• authorizing an electronic funds transfer or transmitting, receiving, or facilitating instructions about an electronic funds transfer;
• clearing or settling electronic funds transfers.

A variety of entities will be covered, such as payment processors, digital wallets, currency transfer services and other payment technology companies that do not hold funds for end users.

Payments Canada's systems provide the infrastructure for account-to-account transfers between members. Members also need to meet the system specific operational, technical, security and other requirements set out in Payments Canada's by-laws and rules before being able to participate on a system. As a result, it is expected that a subset of registered PSPs will want to become members of Payments Canada and seek access to its systems. In particular, some PSPs that hold funds or settle electronic funds transfers may want access to Payments Canada's systems. Based on outreach to PSPs, we understand that initially between five and twenty PSPs might seek membership.

3.2 Credit Union Locals that are part of a Central

Since 1980, credit union locals that are part of a provincially-incorporated credit union central participate in the core payment systems through group clearers. Today, there are two group clearers, namely la Fédération des caisses Desjardins du Québec and Central 1 Credit Union.

The Canadian Payments Act restricts direct membership for credit union locals that are part of a central. This structure reflects the nature of Payments Canada's payment systems in its early years, which could not easily scale to a large number of participants, and the nature of the credit union system at the time.

Since then, the credit union sector has become significantly more concentrated, with the number of credit unions falling from over 3500 in 1980 to 439 in 2020^{Footnote 10}. Additionally, the regulatory landscape has changed. For example, the prudential oversight of liquidity pooling is now solely a provincial matter.

Moreover, technological advancements have meant that the exchange, clearing and settlement of payment items are becoming increasingly distinct and separate activities.

Presently, participants that exchange items over Payments Canada's systems must take on the responsibility of clearing and settlement. The RTR will have a tiered structure of direct and indirect participants from a settlement perspective. That is, all participants can exchange items on the RTR and have a choiceto settle their own payments with the Bank of Canada^{Footnote 11} or have another participant do it for them.

To date, two locals have expressed interest in becoming members to exchange payment items over the RTR.

3.3 Operators of FMIs designated by the Bank of Canada under the Payment Clearing and Settlement Act^{Footnote 12}

Presently there are seven FMIs^{Footnote 13} designated by the Bank of Canada, as either systemically important systems or prominent payment systems.^{Footnote 14} Designation of a system allows the Bank of Canada to oversee the relevant operator to ensure the designated system is operated in a manner that mitigates systemic and payments system risk.

The Review of the Canadian Payments Act identified support for allowing operators of systemically important FMIs to participate on Payments Canada's systems, citing international precedent. To do so, the operator of an FMI would need to become a member of Payments Canada.

As designated FMIs are overseen by the Bank of Canada and subject to standards derived from, and consistent with, the Principles for Financial Market Infrastructures, it is proposed that the operators of all FMIs designated as systemically important or as prominent payment systems be eligible for membership in Payments Canada. The FMI operator would also need to meet the operational, technical, security and other requirements set out in Payments Canada's by-laws and rules before being able to access specific Payments Canada systems. One operator of a designated FMI has expressed interest in becoming a member of Payments Canada in order to directly access Lynx.

4. Governance, Rights and Responsibilities of Membership

In expanding membership, the Government also assessed the legislative provisions related to Payments Canada's governance structure, including the rights and responsibilities of members.

Complementing the legislation and regulations are Payments Canada's by-laws and rules. Payments Canada is developing by-laws for the RTR.  It also plans to assess its suite of by-laws and rules to ensure they are suitable for an expanded membership. By-laws and rules require approval by the Minister of Finance before they take effect.

4.1 Board Composition and Representation

The Canadian Payments Act sets out the powers of Payments Canada's Board of Directors. The Board is provided with counsel from the legislated Member Advisory Council (MAC) and the Stakeholder Advisory Council (SAC), as well as many other Payments Canada fora and regular consultations with members and stakeholders on new policy issues.

The Board has broad authority to carry out all powers granted to Payments Canada, including appointing the President, appointing participants to the Board's advisory councils, setting the budget of Payments Canada, making by-laws, making rules and assessing membership applications.

In 2015, changes to Payments Canada's governance framework came into effect. Amendments reduced the size of the Board of Directors, introduced greater independent decision-making to the Board and strengthened its accountability to the Government and to the public.

Payments Canada's current Board is composed of seven independent directors, five directors representing members and the President and CEO. A nominating committee with a majority of independent directors is responsible for identifying suitable candidates for nomination to the Board. The Canadian Payments Act requires that all directors act in good faith with a view to the best interests of Payments Canada.

Of the five directors representing members, the Canadian Payments Act requires that three represent members that maintain settlement accounts at the Bank of Canada and of which at least two, but no more than three, be from domestic systemically important banks. The other two directors represent smaller members.

During the Review of the Canadian Payments Act, almost all stakeholders indicated that the move to a majority independent Board was beneficial to the achievement of Payments Canada's mandate and to the payments ecosystem more broadly. However, there was no clear path on further changes. Some stakeholders proposed moving to a fully independent Board, while others noted that expanding Board independence could result in a misalignment between the Board's interests and objectives, and those of members.

The existing Board structure balances the voices of direct and indirect settlement participants while accounting for funding and payment volume differences between members. PSPs, operators of FMIs or credit union locals that are direct settlement participants in Payments Canada's systems would be eligible for one of the three settlement participant seats. Those who do not have settlement accounts would be eligible for one of the two other member seats.

As the number of new members is expected to be moderate, at least initially, the Government proposes to retain the current Board structure and representation at this time, but will continue to monitor to ensure it remains appropriate as the membership evolves.

1) Do you agree with the Government's proposal to retain the current Board structure in the Canadian Payments Act?

4.2 Voting

The Canadian Payments Act gives members the right to vote on all matters to be decided by members, which is used primarily in three cases:

• the election of independent and member directors to the Board;
• the removal of independent and member directors; and
• the appointment and remuneration of the annual auditor.

A new director or auditor is elected by majority vote or, if only one candidate is nominated, they receive more votes than are withheld. The recall of an elected director requires a two-thirds majority. The appointed auditor's role is to help ensure the Board is transparent and accountable to members by obtaining reasonable assurance that the financial statements are free of material misstatements, whether by error or fraud.

Voting rights may also decide the counting of quorum among members. Currently, quorum is achieved when the number of members (or proxies sent) equals half of all members.

Since 2015, each member has one vote of equal importance. This ensures that all members, even those without a seat on the Board, are able to influence the overall governance of Payments Canada.

As the number of new members is expected to be moderate initially, between eight and twenty-three, the Government proposes to retain the current voting framework. Going forward, the Government will continue to monitor and consider revisions if necessary.

2) Is the proposed continuance of the current voting structure appropriate?

4.3 Advisory Council Representation

Payments Canada has two advisory councils with mandates to provide advice to the Board.

The Member Advisory Council (MAC) – represents the members. It provides counsel and advice to the Board on the Association's operation of clearing and settlement systems, the interaction of those systems with other systems involved in the exchange, clearing or settlement of payments, and the development of new technologies. The Canadian Payments Act requires that MAC be broadly representative of the diversity of membership. Thus, PSPs, credit union locals that are part of a central and operators of designated FMIs that become members of Payments Canada would be eligible to participate on MAC.^{Footnote 15}

The Stakeholder Advisory Council (SAC) – represents non-member users of the payment system. It provides input on proposed initiatives and identifies issues of concern. SAC is required under the Canadian Payments Act to be broadly representative of users, and requires that at least one member represent PSPs.^{Footnote 16} Respondents to the Review of the Canadian Payments Act provided a wide variety of suggestions for council participation.

It is expected that the vast majority of PSPs will not likely seek to become members of Payments Canada. To ensure that non-member PSP views continue to be heard, the Government proposes to maintain the current legislative requirement for PSP representation on SAC. PSPs that become members of Payments Canada would be eligible for MAC participation, but not SAC participation.

3) Are there any benefits, considerations, issues or concerns with respect to maintaining the requirement for SAC to have a non-member PSP representative?

4.4 Funding

Payments Canada is an incorporated association. It operates as a public purpose, not-for-profit corporation and is funded through transaction fees and membership dues levied on members.

The Canadian Payments Act gives Payments Canada the legislative authority to require the payment of dues by members, and establish the amounts of those dues in by-law. Currently, there are three broad classes of dues payable by members:

• common service dues to cover costs of providing services that are of equal benefit to all members;
• transaction fees to recover the costs of operating a specific payment system; and,
• service fees that are charged to recover costs to Payments Canada for directly providing a specific service to a member.

An appropriate funding model must balance the objectives of ensuring members financially contribute to the systems and services from which they derive a direct benefit, while keeping barriers to entry low for smaller entities.

Payments Canada's emphasis on recovering costs primarily through transaction fees results in a progressive funding model where members with very little payment activity pay less than the largest members who make heavy use of a system.

Funding was not raised as an issue during the Review of the Canadian Payments Act. As the Government is proposing that PSPs, operators of FMIs and credit union locals be granted the same voting and representation rights as other eligible members, the Government views it as appropriate for new eligible members to face the same funding requirements as other members.

4) Does the current funding structure remain appropriate?

4.5 Compliance

To ensure that the core Canadian payment systems are operated safely and soundly, Payments Canada has the authority to enforce compliance with its by-laws and rules on members. Payments Canada's By-law No. 6 – Compliance^{Footnote 17} sets out the procedures for investigating a complaint about a member and the corrective measures used, including establishing a committee to investigate the complaints. The President of Payments Canada may initiate a complaint and refer complaints received to the committee and the By-law sets out the process for the committee to select "compliance panels" for the purposes of an investigation.

Payments Canada may also refer a compliance panel decision to the courts for enforcement. Payments Canada also has statutory authority to suspend a member's rights if they fail on more than one occasion to comply with rules or by-laws or in the case of liquidation or bankruptcy of that member. Additionally, the by-laws of each system permit the revocation or suspension on the system where a participant no longer meets the requirements of the system. Finally, the Canadian Payments Act permits the Board to revoke the membership of an eligible member with a two-thirds resolution from the Board that the member no longer meets the requirements set out in the rules.

Compliance was not raised during the Review of the Canadian Payments Act.The Government believes that the legislative provisions of the compliance framework remain appropriate for maintaining the safety of the core payment systems with the expansion of membership.

5) Is the current compliance structure appropriate for ensuring that members comply with the requirements set out in by-laws and rules?

4.6 Review clause

The Canadian Payments Act does not include a review clause. A one-time review clause was added in 2015 to assess how the revised governance structure was working. While respondents to the Review of the Canadian Payments Act found the new governance structure beneficial to the achievement of Payments Canada's mandate, they noted it was too early to provide a comprehensive assessment. Citing the ongoing modernization of payment systems, respondents suggested undertaking a future review of the Canadian Payments Act.

The Government agrees that future reviews of the Canadian Payments Act are warranted. In particular, the governance framework of an organization is critical to its success and in fulfilling its mandate. In this regard, should the number of new members be significantly different from what is expected, it will be important to ensure that the Board structure and composition, and voting rights remain appropriate.

As such, the Government proposes to undertake a one-time mandatory review after newly eligible members have had sufficient time to join Payments Canada. As it will take some time for PSPs to register under the RPAA and become eligible to join Payments Canada, we propose that the review take place five-years after the Canadian Payments Act amendments come into force.

6) Do you agree with the Government undertaking a mandatory review of the Canadian Payments Act?

7) Do you agree with the proposed timing for the review?

6. Next Steps

The Government invites all stakeholders to participate in this consultation process. By working together, we can ensure that the Canadian payments ecosystem functions well, including by fostering innovation and competition. Based on the results of this consultation, the Government intends to propose legislative amendments to expand membership in Payments Canada.

ANNEX A

Systems designated by the Bank of Canada under the Payment Clearing and Settlement Act