In the spring of 2021, the federal government tasked the central bank with overseeing the retail payments industry. This includes fintech and paytech companies, from small startups to large firms, but not banks, credit unions, or insurance companies, which are already overseen by regulators.
The Bank of Canada currently has around 40 employees working on the project. The bank consulted for a year with a committee made up of representatives from 22 payment companies. It has sent recommendations to the federal government and expects draft regulations to be posted online for comment in the near future. The aim is to start admitting companies to the supervisory system in 2024 and to start supervision in the following year.
Although the new regulatory regime is unlikely to come into effect before 2025, the central bank is encouraging companies to weigh the rules before they are final.
The new rule is in response to the increasing use of digital payments by consumers and small businesses. The surge has been underway for years and has accelerated during the COVID-19 pandemic.
While the exact details are still being worked out, the Retail Payments Activities Act, passed in 2021, sets out the broad requirements of the new regulatory regime. Payment providers are required to register with the central bank, provide risk management plans and follow customer deposit safekeeping rules to prevent losses in the event of bankruptcy.
This legislation aims to safeguard the trust that Canadians place in PSPs. The Act establishes a new supervisory framework to ensure that PSPs are managing certain risks that could affect their users. The impetus behind all of this is to build confidence in the safety and reliability of payment services.
The Bank of Canada will have the option to fine up to USD 10 million for violating the law, although fines of this magnitude would only be imposed in extreme situations.
The Act and forthcoming regulations will establish the mechanics of the new framework. But to make sure that industry players understand what’s expected of them, the documents will be supplemented with supervisory guidance.
Under the Act, the Bank of Canada has the power to take action if a PSP does not comply with the Act or its regulations. This starts with a compliance agreement that lays out the terms by which the PSP must rectify its operations. The next level of enforcement is a notice of violation. When it is issued, the company’s name and the nature of its violations will be published on the website.
Finally, the Governor has the power to issue a compliance order if a PSP is committing – or is about to commit – an act that would have a significant adverse impact on consumers and other end users. Furthermore, if a situation of non-compliance becomes severe, a court enforcement can be pursued, requiring the service provider to comply with the Act or an order.
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