The federal government has tabled legislation that will overhaul the governance and oversight of payments systems in Canada.  Bill C-43, referred to as the Economic Action Plan 2014, No. 2, contains amendments to both the Canadian Payments Act and the Payment Clearing and Settlement Act.  The former Act regulates the Canadian Payments Association which runs the Automated Clearing and Settlement System and the Large Value Transfer System (LVTS).  Together these two systems clear and settle the vast majority of payment items exchanged in Canada, including most cheques and electronic payments.  The Payment Clearing and Settlement Act gives the Bank of Canada the ability to designate payment systems that pose systemic risk thereby subjecting them to supervision and regulation.  To date the Bank has designated two payment systems under the Act, one of which is the LVTS operated by the Canadian Payments Association.

CPA Governance

In its February budget, the Government stated that it intended to introduce changes to the governance and accountability structures of the Canadian Payments Association to ensure that its payment clearing and settlement infrastructures are operated for the benefit of consumers and businesses.  Currently, the Canadian Payments Act contains a complex method for electing the board of directors of the Association.  Under the current rules, one director is appointed by the Bank of Canada, three are appointed by the Minister of Finance and 12 are elected by its members (the institutions that clear items through the system).  The directors elected by members are grouped into seven different classes with the members of each class having the right to vote for a prescribed portion of the 12 directors.  The number of votes that a member may cast is a function of the net number of payment items attributable to the member.  The director appointed by the Bank of Canada acts as the chairman of the board.

The amendments proposed under Bill C-43 will reduce the total number of directors to 13, all of which will be elected by the members.  However, seven of the thirteen directors must be independent of the Association and its members.  Three of the remaining six directors will be elected by the direct and group clearers and two will be elected by the remaining members.  The final member will be the President of the Association selected by the elected directors.  A new quorum requirement will also be established requiring that at least 7 directors be present at a meeting and that a majority of the directors present be independent directors.  The Chairman must also be an independent director.  In addition, the Act will now contain a duty of care standard for directors similar to that which applies to corporations.

The voting rules will also be updated to provide that each member has only one vote regardless of the amount of payment items they submit or receive.  In addition to the changes for the board, additional changes are being introduced to enhance governance at the Association.

Payments System Oversight

The February budget acknowledged that the way Canadian make payments has changed.  More and more Canadian are moving away from cash or cheques and into electronic payments.  While innovation in payments systems can benefit consumers, the Government remains concerned about the systemic risk that innovative systems can pose, particularly if they are widely adopted.

The Payment Clearing and Settlement Act already gives the Bank of Canada the authority to designate any payment system that poses “systemic risk” and to supervise the conduct of a designated system.  The Act defines systemic risk in terms of the spill-over effect that a failure by a participant to meet its obligations would have on other participants or other financial institutions and on the financial system generally.  Under Bill C-43, the Bank’s authority will be extended to allow the Bank to designate systems that present “payments system risk”.  This risk is defined in terms of the adverse impact on economic activity that a failure of the system might have if the ability of individuals, businesses or governments to make payments is impaired or if there is a general loss of confidence in payments systems

Most of the balance of the amendments to the Payment Clearing and Settlement Act are directed to enhancing the Bank of Canada’s powers in respect of a designated payments system.

The Bill must work its way through the parliamentary process before becoming law.

To see the Government’s announcement respecting Bill C-43 click here.