The Government of Canada has introduced legislation to regulate FinTech companies that offer payment services in the country.
The draft legislation, titled the Retail Payments Activities Act (RPAA) and released as part of Bill C-30, aims to implement the previously announced federal retail payments oversight framework, which was first outlined in 2017. Bill C-30 has passed first reading in the House of Commons.
The legislation aims to “foster competition and innovation in payment services by building confidence in the retail payment sector.”
First reported by The Globe and Mail, the legislation was tabled as part of the 2021 budget to “foster competition and innovation in payment services by building confidence in the retail payment sector,” and in particular, among payments startups. Under the proposed law, the Bank of Canada would regulate all payment services companies in the country not already governed by other agencies.
The RPAA follows other regulatory and industry initiatives affecting Canada’s payments industry, including the Payments Canada-driven Payments Modernization initiative and amendments to the Payment Clearing and Settlement Act.
If passed, the RPAA would require Canadian FinTech startups that provide payment processing to register with the Bank of Canada, which would be tasked with maintaining a public registry of payments service providers (PSPs).
Registered startups would be required to submit an annual report and establish, implement, and maintain a risk management and incident response framework that meets Bank of Canada prescriptions.
“Like all these things, it depends on the quality of regulation,” Koho CEO Daniel Eberhard told BetaKit. “But, in general, we’re supportive of strong, clear regulation that allows us equal footing in Canada’s payments landscape. It’s the job of FinTechs to be successful under the frameworks provided. Well-defined regulations are much preferable to ambiguity.”
The Act would apply to any retail payment activities performed by Canadian PSPs as well as any provided by international PSPs for Canadian users. The RPAA details specific requirements regarding how PSPs are to hold user funds.
The legislation seeks to authorize the Bank of Canada to verify and enforce compliance in a variety of ways, allowing the central bank to request information, direct a special audit, or revoke registration due to failures to comply.
To promote compliance, the RPAA would empower the Bank of Canada to issue penalties of up to $10 million and enforce compliance orders on PSPs that violate its rules. It also aims to enshrine an appeals process.
Alex Vronces, executive director of Paytechs of Canada, told BetaKit that Canada’s current payments environment has high barriers to entry that prohibit FinTech startups from accessing key payments infrastructure independently.
“If they want to move money, FinTechs need to access essential payments infrastructure through a bank,” he said. “For some of them, the arrangement is fine. For others, it’s an awkward arrangement because they’re doing business with their competitors in order to compete with them.”
According to Vronces, this legislation “strengthens” Canada’s “payments value chain,” which he said “is only as strong as the weakest link.” For users, he said the financial and operational requirements it outlines “will safeguard their funds and guarantee them a level of operational robustness from their service providers.”
For payments startups, Vronces said, “it means the government is making its way toward a more innovative and competitive financial sector.”
The RPAA would also require PSPs to notify the Bank of Canada before making any significant changes to the way it performs a particular payment activity or begin to offer a new payment option. In addition, regulated companies would have to notify the Bank of Canada of any incidents that have a material impact on them, a user, or a clearinghouse.
The Act allows for a transitional period for registration, and would require FinTech startups to pay a fee to register, as well an annual assessment fee to the Bank of Canada.
“The Retail Payment Activities Act is supposed to be enabling legislation,” said Vronces. “It will help the government make progress on broadening access to essential payments infrastructure and, I hope, including third-party payment initiation in Canada’s work on open banking.”