Canada Gazette, Part I, Volume 154, Number 10: By-law Amending Certain By-laws Made Under the Canadian Payments Act
March 7, 2020
Canadian Payments Act
Department of Finance
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the By-law.)
Amendments to Canadian Payments Association By-laws Nos. 1, 2, 3 and 7 are required as a result of changes to the Canada Deposit Insurance Corporation Act (CDIC Act) to accommodate its updated resolution regime. The amendments also address a concern raised by the Standing Joint Committee for the Scrutiny of Regulations (SJCSR) regarding the discretionary authority of the President of the Canadian Payments Association (operating as Payments Canada) to suspend a participant from participation in the Large Value Transfer System (LVTS) upon a declaration of non-viability.
Amendments to By-law No. 3 are proposed to remove the 0.5% volume requirements for direct participation in the Automated Clearing Settlement System (ACSS). This approach responds to the Bank of Canada Risk-Management Standards for Prominent Payment Systems (PPS Standards) in relation to the transition to risk-based criteria for direct participation in the ACSS.
Amendments to By-law No. 1 are also being proposed to implement the legislative amendments made to the Canadian Payments Act set out in the Budget Implementation Act, 2019, No. 1 (BIA1 2019) regarding the Stakeholder Advisory Council (SAC).
The Canadian Payments Act establishes the Canadian Payments Association (operating as Payments Canada) and sets out the governance and membership requirements of the organization. The Act also mandates Payments Canada to establish and operate national systems for the exchange, clearing, and settlement of payments between banks, credit unions, and other Payments Canada members. Payments Canada operates the ACSS and the LVTS. The by-laws of Payments Canada are statutory instruments, and provide the legal foundation for these systems.
The ACSS is a deferred net settlement system that clears retail payments, including paper-based payment items such as cheques, pre-authorized debits and credits, as well as smaller-value payment items, such as debit card or automated banking machine transactions. The LVTS is Canada’s real-time electronic system for processing large-value Canadian dollar payments. Certain financial institutions participate directly in the LVTS, while others arrange LVTS payments for their customers through LVTS direct participants. There are three sets of amendments to the by-laws:
The first set of amendments align the by-laws with the Canada Deposit Insurance Corporation (CDIC) resolution regime and stay provisions as set out in the CDIC Act, and address a concern raised by the SJCSR. In 2010, amendments were made to the CDIC Act to provide CDIC with greater flexibility to enhance its ability to safeguard financial stability in Canada. Specifically, CDIC was given authority to
- Create a bridge institution to assume the assets and liabilities, in whole or in part, of a failing institution in order to help preserve critical functions while stabilizing and restructuring the institution; and
- Recapitalize (bail-in) domestic systemically important banks by converting certain long-term debt to common shares while the institution remains open and operating, thereby maintaining the institution’s ability to provide critical services to the financial system and to Canadians.
The CDIC Act also includes provisions that would limit the ability of counterparties to close out contracts and relationships with the institution by virtue of the fact that CDIC is undertaking a resolution action.
Amendments to By-laws Nos. 1, 2, 3 and 7 are required to remedy discrepancies with the CDIC Act and to support the implementation of a resolution strategy. The proposed amendments meet the CDIC Act requirements and remedy discrepancies between the CDIC Act and the Payments Canada by-laws.
The second set of amendments align the ACSS by-law with the Bank of Canada Prominent Payment System Standards. In 2016, the Governor of the Bank of Canada designated the ACSS as a Prominent Payment System. A prominent payment system is one whose disruption or failure could have the potential to pose risks to the Canadian economic activity and affect general confidence in the payments system. The designation brought the ACSS under the formal oversight of the Bank of Canada, thereby requiring Payments Canada to meet the Bank of Canada Risk-Management Standards for Prominent Payment Systems. These standards are based on the Principles for Financial Market Infrastructures of the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions. Standard 13 (Access) requires a prominent payment system to have objective, risk-based and publicly disclosed criteria for participation that permit fair and open access. The by-law requires that a direct/group clearer for the ACSS hold at least 0.5% of the volume in the system. Removing the volume requirement under the ACSS by-law is in line with the objective of risk-based standards.
The third set of amendments are consequential to technical amendments to the Canadian Payments Act that were introduced in BIA1 2019. The legislative amendments in BIA1 2019 make changes to the operation of the Board of Directors and move a number of prescriptive details relating to the Stakeholder Advisory Council (SAC) from the Act to the by-laws to enable Payments Canada to more rapidly change the composition of the SAC to keep pace with the rapidly changing payments ecosystem. The SAC is composed of members representing the views of consumers, businesses, retailers, and governments, as well as related service providers. The role of the SAC is to advise the Board of Directors on payment, clearing, and settlement matters, to provide input on proposed initiatives, including by-laws, policy statements, and rules that affect third parties, and to identify issues that might concern payment system users and service providers.
In addition, BIA1 2019 gave Payments Canada the authority to make by-laws that prescribe classes of members of the SAC who are eligible for remuneration. The by-laws currently require two members of the SAC to represent the interests of consumers, but the organization has struggled to fill these seats, given financial constraints facing some consumer groups. Consequently, it is proposed that the by-laws prescribe those representing the interests of consumers as eligible for remuneration. This would ensure that the Payments Canada Board continues to receive high-quality counsel on consumer interests.
The first set of amendments is to address any discrepancies between the CDIC Act and the Payments Canada by-laws in the case of resolution of a financial institution. The amendments also provide clarity on when the Payments Canada President may use his or her discretionary authority to suspend a participant from participating in the LVTS upon a declaration of non-viability.
The second set of amendments is to ensure that Payments Canada observes the PPS Standards.
The third set of amendments is to add necessary provisions for the operation of the SAC and prescribe which of its members are eligible for remuneration (consumer groups).
1) By-law No. 1 — General
The changes proposed for By-law No. 1 include wording to prohibit the Payments Canada Board from suspending a member’s rights solely by reason that the member is subject to a CDIC resolution order.
Where a CDIC member has been declared non-viable and the Governor in Council establishes a bridge institution, a new provision in the By-law would provide for the transfer of all rights and obligations for the exchange, clearing and settlement of payment items from the non-viable member to the bridge institution.
The changes in relation to the bridge institution are designed to ensure that CDIC can operate the bridge institution without the latter being subject to suspension and permit the bridge institution to take on the payment-related activities of the failing institution.
The changes in relation to the SAC would prescribe details of the Council, including the number of members, composition, criteria, eligibility for remuneration, and term limits.
2) By-law No. 2 — Finance
The amendment exempts a bridge institution from the requirement for new members to pay the full common service fee in the first year of membership. Since a bridge institution would take on the membership rights of a failing institution, it would not be subject to the requirement to pay the full common service fee in the first year of membership.
3) By-law No. 3 — Payment Items and Automated Clearing Settlement System
The amendment aligns the By-law with the stay provisions in the CDIC Act, in preventing clearing agents from ceasing to act for an indirect clearer where CDIC is providing a full financial guarantee to meet the obligations of the indirect clearer. This approach protects clearing agents from financial exposures to indirect clearers that are the subject of a resolution order.
The changes also remove the requirement for an ACSS direct or group clearer to hold at least 0.5% of the volume in the system.
4) By-law No. 7 — Respecting the Large Value Transfer System
The changes proposed for By-law No. 7 provide agents of Her Majesty in right of Canada or of a province with the same treatment as a regulator or other supervisory body. The existing section 62 requires the President of Payments Canada to suspend a participant that is declared non-viable by a regulator or supervisory body during an LVTS cycle.
The proposed amendments change the automatic suspension to a discretionary one where the risks to the system or its participants can be adequately mitigated through other means. Section 62 would have the President consult with the Governor of the Bank of Canada and the Minister of Finance after being advised of a declaration of non-viability and ensure that there will be concurrence on whether or not to suspend, taking into account the efficiency, safety and soundness of the system.
In addition, the existing section 63 automatically suspends a participant who is declared non-viable outside of an LVTS cycle, unless the President orders otherwise. While the President has a discretionary power not to suspend under section 63, the proposed amendments would align the language with that of section 62 to ensure consistency in approach and application.
In developing the proposed amendments in relation to resolution, the Canada Deposit Insurance Corporation, the Bank of Canada, the Office of the Superintendent of Financial Institutions and Payments Canada were consulted. In addition, Payments Canada consulted its members.
In relation to the removal of the volume requirements, Payments Canada discussed the proposed changes with its members and with the SAC. The policy positions were set out in a consultation paper, which was distributed to relevant Payments Canada councils, including the Member Advisory Council and the SAC, and released publicly on the Payments Canada website.
In relation to the changes to the SAC, the Department of Finance received feedback as part of its 2018 consultation on the review of the Canadian Payments Act suggesting the need for flexibility and for remuneration of consumer groups. Payments Canada has also consulted with its members and the SAC on the proposed changes before seeking Board approval.
Modern treaty obligations and Indigenous engagement and consultation
This policy will be implemented by amending the Canadian Payments Association by-laws.
Benefits and costs
There are no costs to the Government or taxpayers. Payments Canada is a statutory corporation (non-share capital) created by an Act of Parliament. It operates on a not-for-profit basis and recovers its costs through transaction fees and common service dues levied on members.
In relation to the removal of the 0.5% volume requirement, the estimated cost shared among all 12 existing ACSS direct participants to on-board one or more new direct participants at the same time is $786,500. It is anticipated that only a few institutions may seek to become direct participants in the ACSS.
The expected annual cost shared among all members to remunerate consumer representatives on the SAC is $60,000. Final cost figures will be determined by Payments Canada.
Small business lens
The small business lens does not apply as the amendments do not impose costs on small businesses. All ACSS direct and group clearers, and LVTS direct participants are financial institutions.
The one-for-one rule does not apply as the changes do not impose new administrative burden costs on businesses.
Regulatory cooperation and alignment
Strategic environmental assessment
In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.
Gender-based analysis plus
No gender-based analysis plus (GBA+) issues have been identified for this proposal.
Implementation, compliance and enforcement, and service standards
In accordance with subsection 18(2) of the Canadian Payments Act, by-law changes require approval by the Minister of Finance to come into force. Following ministerial approval, the by-law must be sent to all Payments Canada members by the President. Payments Canada is responsible for ensuring that its members comply with the by-laws, as applicable. The amendment does not require any new mechanisms to ensure compliance and enforcement.
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PROPOSED REGULATORY TEXT
Notice is given that the Board of Directors of the Canadian Payments Association, pursuant to subsection 18(1) footnote a of the Canadian Payments Act footnote b, proposes to make the annexed By-law Amending Certain By-laws Made Under the Canadian Payments Act.
Interested persons may make representations concerning the proposed By-law within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Julie Trepanier, Director, Payments Policy, Financial Sector Policy Branch, Department of Finance, 90 Elgin Street, Ottawa, Ontario K1A 0G5 (tel.: 613‑369‑3719; email: firstname.lastname@example.org).
Ottawa, January 21, 2020
Chairperson of the Board of Directors of the Canadian Payments Association
By-law Amending Certain By-laws Made Under the Canadian Payments Act
By-law No. 7 Respecting the Large Value Transfer System
1 Subsection 14(3) of By-law No. 7 Respecting the Large Value Transfer System footnote 1 is replaced by the following:
(3) The President shall, as soon as reasonably practicable, notify all participants of the name of any participant that has had its participant status suspended under subsection (1) or (2).
2 Section 62 of the By-law is replaced by the following:
62 (1) If, at any time during an LVTS cycle, an agent of Her Majesty in right of Canada, an agent or mandatary of Her Majesty in right of a province, a regulator or a supervisory body takes control of a participant or any of its assets or makes a declaration that a participant is considered to be no longer viable or that a participant is unable to meet its liabilities as they become due, the President may, after being advised of such an action having been taken or such a declaration having been made and with the concurrence of the Minister and the Governor of the Bank of Canada, suspend the participant from further participation in that LVTS cycle if its participation could adversely affect the efficiency, safety or soundness of the LVTS.
(2) If a decision is made to suspend a participant’s participation under subsection (1), the President shall suspend the participant’s participation as soon as feasible during the LVTS cycle in which the action or declaration is made.
(3) If a participant’s participation is suspended under subsection (1), the President shall notify all the participants of the suspension.
3 Section 63 of the By-law is replaced by the following:
63 (1) If, after the termination of an LVTS cycle and before the opening of the following LVTS cycle, an agent of Her Majesty in right of Canada, an agent or mandatary of Her Majesty in right of a province, a regulator or a supervisory body takes control of a participant or any of its assets or makes a declaration that a participant is considered to be no longer viable or that a participant is unable to meet its liabilities as they become due, the President may, after being advised of such an action having been taken or such a declaration having been made and with the concurrence of the Minister and the Governor of the Bank of Canada, suspend the participant’s status for the following LVTS cycle before that cycle begins if its participation could adversely affect the efficiency, safety or soundness of the LVTS.
(2) If a decision is made to suspend a participant’s status under subsection (1), the President shall suspend the participant’s status as soon as feasible before the beginning of the next LVTS cycle.
(3) If a participant’s status is suspended under subsection (1), the President shall notify all the participants of the suspension.
Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System
4 Section 26 of the Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System footnote 2 is amended by adding “and” at the end of paragraph (b) and by repealing paragraph (c).
5 Subsection 29(2) of the By-law is amended by adding “and” at the end of paragraph (a) and by repealing paragraph (b).
6 Subsection 30(1) of the By-law is replaced by the following:
Revocation of status
30 (1) The Board may revoke the group clearer status of a member if that member no longer complies with the requirements set out in paragraph 26(a), (b) or (d) or, in the case of a group referred to in paragraph 28(1)(b), the contractual commitments referred to in paragraph 29(2)(c) no longer ensure the ability of the member to satisfy its liability as group clearer.
7 The portion of subsection 39(1) of the By-law before paragraph (a) is replaced by the following:
Exception — ceasing to act immediately
39 (1) Subject to subsection 39.15(3.1) of the Canada Deposit Insurance Corporation Act, a clearing agent may, despite subsections 38(1) and (3), immediately cease to act for an indirect clearer if
Canadian Payments Association By-law No. 2 — Finance
8 Subsection 4(1) of the Canadian Payments Association By-law No. 2 — Finance footnote 3 is replaced by the following:
First year of membership
4 (1) A new member, other than an amalgamated member or a member that is designated as a bridge institution under the Canada Deposit Insurance Corporation Act, must, in respect of its first year of membership, pay the full amount of the common services dues for the fiscal year in which it became a member.
Canadian Payments Association By-law No. 1 — General
9 The Canadian Payments Association By-law No. 1 — General footnote 4 is amended by adding the following after section 6:
6.1 A member that is a federal institution, as defined in section 2 of the Canada Deposit Insurance Corporation Act, and is designated as a bridge institution for another member by an order made under paragraph 39.13(1)(c) of that Act is deemed, as of the date and time specified in the order for it to assume that other member’s deposit liabilities, to have, as between itself and all of the other members except that other member for whom it has been designated as a bridge institution, acquired all of that other member’s rights under the by-laws and assumed all of that other member’s obligations to those other members under the by-laws, in respect of the exchange, clearing or settlement of payments.
10 Section 7 of the By-law is amended by adding the following after subsection (1):
(1.1) The Board must not suspend a member’s rights under paragraph (1)(b) or (c) if the member is the subject of an order made under subsection 39.13(1) of the Canada Deposit Insurance Corporation Act.
11 Section 10 of the By-law is replaced by the following:
Maximum number of members
10 (1) The Stakeholder Advisory Council is to consist of no more than 20 members, of which at least one but no more than two must be elected directors of the Association.
Composition — criteria
(2) The Council must include
- (a) at least 12 members who are representative of users, of which at least two must be representative of consumers, at least one must be representative of the retail sector, at least two must be representative of the federal and provincial governments and at least one must be representative of the treasury and cash management services sector; and
- (b) at least one member who is representative of payment service providers.
12 The portion of section 11 of the By-law before paragraph (a) is replaced by the following:
Eligibility — criteria
11 Every person appointed to the Stakeholder Advisory Council, other than an elected director of the Association, must
13 Subsection 13(1) of the By-law is replaced by the following:
Term and reappointment
13 (1) Members of the Stakeholder Advisory Council, other than elected directors of the Association, are to be appointed for a term of no more than three years and may be reappointed for any number of additional terms.
14 The By-law is amended by adding the following after section 17:
17.1 Members of the Stakeholder Advisory Council who represent consumers are prescribed as a class for the purposes of subsection 21.2(7) of the Act.
Coming into Force
15 This By-law comes into force on the day on which Subdivision B of Division 1 of Part 4 of the Budget Implementation Act, 2019, No. 1, chapter 29 of the Statutes of Canada, 2019, comes into force, but if it is registered after that day, it comes into force on the day on which it is registered.