THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Wednesday, May 12, 2021
The Standing Senate Committee on Banking, Trade and Commerce met by videoconference this day at 6:30 p.m. [ET] to study the subject matter of those elements contained in Divisions 1, 2, 3, 4, 5, 7, 8 and 9 of Part 4 of Bill C-30, An Act to implement certain provisions of the budget tabled in Parliament on April 19, 2021 and other measures.
Senator Howard Wetston (Chair) in the chair.
The Chair: Good evening to all. I would like to begin by welcoming members of the committee, witnesses, as well as those watching this evening on the web.
My name is Howard Wetston. I’m a senator from Ontario, and I am the chair of the Standing Senate Committee on Banking, Trade and Commerce.
Today we are starting our examination of the subject matter of certain provisions contained in Bill C-30, the Budget Implementation Act, 2021, in advance of it coming before the Senate. This is the pre-study. More specifically, this committee will be looking at those provisions contained in Divisions 1, 2, 3, 4, 5, 7, 8 and 9 of Part 4 of the bill. In today’s meeting we will be focusing on Division 8, the retail payment activities act, or RPPA.
Senators, before we begin, I would like to remind you and the witnesses to keep microphones muted at all times unless recognized by name by the chair. Before speaking, please wait until you are recognized. I will ask senators to use the “raise hand” feature to make any comments or ask questions.
I would now ask the members of the committee to introduce themselves, starting with the deputy chairs of the Banking Committee.
Senator Smith: Larry Smith, senator from Quebec.
Senator Wallin: Pamela Wallin, senator from Saskatchewan.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator C. Deacon: Colin Deacon from Nova Scotia.
Senator Ringuette: Pierrette Ringuette from New Brunswick.
Senator Bellemare: Diane Bellemare from Quebec.
Senator Loffreda: Tony Loffreda from Montreal, Quebec.
Senator Moncion: Lucie Moncion from Ontario.
Senator Klyne: Good evening. Marty Klyne from Regina, Treaty 4 territory and homeland of the Saskatchewan Métis Nation.
The Chair: Senator Klyne is a member of the steering committee of the Banking, Trade and Commerce Committee.
I don’t believe we heard from Senator Dagenais. Am I correct?
Senator Dagenais: You are right. Jean-Guy Dagenais from Quebec. I am replacing Senator Tannas.
The Chair: Thank you very much, Senator Dagenais.
The Chair: Thank you, senators. We will now begin with our witnesses for panel one. We have with us members from the Department of Finance Canada, from the Bank of Canada and from Payments Canada.
I wonder whether or not you would be comfortable in introducing yourselves. I believe we’re beginning with Finance Canada, Erin O’Brien. Ms. O’Brien?
Erin O’Brien, Director General, Financial Services Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you very much for the invitation to be with you this evening to discuss the retail payment activities act. I’m Erin O’Brien, Director General, Financial Services Division, Department of Finance. I am here this evening with three colleagues from the department: Richard Bilodeau, Director General of the Financial Institutions Division; Manuel Dussault, Senior Director of Framework Policy; and Julie Trépanier, Director of Payments Policy.
Mr. Chair, would you like me to continue with my prepared remarks?
The Chair: No. I would like everyone on the panel to introduce themselves, and then we will come back to you. Thank you.
From the Bank of Canada, please?
Ron Morrow, Advisor to the Governor, Bank of Canada: Thank you very much. I am Ron Morrow, Advisor to the Governor, and I have been working a fair bit recently on our pending new responsibilities for retail payments oversight.
The Chair: Thank you Mr. Morrow. From Payments Canada, please?
Anne Butler, Chief External Relations and Legal Officer, Payments Canada: I am Anne Butler, Chief External Relations and Legal Officer at Payments Canada.
The Chair: Thank you so much. We can return to Ms. O’Brien. I believe you have some opening comments.
Before you begin, I would like to ask senators and witnesses to keep interventions brief to ensure that every member can at least get a question. I’m hoping for a second round of questions, if possible. We will do so, if time permits.
Thank you for joining us this evening. We will begin with opening remarks from Ms. O’Brien, followed by Mr. Morrow and Ms. Butler.
Please proceed, Ms. O’Brien.
Ms. O’Brien: Thank you, Mr. Chair.
The government has committed to maintaining a well-functioning financial sector that serves Canadians’ needs and ensures public confidence in the integrity of retail payments. The retail payments sector enables millions of Canadians to send and receive money on a daily basis and plays a key role in promoting economic activity.
The current COVID-19 crisis has accelerated the adoption of digital payments and heightened the need to keep them safe and reliable. The proposed retail payment activities act implements a new retail payments oversight framework that would promote growth, innovation and competition in digital payment services while ensuring these services are safer and more secure for consumers and businesses.
The proposed legislation includes requirements for payment service providers such as card networks, payment processors, money remitters and digital wallets that are not regulated financial institutions; to safeguard end-users’ funds against losses; and to mitigate risks associated with operational failure that could disrupt their services.
The Bank of Canada would regulate payment service providers’ compliance with the framework requirements and maintain a registry of regulated payment service providers. The proposed legislation also includes national-security safeguards modelled on the framework that applies to federally regulated financial institutions to enable the government to identify and respond to national-security-related risks.
The government has consulted broadly in the development of the framework and has engaged with a wide range of stakeholders including provincial and territorial officials who have expressed broad support for the objectives of the proposed framework. The proposed framework recognizes that the federal government and provincial and territorial governments have complementary objectives and powers in this area. The federal government looks forward to maintaining strong collaboration and support with provincial and territorial governments as we move forward with the implementation of the framework.
The proposed legislation sets out the main elements of the framework. However, regulations and guidance will be required before it can be brought into force.
Thank you, and I look forward to the discussion.
The Chair: Thank you so much, Ms. O’Brien. Mr. Morrow, please go ahead with your presentation.
Mr. Morrow: Mr. Chair and members of the committee, thank you for the invitation to appear before you. I am pleased to have the opportunity to represent the Bank of Canada regarding the provisions within Bill C-30 that will bring into force the Retail Payment Activities Act.
The new act will provide the Bank of Canada with new supervisory responsibilities over retail payment service providers. The bank is prepared to take on these new responsibilities, which are in line with our overarching objectives: ensuring the economic and financial well-being of our country and its citizens.
We see retail payments supervision as complementary to our existing oversight of large, critical and economically important payment systems. Nevertheless, we recognize that retail payment service providers are very different than the entities we currently oversee and that this will require a very different supervisory approach.
We have benefited greatly from the industry consultations that have been held thus far on the proposed framework, and we have learned a lot through those consultations. If this legislation comes into force, we look forward to working with Finance Canada and continuing our consultations with key stakeholders to help develop regulations and guidance to support this new framework.
Thank you for the chance to say a few opening words. I look forward to answering any questions you may have.
The Chair: Thank you so much, Mr. Morrow. We can now turn to Ms. Butler after whose presentation we will turn to the committee for questions.
Anne Butler, Chief External Relations and Legal Officer, Payments Canada: Thank you for inviting me to be here today to provide input into the subject of Bill C-30, specifically those portions associated with the retail payment activities act.
Payments Canada, my employer, is a public purpose corporation that operates the national payment infrastructure that underpins our economy, clearing and settling over $420 billion every day. Our mandate is to operate Canada’s national payment systems to facilitate interoperability and to enable the development of new payment methods and technologies. We continually ensure the efficiency, safety and soundness of our systems, and take into consideration the interests of end users, Canadians and Canadian businesses.
This commitment to safety, soundness and the interests of end users drives our support for the retail payment activities act. The act strikes a balance between enabling payment service providers to offer innovative services, and delivering the reliability and safety in the payments market that Canadians have come to expect and rely upon. It will do this by enhancing trust within Canada’s payments ecosystem and enabling broader access to Canada’s national payment systems.
I’ll start with enhancing trust. COVID-19 has accelerated the adoption of electronic payments. Canadians are turning to electronic payment options that are often delivered by providers today who are not subject to the same level of regulation as financial institutions. Enhanced retail payments regulation will expand trust between incumbents and newer entrants, and between all providers and their customers. Trust is the bedrock of a networked industry like payments and is a key enabler to innovation.
I’ll turn now to access. The retail payment activities act is also a critical pillar to support Payments Canada expanding access to our national payment systems. We are working with the Department of Finance, our members and stakeholders to amend Payments Canada’s enabling legislation to broaden membership and system access to include entities registered under the retail payment activities act. This will facilitate registered payment service providers having direct access to our payment systems, enabling enhanced competition and providing opportunity for greater innovation, which benefits Canadians, Canadian businesses and a thriving fintech and pay tech economy.
In closing, Payments Canada welcomes the retail payment activities act. We also recognize the years of effort and industry consultation by officials of the Department of Finance to get us to this point. Thank you.
The Chair: Thank you very much for your comments. The comments of all witnesses are very helpful to our ability to understand the budget bill.
We will begin questions from senators, starting with a deputy chair.
Senator Wallin: I’ll put the question to Mr. Morrow from the Bank of Canada, but if Ms. Butler would like to respond as well, that would be great. It’s a quick two-part question.
The new entities required by the Bank of Canada to pay for their own assessment process, subject to these new regulations, does anybody feel this could be a disincentive for start-ups or smaller operations — more novel providers — and keep them out of the market? Related to that is whether the new entrants who are subject to all the security reviews — is that going to be shared with the end users, with the public? Thank you.
Mr. Morrow: Thank you very much, Senator Wallin.
With regard to the fees to be charged as part of this new act, we have not yet fully developed how those fees will be calculated or what will go into them. We have a number of underlying principles we want to make sure we adhere to. We want to make sure the fees are transparent, simple and easily understood.
We will be putting together a framework for how those fees can be divided among participants. Our aim would then be to consult with the industry around what that fee structure looks like and whether they think it’s appropriate.
Of course, the ability to pay will be one the key factors we will take into consideration within this framework. At the heart of this, this is an initiative that is meant to promote competition and new entrants in the system and not to impede them, so we will certainly take that into account when we think about the fees.
When it comes to the security assessments that will be done on this, I would turn to my colleagues at the Department of Finance.
The Chair: Does anyone from the department wish to take that on?
Richard Bilodeau, Director General, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: I would be happy to take that question.
If, upon the completion of a review of a national security review, the minister decided to revoke or refuse registration, there is a requirement in the proposed legislation to inform the applicant that their registration has been refused or revoked. The notice would be provided to the Bank of Canada, and the bank would be obligated to inform the applicant of that.
Senator Wallin: Not just the applicant; I was asking about the public.
Mr. Bilodeau: If I’m not mistaken, the fact that the company’s registration had been revoked would be made public.
Manuel Dussault, Senior Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: If I can add to that, subclause 27(1) is where the explanation is. There is a list of registered entities, and it says:
The list must set out the reasons for a refusal or revocation.
You can find that requirement there.
The Chair: Thank you.
The next question will be from our other deputy chair, Senator Smith.
Senator Smith: According to a briefing binder, the act would require payment service providers to identify and mitigate operational risks, safeguards, end-use funds and register with the Bank of Canada.
My questions are in relation to consumer data privacy. What types of data, if any, would these providers be required to collect, and are there any data disclosure requirements to the bank? Finally, what kinds of safeguards are in place to protect end-user funds?
The Chair: Is that question directed to Finance?
Senator Smith: That’s Division 8. Finance Canada would be great if they could answer.
Ms. O’Brien: Sure, I will take this question. Then I might turn to Mr. Morrow in terms of the implementation.
With respect to the overall framework of operations and safeguarding end-user funds, operational risks would include data breaches that damage a payment service provider’s reputation or reliability, and this is why we’re capturing these risks under the framework. In order to address the risk, the proposed legislation would require the payment service provider to establish an operational risk management framework in order to identify and mitigate the risks.
With respect to data, the framework would ensure that data is being held securely and managed responsibly, but the framework itself does not address privacy risk. The existing framework with respect to the protection of data privacy would continue to apply in this area.
Senator Smith: If I could ask you, have you folks created the actual framework? Is it set in stone now for users, or is it wide open? Is someone going to just listen to the type of feedback that you’ve given, or that the department gives, and then, make up their own framework, or is there a set standard that you have established?
Ms. O’Brien: Do you mean in terms of data that they must collect?
Senator Smith: In terms of the data privacy, is there a framework you’ve set up that the members have to use to provide you with the assurance that they are functioning properly?
Ms. O’Brien: With respect to data privacy and requirements to ensure privacy, the current requirements under the Privacy Act and the Personal Information Protection and Electronic Documents Act, or PIPEDA, for example, would continue to apply.
Payment service providers under our framework would have to identify their risks and compile an operational set of risk requirements, which are not yet elaborated on within the framework. We will elaborate on those under the regulations. Our intention, however, is to adapt the operational risk principles that currently exist within the Bank for International Settlements’ Principles for financial market infrastructure. We will look at international standards that apply and adapt them to the retail payment space.
Senator Smith: Thank you very much.
The Chair: I think we should move on. If there is a second round opportunity for the Bank of Canada to elaborate further, we will go to that.
Senator Klyne: Thank you for coming out this evening.
My first question is for the Department of Finance with regard to Part 4, Division 7 regarding the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which proposes amendments that will broaden the definition of the head of an international organization to include the head of an affiliated institution of that international organization and adds the head of an international sports organization. It also proposes to broaden the definition of a politically exposed domestic person to be more inclusive of the two other senior levels of government. Could you provide the rationale for proposing those changes and why now?
Ms. O’Brien: Thank you so much for your question.
I’m not at liberty at this moment to answer it as we are here that discuss Division 8 and the retail payment activities act. However, I would be happy to get back to you with an answer to the question with respect to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or PCMLTFA.
Senator Klyne: I do have another question. This would be for Payments Canada. Payments Canada, are you able to answer a question on Part 4, Division 7?
Ms. Butler: I came to speak to the retail payments activity act. You could ask the question, and I could undertake to provide you an answer if that’s satisfactory.
The Chair: I think, Senator Klyne, we will have an opportunity to address those issues. They will be forthcoming. I would encourage you to withhold those questions. We could potentially deal with witnesses at that time. We are going to devote our meeting to Division 8 this evening, and there will be time to address those areas later.
Senator Klyne: Including the Bank of Canada?
The Chair: I’m not sure —
Senator Klyne: It was around part —
The Chair: Mr. Morrow, do you have any comments?
Senator Klyne: I haven’t asked the question yet.
Mr. Morrow: I believe that the bank will be appearing separately on Division 2, so there will be an opportunity to ask the question and have someone answer it at that point.
Senator Klyne: I’ll save my questions for the next group of witnesses then.
Senator Bellemare: I have a question for the Department of Finance and the Bank of Canada. When I read the bill, I must admit that I felt a little uneasy, because it seems to me that it is designed in a very traditional way with respect to payment mechanisms. I wondered whether it wasn’t a coalition of the financial groups that provide traditional payment mechanisms to protect themselves in some way from cryptocurrencies.
The Standing Senate Committee on Banking, Trade and Commerce has studied cryptocurrencies in the past. It’s a very decentralized payment method, whereas the bill we are considering now represents a very centralized view of payment methods. In short, that’s my reaction to reading this bill.
When I read Bill C-30 and saw that the Bank of Canada had already set up an advisory committee, I also wondered whether we were not putting the cart before the horse. Did you include cryptocurrencies in the advisory committee? Did you include consumer issues, as Senator Wallin pointed out? Why create a bill when there is already an advisory committee? Will the bill be connected to the framework that will be developed? Finally, are any international experiences similar to what we are doing here? Those are my questions for the Department of Finance and the Bank of Canada.
Ms. O’Brien: Thank you for the question.
To begin, the scope of the framework includes digital and electronic payments. It has the flexibility to capture payment service providers that offer retail payment services using virtual currencies. Although, I would note that virtual currencies for the purpose of retail payments are currently quite limited. The framework does give us the scope to include them, and we would be developing more precise elements with respect to how it would apply to virtual currencies as we develop regulations.
This is a live area of policy development, and we’re actively engaging with regulators internationally, federally and provincially to better understand these products, including how they should be treated under our legislative and regulatory frameworks.
Maybe with that, Mr. Morrow, I’m not sure if you had anything else that you would like to add?
Mr. Morrow: Thank you very much, Erin. I can say a few words about what other jurisdictions are doing when it comes to the supervision of retail payment service providers. There are regimes in other countries. I think the two most significant ones are the payment system Directive 2 in Europe and a similar retail payments regime in the U.K. What this regime seeks to do is very consistent with what these other jurisdictions have done. It’s perhaps slightly more narrowly focused than some of the others, focusing on two core elements: making sure that end-users’ funds are protected and ensuring that payment service providers have taken adequate steps to manage and mitigate their operational risks associated with their activities.
You are correct, senator, we do have an advisory committee that has provided a lot of invaluable feedback. Part of the feedback we’ve gotten is that, where possible, where we’re seeking to achieve similar objectives to what’s being sought in other jurisdictions, that it would be helpful if we could align our rules and regulations with those other jurisdictions, just to avoid increasing regulatory costs for payment service providers that operate in a variety of different jurisdictions. Maybe I’ll stop there.
Senator C. Deacon: Welcome to each of you. Lovely to see you again and especially to be discussing this particular topic as part of the Budget Implementation Act. It’s our first move down the road in this country toward trying to modernize. I like the overview of the objectives up front that you provided, Ms. O’Brien, in terms of supporting growth, innovation and competition, that we have something that’s safer and more cost-efficient for Canadians. I want to ask two questions in that, and I’d love each of you to provide me with your advice in that regard.
One is what are the lessons learned globally that we need to pay attention to, with respect to PSD 2 or any other regime that has been implemented globally as we implement this legislation in Canada and develop the regulations, policies and programs around that, to make sure those important objectives are, in fact, achieved in reality.
Second, what would be your guiding values to make sure that — Canada has a long history of a very high regulatory burden relative to other nations, as assessed by the OECD or World Bank. We’re leaders in creating regulatory burden and not necessarily leaders in creating regulatory efficiency and effectiveness. We have a great banking system; no debate about that. But we need to get more efficient in everything that we do if we’re going to afford this COVID debt that we’re building up.
So I’d love you to talk about the lessons learned elsewhere and the guiding values that will make sure this is implemented in a way that is as efficient and effective as possible. Thank you.
The Chair: Who would like to begin?
Ms. O’Brien: I’m happy to put my oar in the water first. Thank you very much, Senator Deacon. I appreciate the question. It’s nice to see you again.
In terms of lessons learned globally, it’s a very interesting question. What comes to my mind is this legislation is sorely needed; we are actually behind many of our international peers in terms of providing oversight of retail payments, and I think this puts us at a disadvantage. You noted the objectives of the legislation: not only to ensure retail payments are safer and more secure for use of consumers and businesses but, just as importantly, to promote innovation and dynamism in this space.
The lack of an oversight or regulatory framework creates uncertainty, as we’ve heard from some payment service providers. This uncertainty can affect business investment. It can also have a negative impact in terms of consumers and businesses feeling that they can use these products and services safely. So having an oversight framework is critically important and, as I say, will bring us on par with a number of our international peers.
In terms of guiding values, I would say as we look forward to developing the regulatory framework that will underpin the legislation, some of those guiding principles would include simplicity, transparency in the regulations and fairness. I think I would also add proportionality, so understanding that we would want to design the regulatory system to appropriately address risks that payment service providers present. We understand that the nature of the risks are not as severe or as serious as perhaps other systemic payment systems in the country, for instance, the Large Value Transfer System or prominent payment systems that present a higher risk, and therefore the oversight system must be commensurate with that. I hope that gives you some direction in terms of —
Senator C. Deacon: Thank you, Ms. O’Brien. Ms. Butler and also perhaps Mr. Morrow.
The Chair: I’d like to hear from both witnesses, obviously, but let’s do so briefly if we could. We have other senators who want to get engaged here. Please go ahead. We’re happy to hear from you.
Ms. Butler: I’m happy to briefly comment on both of those questions. From lessons learned globally, I would say you can observe the value of a known and fair regulatory environment in terms of enabling innovation in the market, and you can see the participation of players in markets like the United Kingdom that have benefited from that certainty of regulation. It’s an opportunity here in Canada to provide that kind of support as well.
In terms of guiding values, when we are thinking about the regulation of this space, I think a lot of thought has been put into making sure that the regulation will be balanced and equitable, and measured in its approach to the activities that are undertaken by these providers. It’s very important to have that focus. Thank you.
The Chair: Thank you so much. Mr. Morrow.
Mr. Morrow: Very briefly, I think one of the key lessons I’ve taken away from other jurisdictions is the importance of a principles-based approach rather than something that’s overly prescriptive. We know the outcomes we want to achieve in terms of protecting funds and making sure risks are well managed. How that gets done is less important than the fact that it does get done. That kind of principles-based approach I think has served others well and will serve us well.
When it comes to regulatory burden, I think one of the things we want to achieve with this framework is that because it’s going to be principles-based, especially when we’re thinking about things like operational risk, there are already a lot of standards in the industry — ISO standards or payment card industry security standards that go about achieving the same types of things we want to achieve with this framework. If a payment service provider is complying with those standards and can demonstrate that, they should be able to quickly, easily and relatively painlessly show us how they’re complying with the standards outlined in this act and in the regulations.
The Chair: I appreciate the brevity of all the witnesses.
Senator Loffreda: Thank you to our panel of witnesses for being here. My question is for the Bank of Canada and/or Finance Canada and Payments Canada. On the retail payments oversight framework, public consultation papers were issued in 2015 and 2017. What were some of the major concerns of the stakeholders that were integrated into this act? Were there any concerns that are not integrated, and why? Also, maybe you can elaborate on some of the other key learnings through these consultations.
Mr. Morrow: I can certainly start, and then Ms. O’Brien can step in.
In terms of the consultations that took place, there was a lot of feedback received and many submissions to the Department of Finance. I would say they were all broadly supportive of what was put forward. A lot of the questions received were more around clarifying what was meant — providing greater specificity. When it came to areas like the various mechanisms that could be used to safeguard end-user funds, there was some concern it was too narrow a list and that it should be thought about being widened. That’s an example of a change that was made between the time of the consultation paper and what’s being proposed here in Bill C-30. That’s what I have on that. Ms. O’Brien, I’m sure you have more to add.
Ms. O’Brien: Thank you, Mr. Morrow. I would add two very important elements that had come up with respect to the consultations we held, notably with colleagues in Quebec. The legislation, for instance, was changed so that provincially regulated financial institutions are excluded from the scope of this legislation. In addition, we’ve included a recognition mechanism whereby should any province or territory decide to develop measures in this area that are very similar to what we have in the framework, those would be recognized by the Bank of Canada to prevent unnecessary duplication in terms of the application of the framework. Those were two very important comments that we had received and have addressed.
Senator Loffreda: Thank you for your answers. If there’s a second round, Mr. Chair.
Senator Marshall: My question is for the Department of Finance. I’m wondering why we have this bill now. The reason for that is when you look at the legislation, we don’t have the regulations yet, and we don’t have the finalized framework. Mr. Morrow couldn’t explain what the fee structure will be. Public consultations were in 2015 and 2017, so that was awhile back. That information would be dated. A lot has happened since then.
The information we have is that there’s an expectation that the bill won’t come into effect for another two years. We don’t have the finalized framework, we don’t have the regulations and we don’t have the fee structure. So why are we getting the bill now? Why wouldn’t we get the entire package? We’re getting a bill, and we’re being told it’s going to be another two years. Why would we get it in bits and pieces? Why can’t we get the entire package so we can see everything before we approve the bill?
Ms. O’Brien: I can appreciate that the legislation is a framework, and so it outlines the primary directions in terms of the oversight framework. I’ll pick up on a couple of your comments. In terms of the dated consultations, we have been working to develop this framework for a number of years. Initial consultations or public consultations date back to 2015. The consultations have been constant throughout the process. While the last public consultation paper was dated 2017, we have a number of fora in which we consult and discuss these issues with the industry. The information and views we have are very current.
Putting the legislation out now will allow us to continue to consult with industry so we can better develop the underpinning — the regulations that are to come. It will also allow us to advance important policy work that we are engaged with. Anne had made reference to this in her opening comments about opening access to Payments Canada systems and membership. Doing it on the staged basis allows us to make progress on a number of different files in parallel and also, I think, allow industry to eventually be ready to implement the legislation.
Senator Marshall: The public consultations in 2015 and 2017, could we have a link to those consultations so we can see what issues were raised and what comments and concerns stakeholders had? If you could send the link to the committee clerk, that would be appreciated. Thank you.
The Chair: I appreciate the question, Senator Marshall.
Senator Moncion: My question is along the lines of Senator Marshall’s comment. I am wondering why the consultations took so long.
Could you also tell me how many more players you will need in the system in order to be able to implement this whole set of rules?
Could you tell us how the system currently works and how it is regulated for financial institutions? I would like to know how the financial institutions and this system will work in parallel. How will the two fit together?
Ms. O’Brien: Thank you. If I understand your question correctly, I would start with this. In terms of the number of payment service providers we believe are in the marketplace, at the moment our estimates are at about 1,500 companies we think would be captured under this framework.
With respect to how it would relate to currently regulated financial institutions, the framework excludes federally and provincially regulated financial institutions from the scope of this legislation given that they are currently regulated under other statutes. So they would be excluded from the scope of the RPAA.
Senator Moncion: Thank you.
If I’m looking at, let’s say, Moneris, it’s been out there for a number of years, and they’ve been working with different financial institutions in providing this service. Having 1,500 providers out there that could possibly be part of this framework is a lot of players for the payment system.
I understand quite well why we need regulation, and that’s why I’m thinking the following: Why did it take so long? It’s not a question; it’s just a comment, but if you have anything to add to this, please do.
Ms. O’Brien: I agree the legislation is very welcome and needed. It’s a very complex area, and it has taken a number of years to develop. The question of putting legislation forward is always at the discretion of the government.
Senator Moncion: Thank you.
Senator Ringuette: In a way, my question is a follow-up to Senator C. Deacon’s question with regard to regulation. I’m looking at the process that you’re proposing for the application. There is the application that the governor will assess the risk, the data, security, privacy, et cetera. Then that application is sent to the minister, who will oversee it, including national security. If there’s a refusal at either end, there’s an appeal process at both ends.
My question is this: It’s hard to identify who is the real boss of this process. I cannot understand why it cannot be the Governor of the Bank of Canada. The Governor of the Bank of Canada would have access to sending applications to be reviewed by CSIS. The process is not seamless enough, from my perspective. Tell me why.
Ms. O’Brien: Thank you so much. Senator, you’re correct that it’s a two-stage process.
However, to better explain the national security elements of the act, I’ll turn your question to my colleague Richard Bilodeau.
Mr. Bilodeau: Thank you for that question.
To clarify, maybe I’ll answer your last question first and say that the Minister of Finance has overall responsibility for the integrity of the financial sector. When we were developing this, we kept that in mind along the way and worked with the Bank of Canada to figure out how the national security review process would work. The procedure that we’ve been developing and will continue to develop, should this legislation be adopted, is really a process that when applications do come in, it’s not a sequential process but a process that can happen simultaneously, where the Bank of Canada and the governor do their work and then the national security review process can happen, directed by the Minister of Finance and the department, along with our security partners.
Also, based on what we know, we do expect that the vast majority of applicants will go through the national security review process rather quickly. There will only be a few instances that might take a little more time.
But those processes will happen simultaneously.
Mr. Morrow: I have very little to add to that. At the Bank of Canada, we’re very comfortable taking the application and being able to assess the end-user fund safeguarding aspects and the risk management processes that a payment service provider will have in place.
When it comes to denying someone on national security purposes, we believe it’s the purview of the government more broadly to determine what is a national security risk and what is not, which is why this division of labour is laid out in the registration process and where the minister decides on that aspect of it.
Senator Ringuette: Yes, but the process also includes an appeal process to the governor, an appeal process to the minister and then an ultimate appeal process to the Federal Court.
Mr. Morrow: It’s perhaps a little simpler. When a payment service provider comes and they apply to register with the Bank of Canada, we’ll take some basic information about who they are and determine whether they are actually covered by this act and therefore need to be registered. At that point, we’re ready to register them. If they are not a payment service provider or have run afoul of particular infractions under the proceeds-of-crime legislation, there is capacity for the governor to refuse registration at that point. If the governor were to refuse registration, there’s a process of appeal through the governor and ultimately to the Federal Court.
If, on the other hand, we’re fine with the applicant, and if there’s a national security issue, then that appeal would take place with the minister. So the appeal process is separate for each of the two aspects.
Senator Ringuette: Thank you.
Senator Dagenais: My question is for Ms. Butler.
Ms. Butler, the bill brings about changes that will speed up transactions. However, if I quickly survey businesses, I am not sure that I will find any people who are aware of the changes being made.
For large companies with lawyers and accountants, it’s probably easy to keep up with the process, but for a small business owner, taking advantage of the new provisions can be complex and expensive.
Do you plan to make the ensuing changes and benefits better known, especially for electronic payments?
Ms. Butler: Thank you, senator. I’ll answer this from the perspective of Payments Canada, and there may be other members of the panel who may want to speak from the bank’s or Finance’s perspective.
It’s an important question around how to make sure Canadians and Canadian businesses understand the opportunities this provides. Payments Canada has a number of ways in which we have already participated with both the bank and the Department of Finance to help socialize the retail payment activities act — as it was formerly known, retail payments oversight — with our stakeholder groups and member associations. We have two advisory councils in which the Department of Finance participants as an observer and in which it has been able to discuss and socialize this act and the framework in that forum.
We do also through our conference, for instance, which happens annually. Over the COVID period, of course, we’ve had to do that remotely.
It’s very important to continue to do that socializing of this issue, because as I said when I testified earlier, this is a very important first step for continuing to modernize the payments ecosystem in Canada. This regulatory change is a key enabler for increasing access to the payment systems.
Payments Canada has a significant modernization program under way which will include the launch of real-time payments in Canada and will be an important enabler to innovation and, we expect, will be one of the primary attractions for a payment service provider to become registered and then apply to become a member of Payments Canada.
We have plans to continue to work with our stakeholder audiences, members, the bank and the Department of Finance to continue to plan for those changes and socialize the importance of that as we move forward, including our conference annually and outreach throughout the year. Thank you.
The Chair: Thank you. Does anyone else wish to add?
Mr. Morrow: I can just add that the Bank of Canada equally views outreach in communication as an exceptionally important part of our rolling out of this new responsibility. We do have plans in place to reach out to payment service providers. We are building a contact list of different payment service providers. At last count, we had 700 or 800 entities that we had pre-identified. We will be reaching out to them over the summer and fall to explain what this act is, what it is about, and what their responsibilities may be under it, what advantages could accrue to them as a result, but also to try to get them engaged so that we can get further input from them as the final elements of the framework are built, and we can take into account their views as those decisions get made.
The Chair: Thank you, Mr. Morrow.
Senators, time is up for this panel. I want to thank Ms. O’Brien, Mr. Morrow and Ms. Butler for the information and testimony that they have provided us. We really appreciate it.
I would also make one quick comment. I think you may be able to accomplish this, Ms. O’Brien, in a year, not two years. This will be your challenge. I’m absolutely convinced you will be able to do it with the assistance of the bank and Payments Canada.
Thank you all.
Senators, we will move on to our second panel, which will continue to focus on Division 8 of Bill C-30. Before we start our panel, I would like to thank you very much for keeping your interventions brief, as well as the answers from our first panel, which is very much appreciated, so that we each have a chance to ask questions.
To all the witnesses who have just arrived into the meeting, thank you for joining us this evening. We have with us from the Electronic Transactions Association, Scott Talbott, Senior Vice-President, Government Affairs; and from PayTechs of Canada, Alexander Vronces, Executive Director.
I will ask both witnesses to introduce themselves. Thank you so much.
Scott Talbott, Senior Vice-President, Government Affairs, Electronic Transactions Association: Good evening. I’m Scott Talbott, Senior Vice-President of Government Affairs at the Electronic Transactions Association. I want to thank the chair and committee members for this invitation to appear before you this evening. We are pleased to participate in the committee’s study of Division 8 of Bill C-30, the Budget Implementation Act.
ETA represents the entire digital transaction industry, including banks, fintechs, networks and payment processors. ETA members are responsible for serving tens of millions of customers and processing over $1 trillion in credit, debit and prepaid card transactions every year in Canada, as well as over $2 trillion annually worldwide. Our member companies are constantly developing and deploying innovative payment products and services to help consumers receive, hold and spend their money with secure, convenient and speedy payment solutions.
We thank the Government of Canada for its leadership on the inclusion of the retail payment activities act in Bill C-30. As you know, the act establishes a new regulatory payments framework for fintechs or payment service providers. This new framework will increase access to the payment system for fintechs while simultaneously regulating them for operational risks, as well as protecting consumers.
The implementation of the RPAA is only the first step in a multi-step process toward modernizing Canada’s payment and regulatory systems. As soon as possible, ETA encourages the government to continue to build on what will be established with the RPAA by also modernizing the Canadian Payments Act to create an associate membership class within Payments Canada. Such a change would facilitate additional access for fintechs to the Real-Time Rail, or RTR, that Payments Canada is on track to complete by 2022.
In combination, these two measures would provide ETA member companies with opportunities to continue to deliver the new products and services to consumers and merchants. Both of these steps, the RPAA as well as the new associate membership class, will require Finance Canada to write new regulations. Because there are so many types of payments companies and innovation often occurs quickly, we encourage Finance to consider a couple of points. The first is that the regulations should be principles-based rather than using bright-line tests, and they should focus on the risk profile of the fintech given its size and complexity as well as its products and services. With this approach, the regulations will have flexibility to adapt for future innovation as well as new entrants.
The second point is harmonization. Many other public laws and private sector rules of the payments industry already exists, and the new regulations should consider these in order to harmonize and avoid unnecessary redundancy.
In closing, I want to acknowledge and applaud the Bank of Canada and Payments Canada for their continued leadership and collaborative approach in these efforts to create a positive policy environment for continued innovation, competition and economic growth while ensuring robust consumer protections.
Senators, thank you again, and I look forward to your questions.
The Chair: Mr. Vronces.
Alexander Vronces, Executive Director, PayTechs of Canada: Thank you for the invitation to speak about the retail payment activities act. I am Alexander Vronces, Executive Director of PayTechs of Canada. We are a community of fintechs and payments, and we advocate for a policy change to promote competition and innovation in the sector.
I’d like to kick off my remarks today with a quote from the Kalifa report, an independent study on the fintech sector commissioned by the U.K. government:
Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution, that is changing the way we do finance.
In the U.K., fintech is strategic priority. In Canada, we are just getting started.
Modern payments regulation, access to payment systems, open banking, these are the basic building blocks of a modern financial technology sector. The U.K. already has them all. Now the U.K. is talking about a strategy to invest more than $1 billion in the sector to attract global talent and to ensure that the government as a whole is thinking about fintech in a more coherent and deliberate way.
Canada does have some catching up to do. This starts with the first building block, modern payments regulation, which is the retail payment activities act. We support it.
That legislation will help build trust in our sector. It’s also going to pave the way for standing up the other basic building blocks: access to payment systems and an open banking framework that includes not just a seamless movement of data but also money, the payments fees of consumer-directed finance.
Canada may be behind, but is not yet out of the race. Another thing the Kalifa report says is that Canada is still a contender.
Canada has promising fintech stories across the country, in Vancouver, Calgary, Toronto, Montreal, St. John’s and so many places in between, but if we don’t stand up all the basic building blocks and soon, some of these promising stories may not have happy endings. Modern payments regulation by itself is not enough. Without the other basic building blocks, it’s just going to be more regulation without more opportunity to compete and innovate.
For competition and innovation, we need access to payment systems, which is a separate legislative initiative. We also need open banking, which is a separate legislative initiative. Canada can catch up and have a financial sector fit for the 21st century, but for that to happen, we need the government to take the lead and stand up all the basic building blocks.
Thank you again for the invitation to speak here today. I am happy to take any questions you may have.
Senator Smith: Thank you to our witnesses for participating. I wasn’t very clear in my first question, but I would like to ask, if I could, about the retail payment activities act in terms of the Electronic Transaction Association. Maybe Mr. Talbott can answer.
How would the use of crypto-currencies in retail be subject to the act? Has the government provided any guidance, or is it looking at how digital currencies impact retail activities, because we know there are Canadian companies that accept bitcoin as a form of payment? If you could educate me, Mr. Talbott, I would appreciate it.
Mr. Talbott: Senator, I appreciate the question. The legislation is a framework and the details have to be filled in. The gist of it is if you are not a bank and you are primarily engaged in payment activities, you would be classified under the RPAA, which is a new term — the old term was RPOF — you would be considered a PSP and, therefore, covered under the act in question. Whether that’s crypto-currencies or other activities in the payment space, it would be covered. The act has the flexibility in its drafting to be able to expand to include additional technologies —
Senator Dagenais: No translation.
The Chair: Madam clerk, can you find out if we have a problem with translation? Let’s wait for a moment, Mr. Talbott. You may continue.
Mr. Talbott: I’ll summarize the answer. In short, the act contemplates additional technologies, and its core function is to regulate entities that are not banks primarily engaged in payments. A crypto-company primarily engaged in payments under the act, if enacted, would be considered a PSP and, therefore, subject to the RPAA.
Senator Smith: As someone who understands what is going on, how fast do you see the evolution of new currencies in terms of their implementation, and how will they be affected by the regulations the government sets up? Is this going to be an opportunity? Is this something that will evolve quickly?
Mr. Talbott: First, the Electronic Transaction Association members are working quickly to implement and use crypto-currencies for their own operations. However, I do not see it being adopted at the consumer level all too quickly. There is largely a lot of confusion and currency fluctuations. From a business standpoint, they are using crypto-currencies or positioning themselves to do so.
I think the regulation will actually be a benefit. Initially, while it may seem like a burden, it will provide certainty and predictability to the companies. It will also provide safety and security. There are operational risks built into the legislation and, presumably, the regulations that will provide for systemic risks and protect consumers. The legislation and the regulation together will provide certainty and clarity, as well as protect the payments system. In the end, it will have an important role to play.
Senator Smith: Can you see consumer protection being developed quickly in this new field?
Mr. Talbott: Industry generally moves quicker than regulations, which is not a bad thing. The crypto-space is moving quickly, and it’s up to the government to determine how fast it will regulate the space. It’s up to the government in terms of the speed. The answer could be yes.
At the same time, because technology is moving quickly, you want to make sure you get it done right. Taking the time to move judiciously is important here. You don’t want to stifle innovation before it gets a chance to take off.
Senator Wallin: My question follows on that. With all the new layers of rules, it sounds like it could be a disincentive, initially, for new entrants to the game. Is there a concern that those who provide the payment function but for whom it’s not their primary business might be able to circumvent the rules or say that it’s not their primary business? I’m looking from your vantage point as to how you see the rules and how tight the net is.
Mr. Talbott: I’m happy to start, though I know Mr. Vronces has some thoughts as well.
One of our messages to the Department of Finance as they write the regulations is to provide risk tailoring or risk approach so that large entities with a huge footprint and lots of products and services will be regulated by the same themes as the smaller ones but that they can scale it for the risk profile of the entrant. That should create a path for smaller entrants. While the themes should be the same for all entities, the burden should be lessened for the smaller entities, and we heard that in the other panel as well.
I know Mr. Vronces represents small companies, so I’m happy for him to weigh in.
Mr. Vronces: At this point, the regulatory framework is high level, and the devil will be in the details. In the long run, it will be of benefit for companies in the sector because it will help build trust. Even the small companies see value in having a government stamp of approval and being able to say they comply with standards that protect end-user funds and mitigate a range of operational risks.
I’m also confident at this point that the department and the bank are thinking about this the right way. As they said in the last panel, one of the guiding principles is proportionality. We are going to continue to encourage them to do what Mr. Talbott said, which is to think about the risk this introduces and make sure the risks are proportional to those. We are not concerned at this point, but we will be watching closely.
Mr. Talbott: To follow up on the second question about the tightness of the net, the regulations are focused on companies that are engaged in payments as their primary business. If it is secondary to you or your business, then you would not be covered as currently contemplated by the legislation. That seems to strike a good balance.
Senator Bellemare: I appreciate the opportunity to discuss this bill with you. My question is about the costs associated with it. We know that payment methods often come with transaction costs for both retailers and consumers, such as with Visa, Interac, and so on.
Will this bill have an impact on transaction costs? When we look at section 20, which deals with the protection of funds, we need trust accounts — I’m not surprised, since they want to reduce risk — can we conclude that this section will have an impact on fees? How will cryptocurrency fit into section 20? How is it going to be reflected in this section in the legislation? I’m not sure whether my question is clear enough.
Mr. Talbott: Unfortunately, the cost of government regulation is part of the cost of doing business, and prices generally reflect that. I think what is important to consider, though, is that the cost of fraud is also part of the cost of doing business. So when you weigh the costs of registration against the costs of the fraud that the legislation and the ensuing regulations will prevent, hopefully the two will net themselves out and, in fact, could even be a positive. By reducing fraud and by ensuring safety, soundness and security in the payments industry will help prevent fraud, and that will keep costs down as well.
Mr. Vronces: A comment on the first part of the question. I don’t think this will put upward pressure on transaction costs in the Canadian economy. As I said in my opening remarks, I think this is a first step toward standing up all those three building blocks: modern payments regulations, access to payment systems and open banking.
Access to payment systems will give fintechs and payments the opportunity to provide new ways to pay in all parts of the Canadian economy, which will provide the competitive pressure I think we need to put downward pressure on transaction costs. I think rather than increasing them, this regulation is a first step to decreasing them.
Mr. Talbott: I agree.
Senator C. Deacon: Nice to see you both here at this meeting discussing this topic.
I asked the question, and you’ve touched on it a lot but I wouldn’t mind a little bit of reiterating. I asked a question of the last panel about what are the lessons learned globally. One of the benefits of being a last follower is you get to see what other people have done wrong and done right; so what are the benefits and lessons learned in terms of our global competitors? You’ve spoken about guiding values, principles-based risk tailoring and harmonizing. Have you any to add to that or reinforce? What are your biggest worries here? My biggest worry is we have a complex regulatory regime versus a streamlined, more agile regulatory regime. We have that history in Canada of developing a pretty heavy regulatory burden across our country as judged by external bodies like the World Bank and OECD. What are your biggest concerns? For me, regulatory burden and timing. But what would you like to offer on those? Thanks very much.
Mr. Talbott: Senator Deacon, nice you to see you again. I think the biggest concerns — I have learned not to disagree with Senator Deacon, so I will echo his concerns are ours, namely that the system becomes too complex.
I don’t think there is much of a risk of that here, though. I think the flexibility built into the legislation and the comments we have heard so far from the outstanding team at Finance as well as the Bank of Canada is that they, too, are focused on flexibility, and hopefully that will keep costs down, as well as complexity. We are pleased with that.
Lessons learned from around the globe: First of all, that it is needed and necessary. The marketplace has moved quickly to develop new products and services, and providing this degree of regulatory structure and framework will help provide safety and soundness while ensuring competition growth, while protecting consumers as well as merchants. So the lesson learned is that this is a necessary step to move Canada up with the rest of the world.
Mr. Vronces: I agree. I would only add that as far as lessons learned, I think the big lessons from abroad and places like the U.K. and Australia and elsewhere, are two things: There has been persistent political leadership to champion the sector, to understand and communicate the importance of the sector widely and broadly.
I think the other thing is that other jurisdictions view the sector in a more holistic way. I sound like a broken record here, but it’s the three building blocks. It’s not just modern payments regulations; it’s access to payment systems and it’s open banking. These things need to be done all together. We can’t just do one and kick the can down the road, because then the risk is we will end up with more regulation without opportunity to compete and innovate.
As far as guiding principles, I think competition and innovation need to be at the heart of what we do here. I also think we need to make sure we are providing choices to these fintechs, because for a good deal of them they are wondering what’s next. They don’t easily and nicely fit under any existing regulatory framework in Canada, and some of them quite literally are asking themselves the question, “Do I become a bank, or do I leave the Canadian market?”
I think it’s obvious to everyone what the easy answer is when you are an up-and-coming financial technology company: You leave the Canadian market. And those are the outcomes we want to avoid.
Senator C. Deacon: Thank you very much.
Senator Loffreda: Thank you to our panellists for being here. I noted and read that the proposed legislation would align Canada with other jurisdictions such as the United Kingdom, Australia and the European Union, who have regulatory frameworks for new and emerging payment service providers in place.
I didn’t read anywhere that we’re aligned with the U.S. Are we aligned with the U.S.? The U.S. is our major trading partner. How does the U.S. regulate payment service providers? Even in our discussions this evening, the U.S. hasn’t come up as a nation that we are aligned with. To what extent do these providers do business in Canada? What is the current market share or landscape in Canada? How do you see the industry evolving in the near future, given the acceleration of the digital economy, its impact on the industry? Do you see the financial institutions that are not subject to this act holding their market share, consumers benefiting from the act and the landscape or market share changing across Canada? Thank you.
Mr. Talbott: I’m happy to answer that, senator. I appreciate the question. In the U.S., where ET also operates, they use the state system to regulate the fintech players, but there are proposals at the federal level to consider increasing access to faster payments for the Federal Reserve for fintech players both at the regulatory as well as the congressional level. The state-level regulation in the U.S. addresses most of the issues that we’ve talked about here, but there are similar proposals at the federal level.
In terms of doing business in Canada, it’s difficult to say. I’m happy to look into the numbers and see if I could come back to you with more. But many ET member companies are in both countries. Obviously the volumes are different simply based on population, but in terms of population, many ET member companies, both traditional as well as fintechs, work across the border. Many transactions that originate in Canada are processed in the U.S. and vice versa.
In terms of evolving markets, I think that the fintechs base has accelerated its growth in recent years. It has been a tremendous explosion, and they have come on strong, both in terms of the number of participants as well as the volume and the dollars in transactions. The COVID pandemic actually accelerated a lot of the PSPs and fintechs utilization. We saw a tremendous increase in user accounts, as well as dollar volumes in many fintechs, and I expect that trend to continue.
The Chair: Thank you, Mr. Talbott. Mr. Vronces, do you have any comments?
Mr. Vronces: There is no way I am going to outdo Mr. Talbott on that answer so I’ll stay silent.
Senator Klyne: I have two quick questions. First one relates to the preamble to the retail payments activities act, which sets out the purpose of the act through sections 1 to 11, and relevant definitions and rules to determine if entities are affiliated and the types of retail payment activity that would be subject to the act.
What is the anticipated impact of those serving the payments ecosystem as it relates to excluding many retail payment activities from the application of the act, if any impact?
Mr. Talbott: I think, if I understand your question, what is the scope of the act in terms of who is eligible and who is not, I think at its core the basic definition in the act is that if you are a non-bank — and there are other exceptions, but if you are a non-bank primarily engaged in the business of payments, then you would be covered by the act. If payment is incidental to your business, then you would not be included in the act as it is currently drafted.
Senator Klyne: To continue on with Senator Deacon’s line of questioning, are there any concerns with the act’s framework interacting with the open banking framework being developed by the Minister of Finance? If so, do you have any recommendations in that regard?
Mr. Talbott: I’ll defer to Mr. Vronces to start, and then I will be happy to follow up, if that’s all right, Mr. Vronces.
Mr. Vronces: I think when the Government of Canada first started consulting on consumer-directed finance or open banking — this was many years ago — it made sense to exclude from the scope of that consultation, the payments piece of open banking, the third-party payment initiation, and focus only on data mobility. However, in 2021, now that we’re going to have modern payments regulation, now that we’re close to having a new real-time payment system stood up by Payments Canada and all its members, I think it’s time to make sure that it comes into the scope of the conversation. Otherwise I fear we’re going to miss an opportunity.
Senator Klyne: Thank you for that. I have another quick question to follow up on Senator Loffreda’s question. Part 5 of the retail payment activities act sets out the Bank of Canada’s and the Minister of Finance’s proposed powers with respect to administration and enforcement. Violations of the act would be subject to administrative monetary policies compliance orders, as well as orders for reasons related to the protection of national security. Given the act’s similarities to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, do you anticipate a role for law enforcement in verifying compliance with the act?
Mr. Talbott: I’m happy to take that one. Unfortunately, the reality of our world is terrorism, whether they are locking down oil pipelines or trying to steal money. I would imagine that because of the threat of thieves, something we take seriously and work diligently to protect consumers against, but unfortunately that threat is real. The payments industry works with law enforcement on a number of different fronts, and I would imagine, given the connection to anti-money laundering and other regulations that law enforcement would have a role to play, unfortunately.
Senator Klyne: Thank you.
Senator Marshall: Thank you, witnesses, for being here tonight. I want to talk about timelines and get your opinion on the time frame we’re working with. The officials told us that the consultations started back in 2015. We have the bill now, which is a broad framework, but we haven’t seen any regulations yet or the finalized framework; we don’t know how the fees will be determined. Based on the information we have, the Department of Finance estimates another two years before everything is finalized. Is there a possibility, based on what you know and what’s transpired over the last few years that the framework could be somewhat outdated by the time we get it? You mentioned earlier that we’re behind some of the other jurisdictions. Is it a possibility, because it’s taken so long for the Department of Finance to get the whole package together, that it might be outdated by the time we receive it?
Mr. Talbott: I’m happy to answer, Senator Marshall. It’s a good question. The short answer is, of course, it’s a possibility, but I think the way that the legislation is currently drafted and the indications from both the team at Bank of Canada as well as Finance, that they’re focused on a principles-based regulation, that there’s enough flexibility built into the structure that recognizes the speed of innovation as well as the different size and types of entrants. With that in mind, hopefully there’s enough flexibility built into it to accommodate changes to the system.
Senator Marshall: Thank you. Could I hear from the other witness as to your views on it?
Mr. Vronces: First, and maybe facetiously, the public policy wonk in me hears two years and thinks wow, that’s fast. But I think, given the fact that the legislative framework is relatively high level, given that it’s principles-based, I think it will give Canadian policy-makers and regulators sufficient flexibility to adjust as things change.
Senator Marshall: Thank you for your confidence.
Senator Dagenais: My question is for Mr. Talbott. In the context of all these changes to electronic payments, can you tell us whether consumers will lose certain protections, while businesses will surely benefit greatly from the new adjustments? Isn’t the government taking advantage of the pandemic to make changes? Could the Standing Senate Committee on Banking, Trade and Commerce have examined these changes more thoroughly had they not been included in the budget?
Mr. Talbott: Thank you, senator. I appreciate the question. In terms of whether consumers will lose protections under the proposed law, the answer is unequivocally no. The law focuses on a number of areas, from safeguarding consumer funds to ensuring operational risks are taken into account, various reviews, applications. I know the legislation and the ensuing regulations actually strengthen consumer protections, which benefits not just consumers but merchants, as well as the entire economy.
In terms of your question about the timing relative to the pandemic, my answer again would be a respectful no. This has been in the works, as we just heard, since 2015, long before the pandemic came along, and was necessary given the changes to the marketplace with the fintechs entering the system and becoming larger. I think, if anything, the pandemic, where we saw a greater use of the fintechs, both in terms of mobile wallets, contactless and other technology, that it actually increases the need for legislation and ensuing regulations.
Senator Dagenais: Thank you.
Mr. Vronces: I agree and would add that, though the public consultations began in 2015, I think the broader discussion goes back even further, back to 2011, when the government’s payment system task force review put out a report, Moving Canada into the Digital Age, in which they called for an overhaul in the way we govern payments. At the time, they called for a function-based approach to regulation, regulating companies based on the payment function they perform rather than the type of entity they are. This retail payment activities act is the culmination of at least a decade of conversation.
Senator Moncion: How on board are the large financial institutions? I think they were the ones who were controlling where we were going for a long time. I’d like to hear you on this.
Mr. Talbott: Sure, senator. It’s a good question. If you take a step back to 10 years ago, the larger institutions were, as you would expect, naturally reluctant, as many large institutions are, to change. If you fast-forward to today, many large institutions, especially on the banking side, which are heavily regulated, welcome the change for two reasons: One, because they understand the value that regulations provide in increasing safety, both of the funds and for consumers; and two, because of a reality of convergence between traditional players and the fintechs. They are working together more and more with each other. Often the regulations that a bank is subject to flow down to a third-party provider. So the bank must ensure compliance, ensure that the third parties are in compliance with the regulations the bank is subject to. The regulation and the legislation that’s proposed will actually increase many of the same regulatory themes that banks face, thereby strengthening their ability to do business with third parties gives them greater comfort and security and should give regulators the same levels of comfort and security over the fintechs.
Senator Moncion: Thank you. What are the risks of postponing this legislation for a year or two?
Mr. Talbott: I think the markets continue to develop. Consumers, more and more, are utilizing the fintechs. You have fintechs not operating out there in a vacuum but simply more and more consumers are utilizing them. So the benefits contained in the legislation, consumer protection, safety and soundness, operational risks, would be unrealized. In our opinion, there is no reason to delay in implementing the legislation.
Mr. Vronces: I would agree, especially with the shift to e-commerce and online payments, to digitization of this entire sector. I think it’s important to note that the payments value chain is long, complex and there are a lot of intermediaries. It’s only as strong as the weakest link. This legislation will strengthen the Canadian payments value chain. From a safety perspective, I think we need it more than ever.
On the other side, delaying this means delaying the standing up of the other building blocks, access to payment systems and an open banking framework that includes not just the movement of data but also money, which would be detrimental to investment in this sector.
There was a report from Accenture that came out a couple of months ago, that studied the Canadian fintech sector. They found that because of this uncertainty the sector is losing steam. They found fintech start-ups are on the decline. I can tell you anecdotally there are fintechs in payments that are thinking of becoming a bank or leaving the Canadian market, which is not a question we should have to put to them.
Mr. Talbott: If I could add one more point. We need to look no further than the crypto-space we’ve talked about before. A year from now, that will be a more mature market, and it is important to ensure there are regulations to help it grow but also to provide protections.
Senator Ringuette: About four years ago, we went through the legislation approving the big Canadian banks and the possibility for them to acquire fintechs. How many of your membership are now totally or partly owned by Canadian banks?
Mr. Talbott: Senator, that’s a good question. I have to go and check. I don’t know how many banks completely own our members. I know there are joint ventures and other types of arrangements between banks and fintechs to capitalize on the resources each one brings to the table. But I don’t have a number for you at this point. I’m happy to circle back and see if I can come up with a more definitive answer for you, senator.
Mr. Vronces: Also, I don’t have a definitive answer. I can look into it and get back to you. My hunch is that many of them are not fully owned by large financial institutions or financial institutions of any size, because a lot of them want access to the payment system because they don’t get the service levels they hope and want right now, having to go through a bank.
Senator Ringuette: Thank you.
The Chair: If you’re able to provide those answers, please provide them to the clerk of the committee, and then the committee will be able to receive the responses.
We are at second round now.
Senator C. Deacon: I know it’s not part of this proposed legislation, but I would like you to touch on any concerns that the new proposed digital services tax doesn’t somehow make its way into affecting this sector. I don’t think that’s the intention, but it was in the budget speech. Again, it’s about clarity. It’s a question I would love to have asked if we had a second round with our previous witnesses. There’s a need for clarity there. Again, wonderful to have you here speaking about this issue. Thank you.
Mr. Talbott: Senator C. Deacon, I’m happy to take that. I think we have some concerns with Canada moving unilaterally to impose a DST, a digital services tax. The way the legislation is drafted, it is broad and could result in double taxation. There are a number of taxes that are collected and paid by companies that might be caught by a DST.
Additionally, the OECD, as you know, is working hard to develop a global tax in this space. While the proposal contained in Bill C-30 is designed to be temporary, we think it might undermine the efforts on the global scale by the OECD to create a global DST.
Senator C. Deacon: Mr. Vronces, do you have anything to add?
Mr. Vronces: Nothing to add on my end.
Senator Loffreda: We briefly did cover this topic, but it’s so important that I’d like to retouch on it and ask my question. The main concerns are confidentiality and security, and the resources required to constantly mitigate these risks for the evolving threats. It’s such a dynamic industry, as we know. Could this act assure the consumer that payment service providers could keep up with the major financial institutions in providing confidentiality, security and adequate resources to constantly protect the consumer?
Mr. Vronces: I think this first phase of the retail payment activities act does have a narrow focus on end-user fund safeguarding and operational risks. Despite that, there are other pieces of legislation that I think could help in this regard that are already on their way to becoming law, hopefully, perhaps with some targeted amendments. When I think about data and privacy, for example, I think about the new privacy legislation that was tabled in 2020. That will go some way to addressing some of the concerns.
I don’t always think it’s possible or ideal to have everything in this one particular piece of legislation, because we also want to avoid duplication between the different laws of the land. We don’t want to create regulatory confusion, because that would just cause more uncertainty for a lot of start-ups and challengers in this space.
Mr. Talbott: I would add that ETA has been a proponent of an idea we created that would offer a tax break to small businesses that purchase cyber that are compliant with the government’s ideas of cybersecurity and purchase cyberinsurance. That is one way to help address some of the concerns that you raise, senator.
Senator Loffreda: Thank you. Because the resources are so important to keep up with these evolving threats that we all see and are aware of. Thank you.
Senator Dagenais: My question follows on from Senator Loffreda’s question.
We know that e-commerce is often carried out by foreign entities. Could you give an example of what the new regulations will change for consumers? You know that consumers generally do not ask questions before making a payment. What will this change for them in reality?
My question is for Mr. Vronces.
Mr. Vronces: Given the way you framed the question, I think there is definitely a group of consumers who probably won’t notice the difference because they don’t ask these questions now.
I think good evidence of this is what was uncovered during the government’s consultation on open banking. A bunch of consumers have given up their online banking credentials and that’s obviously not good. To some extent, they haven’t even realized they’ve done it. With this retail payment activities act, not all consumers may notice a difference. I think the upgrades, the increased safety on the back end will produce better outcomes for them because their funds will be safeguarded and their payment service providers will have to adhere to minimum standards with regard to the way they operate and incident management frameworks and all that other stuff. So that they don’t notice it I don’t think is necessarily a problem.
For the consumers who are more discerning, savvier, who shop around and who really want to dig into the detail and figure out who they’re dealing with, I think this legislation, though it is regulation, could help on the innovation front by building trust in this sector — trust that may be, among a certain segment of consumers, not quite there.
Mr. Talbott: Senator, thank you for the question. I think that consumers may not notice this because the payments industry works hard to make sure nothing happens. That is, we work tirelessly to fight fraud and ensure that consumers are unaffected. It happens, of course, but we work hard to make sure nothing happens. If you never noticed it, that means we’re doing our job.
The Chair: I think that’s the end of the questions. Let me ask a question if I may. The framework in which this legislation now appears, I think you would probably agree that we’re not going to be struggling with the rush to wait. I would like to have that feeling at some point.
Mr. Vronces, you talked about open banking. You’ve talked about privacy legislation. We’re now looking at the retail payment activities act, which may be passed but may take a couple of years to implement. While the digital economy exists, while foreign competition continues to develop and while we see the dynamism that evolves in other countries and in other economies, it seems to me that you are quite satisfied with the status quo — not to put words in your mouth. Frankly I am not, because I think if we continue to wait, including for this legislation, we will get further and further behind and lose that opportunity.
Do you have any comments on how you might be able to accelerate the potential opportunities for government to move ahead on these important pieces of legislation, one of which is in the House at this time? Any comments from either of you?
Mr. Vronces: I can have a crack at that question. For the record, I am not satisfied with the status quo. We’ve been advocating loudly for some time that things aren’t working in the sector. We want this change and we wanted it yesterday. At the same time, we recognize that these things take time and there’s a process. The government has to dot all the I’s and cross all the T’s. That’s maybe where my complacency, if there is any, is coming from.
In terms of how to get the government to proceed and hurry up and speed things along, one would be to make sure this retail payment activities act passes fast — right away. I’m happy that it wasn’t tabled as a stand-alone bill. I’m glad that it’s in this package of other legislative amendments and it’s going to breeze through, hopefully. I say that knowing that if we don’t get the other things, this is going to be more regulation without more opportunity to compete and innovate. However, I think the government has been loud and clear. Those other building blocks are not going to come until this happens, so this needs to happen.
On access to payment systems and open banking, I think the onus is on us as a sector to continue to demonstrate what the value proposition is of our policy agenda. I also think, though, that the government needs to continue to show more political leadership on this file. In these other jurisdictions that are much more advanced than we are, there has always been political leadership. I’d like nothing more than to see somebody in the cabinet take this on — take on fintech and champion it in Canada. In the U.K., they’re able to spot us and see Canada as a competitor. They actually warn of Canada as a competitor in that Kalifa report. If we can’t see that opportunity under our own noses, I don’t know how we get out of the mess.
Mr. Talbott: I appreciate the question. I agree with Mr. Vronces that this needs to happen soon, but it also needs to happen right. I think the legislation before you strikes that balance in terms of getting it right. The principles-based approach will help. This is the key, that Canada leapfrog ahead to catch up with the rest of the countries that have implemented such processes already. That’s important for the competition as well as for the economy, especially as we struggle to get out from underneath the weight of COVID.
In terms of what we can do, ETA and its members are loud cheering sections. We’re strong advocates. We applaud your leadership and your efforts to move this bill and other bills forward. As I mentioned earlier, this is just part of a necessary multi-step process. The markets will continue to evolve as they should, and we encourage them to do so. However, it’s important for good public policy to create a framework to regulate those with a principles-based approach that encourages continued innovation while still providing robust consumer protections.
The Chair: Thank you so much. I believe that concludes the questions from the committee. I want to thank you both sincerely for coming this evening and providing this information for us. It’s of great assistance to us as we consider Division 8 of Part 4 of Bill C-30. Thank you so much.
Mr. Vronces: Thank you very much for having us.
Mr. Talbott: Thank you.
The Chair: Honourable senators, I think we’re at the end of our meeting time. I want to thank the panellists, as I just did. I believe that concludes our meeting for this evening. We will adjourn the meeting. The next meeting we will be considering Divisions 1, 2, 3, 4, 5, 7 and 9 of Bill C-30, which I believe will be on May 26. Thank you so much.