Bank of Canada to become default payments regulator

Central bank will oversee any company not already regulated under proposed law
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The Bank of Canada will regulate all payments services companies not already regulated by other agencies, under draft legislation introduced by the Canadian federal government.

The retail payments activities act is part of the government’s federal budget for 2021. Chrystia Freeland, the finance minister, introduced the budget on April 19. It is at the second reading stage in Canada’s House of Commons, and will need to pass that and a third reading, and pass the Senate, before becoming law.

If passed, the law will apply to any payment service with a place of business in Canada, or that “directs retail payment activities at individuals or entities that are in Canada”. However, it excludes entities like banks, credit unions and government agencies that fall under other regulatory regimes.

The draft legislation also excludes payments systems tied to a single enterprise. It does not apply to certain kinds of electronic funds transfers, such as those used for ATM withdrawals and certain financial contracts.

The draft law specifies that the Bank of Canada will “supervise payment service providers that perform retail payment activities”. The central bank will also assist and encourage payment providers to comply with the law’s provisions.

The proposed law further mandates the central bank to “monitor and evaluate trends and issues related to retail payment activities”. Retails payments firms must develop a “risk management and incident response framework” and create dedicated accounts for end-user funds.

Regulated payments companies will have to register with the Bank of Canada. The finance minister may review applications for registration on national security grounds. During debates on the budget, member of parliament Gabriel Ste-Marie objected to the retail payments law specifically. He called the proposed statute “rather vague” and suggested it was overreach on the part of the federal government.

The proposed legislation says the Bank of Canada will be allowed to audit payments firms and request information from regulated firms. It will also be able to levy fines and enter into compliance agreements, and revoke registrations for violations of the law.

Independent payments providers do not currently have access to the Bank of Canada’s clearing systems. Allowing that would require an amendment to a different law, the Canadian Payments Act.

The Bank of Canada told newspaper The Globe and Mail that it planned to hire additional staff to deal with payments regulation.

The central bank is currently developing a “real-time rail” payments system, which it expects will become operational next year. This new system will be developed from the existing Interac network.

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