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Canadian Payments Association Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

May 26, 2005

Mr. Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
L’Esplanade Laurier
20th Floor, East Tower
140 O’Connor Street
Ottawa, Canada
K1A 0G5

Dear Mr. Salembier:

I am writing on behalf of the Canadian Payments Association (CPA) in response to the invitation to comment on the consultation document for the 2006 review of financial institutions legislation (Annex 6), released as part of the Budget 2005.

As you are aware, the CPA is a not-for-profit corporation governed by the Canadian Payments Act (CP Act) and is primarily responsible for establishing and operating Canada’s clearing and settlement systems for payments, and facilitating the development of new payment methods and technologies.

The CPA currently has 119 members, including chartered banks, foreign bank branches, trust and loan companies, centrals representing credit unions and caisses populaires and other deposit-taking financial institutions. Further, as a result of the last financial services legislation review, the membership eligibility requirements were expanded to allow life insurance companies, securities dealers, trustees of qualified trusts and qualified corporations on behalf of their money market mutual fund, to also become members.

The CPA welcomes the opportunity to provide its views on some of the issues outlined in Annex 6 and looks forward to working with the Department of Finance on improving and adapting the current payments framework. In this regard, the CPA’s comments are presented in two parts: i) cheque imaging; and ii) improvements to the governance and operations of the CPA and the national payments system.

Part A of the submission outlines the CPA’s plan, in cooperation with its member financial institutions, to modernize Canada’s national cheque clearing system through a transition to electronic processing. On this important issue, the CPA is seeking certain legislative amendments to support an initiative that would modernize and enhance the efficiency and resilience of the current cheque clearing system. These amendments are essential to improving the payments system’s operation and enhancing the welfare of all of its participants.

The comments contained in Part B are in respect of the other issues of interest to the CPA, namely addressing disclosure and assignment of liability for electronic transactions, improving the regulatory approval regime, and improving the Canadian payments system’s operation and efficiency. With the exception of the proposed amendment relating to the by-law approval process, the amendments set out in this Part are minor and technical in nature; they are considered necessary from the perspective of good governance, transparency and effective risk management. The amendments proposed in the context of improving the regulatory regime (i.e., CPA by-law approval process), will serve to expedite the CPA’s decision-making process and reduce costs associated with preserving the public policy objectives set out in the Act.

The CPA would be pleased to discuss any of the issues raised in this letter and the attached submission with the Department of Finance.


Original signed by

Guy Legault,
President and Chief Executive Officer

Submission to the Department of Finance In Response to the Call for Comments on 

"An Effective and Efficient Legislative Framework for the Canadian Financial Services Sector"

A Consultation Document for the 2006 Review of Financial Institutions Legislation

May 26, 2005

Part A

Modernizing Canada’s Payments System Through Cheque Imaging

In Annex 6 to the budget documents, the Government indicated that it is seeking views "on allowing financial institutions to electronically process cheques in place of paper cheques and on ways to improve the Canadian payments system’s operation and efficiency." The Canadian Payments Association (CPA) welcomes the opportunity to provide comments on this topic.

Indeed the CPA, in cooperation with its member financial institutions, is working on a plan that would modernize Canada’s national cheque clearing system through a transition to electronic processing. This modernization, facilitated by image technology, is essential to improving the payments system’s operation and efficiency.

We are pleased that the Government has identified this initiative for consideration in its consultation document "An Effective and Efficient Framework for the Canadian Financial Services Sector", under the goal of "Adapting the Framework to New Developments." In addition, we believe that the cheque imaging initiative is consistent with the two other broad goals of the Government’s review, namely "Enhancing Interests of Consumers" and "Increasing Legislative and Regulatory Efficiency".

A growing number of countries around the world have already adopted some form of electronic process for clearing cheques or are in the process of doing so. These include the United Kingdom, Australia, Hong Kong, Portugal, Spain, France, New Zealand, Sweden, and most recently the United States, where the Check 21 Act came into effect in October 2004. It is thus important that Canada keep pace with global innovation by putting in place the framework to facilitate a move to image-based clearing.

Through a modernization of the clearing process, Canada’s financial system and all Canadians who participate in it will benefit from improved efficiency and resilience, as well as the innovative new services that financial institutions will be able to offer to their clients.

The CPA’s plan will enable this transition on a national, industry-wide basis. The first phase of implementation of image-based clearing is targeted for January 2007.

1. Current Cheque Clearing System: Legislation Impedes Innovation and Efficiency

The framework for the current cheque clearing process flows from provisions in the Bills of Exchange Act relating to the presentment of cheques at the drawee institution (i.e. the institution that holds the account on which the cheque is written). These provisions were enacted in 1890, long before the advent of information technologies that have now been widely adopted by both business and government entities, as well as Canadians generally. In essence, these provisions require that actual paper cheques be sent by the financial institution that accepts them on deposit to the financial institution that holds the account on which they are drawn.

Thus, each business day, cheques and other paper-based payments deposited at branches across the country are bundled, totaled and sent by air or ground courier to the regional processing centre for that financial institution or its clearing agent in one of six cities across the country. A similar process is in place for cheques deposited at Automated Teller Machines (ATMs). Once the cheques reach the data centres, they are passed through high-speed readers and sorted based on the financial institution holding the accounts on which they have been written. Next the cheques must be re-bundled and transported to another processing centre that serves the financial institution of the person who wrote the cheque.

There the items are processed again through a high-speed reader to verify the number and value of cheques received. Next the cheques are put through the machine again to sort them based on the branch that holds the account on which the cheque was written. Depending on the financial institution’s internal processes, the cheques may then be shipped to the various branches. If a cheque cannot be honoured (for example, due to insufficient funds or a stop payment order), it must retrace the entire journey back to the branch where it was initially deposited.

Under the current clearing process, each paper cheque must be passed through a sorting process up to four times on its route to the FI holding the account on which it was written, as well as being handled manually by several different employees. If the cheque is dishonoured and must therefore be returned through the clearing system, the number of times the cheque is sorted and manually handled doubles. It may also be transported up to four times.

Approximately 5,000,000 paper cheques are moved between financial institutions through Canada’s clearing system every business day. The requirement to move the paper items extends the clearing cycle for cheques, particularly those that have been dishonoured, and consequently a period of uncertainty when the financial institution that accepted the cheque on deposit and its customer do not know whether the cheque is "good".

Information technologies not contemplated at the time the legislation that has shaped the current process was enacted now provide significant opportunities to improve Canada’s cheque clearing system.

2. Modernizing the Cheque Clearing System to Improve Efficiency

The CPA supports the Government’s position, as stated in its consultation paper, that ". . . it is important to make sure that [the regulatory framework] remains current and up-to-date with events and developments in the global environment." In this context, the CPA is proposing amendments to the Bills of Exchange Act to facilitate innovation in the clearing system through the cheque imaging initiative, formally referred to as Truncation and Electronic Cheque Presentment.

The CPA and its member financial institutions are developing an industry-wide plan to modernize Canada’s cheque clearing system using image technology. This initiative will allow Canada’s clearing system to keep pace with others around the world that have implemented measures to support a transition to electronic clearing of cheques.

Under the planned system, Canadians will continue to write cheques and deposit those they receive as they do today. Financial institutions will, for the most part, follow their current practices for delivering deposited cheques to their processing centre. From that point on, new technology will be used to make the clearing process faster and more efficient.

At the data centre, images of the front and back of a cheque as well as the codeline data will be captured. Instead of shipping the physical cheques, these electronic files will be exchanged between financial institutions over a secure network, with a fully redundant back-up capability. The images will be available to the financial institution holding the account on which the cheque is drawn by 6:00 a.m. Eastern Time. This will enable FIs to make the images available to their branch staff and to customers faster than is the case with paper cheques today.

In the event that a cheque is dishonoured – for instance, as a result of a stop payment or as a counterfeit item, the image will be returned through the clearing system, allowing the FI that accepted the cheque on deposit and the depositor to receive notification faster than in today’s paper environment.

3. Cheque Imaging Offers Benefits for the Payments System and All Participants

A move to image-based cheque clearing will provide a number of benefits:

  • Improved Efficiency

As explained above, the current clearing system requires that cheques be processed in reader-sorters up to eight times and handled manually by several people. A transition to image-based clearing will reduce the number of times that cheques must pass through machines or the hands of FI employees. In addition, it will facilitate the delivery of image-based services by FIs to their clients that will enable clients to streamline their internal processes.

  • Enhanced Resilience of Clearing System

Today’s clearing system is heavily dependent on physical transportation networks and consequently vulnerable to disruptions ranging from bad weather to airport security incidents. The most acute example of such disruption was the aftermath of the terrorist attacks in the United States on September 11, 2001, when air cargo, including cheques in transit through the clearing system, was grounded for several days. Such disruptions increase risks for both financial institutions and their clients.

The shift to image-based clearing will improve system resilience by reducing reliance on transportation networks.

A fully redundant back-up telecommunications network will be in place for the exchange of images between financial institutions in the event that the primary network is not available.

  • Innovative Customer Services

The availability of cheque images will enable financial institutions to respond more quickly to customers’ queries relating to cheques, such as trace requests. In addition, it will facilitate the introduction of new image-based services that provide faster customer access to cheque information than is currently available and make record-keeping more convenient.

Research conducted with customers that already have access to cheque images, notably credit union members in Western Canada, found very positive response to the new services, with convenience and improved efficiency cited as the primary benefits.

In interviews conducted by Angus Reid in late 2003, 90 per cent of businesses and consumers indicated that image-based services they are receiving from the credit unions are either equal to or better than the traditional practice of returning cancelled cheques, with a majority of each group indicating the new services are superior.

While each FI will determine the specific services and features it will offer on a competitive basis, it is anticipated that most of those serving retail customers will make available an on-line image service as well as a form of printed image statement.

  • Potential Shortening of Hold Periods

Financial institutions establish their proprietary policies with respect to holding funds deposited by cheque based on their assessment of risk. Although it is not the only factor, the amount of time a cheque may be "in transit" in the clearing system is an important consideration in an FI’s decision as to the length of a hold it may place on funds. When fully implemented (currently projected for the end of 2008), image-based clearing will shorten the clearing cycle or "time in transit" for domestic cheques. It is thus anticipated that FIs will review their policies and reduce hold periods for those clients that experience them.

  • Potential New Tactics to Combat Fraud

A key factor in cheque fraud is the perpetrator’s ability to exploit the length of the clearing cycle – that is, the time between the deposit of the fraudulent item and its return to the FI that accepted it on deposit after it has been dishonoured. In today’s paper-based system, this cycle may take as much as seven business days in regular conditions, and even longer in certain circumstances. With cheque imaging, this time period will be shortened considerably, thereby improving the chances of reducing fraud losses for FIs and their customers.

In addition, the move to digital images will enable financial institutions to offer clients new fraud prevention services, such as encryption of key data on cheques for verification that such details as the amount or the name of the payee have not been altered.

4. Stakeholder Communication and Consultation: A Key Element of the Transition

The CPA began a broad communications and consultation program on the cheque imaging initiative in 2003. To date, this process has included:

  • the CPA’s Stakeholder Advisory Council, which includes representatives of consumers, various business sectors, retailers, governments and service providers to the payment system;
  • federal departments and agencies, including Public Works and Government Services Canada, Canada Revenue Agency and Canada Post Corporation;
  • all provincial and territorial governments;
  • a sample of large businesses and small to mid-size enterprises;
  • cheque printers and financial software developers;
  • cheque processors;
  • law enforcement agencies; and
  • CPA member financial institutions.

Stakeholder communities have expressed general support for the cheque imaging initiative

, and the CPA and its members have taken input received from them into account in laying the groundwork for the transition – for example, in the development of cheque standards.

Consultation is ongoing on aspects of the plan that remain under discussion, notably a policy on the retention period for original cheques in light of the fact that images will become the official payment item.

5. Legislative Amendments Will Facilitate Modernization and Improvements to Cheque Clearing

To facilitate a transition to image-based clearing of cheques and other paper-based payment items, the CPA is proposing a number of amendments to the Bills of Exchange Act (BEA).

(a) Revised Definition of Cheque

The CPA proposes that the definition of "cheque" in the BEA be revised to include the original paper item, the digital image of that item and any output of that digital data

. The objective is to clarify that the image of a cheque, or any printout made from that image, will satisfy legislative and regulatory requirement to retain or produce a "cheque" (i.e. provide certainty that the digital data or printout will be legally equivalent to the original paper item).

The following wording is provided for consideration:

"165(1) A cheque is a bill drawn on a bank, payable on demand, and includes digital data and a display, printout, or other output of that data, provided the digital data, display, printout or other output was created by or from digital imaging of such bill by or on behalf of a bank by a computer system conforming to bylaws, rules or standards of the Canadian Payments Association or from the application of another technology or process conforming to bylaws, rules or standards of the Canadian Payments Association." [proposed new wording indicated by underscore]

In addition, for greater certainty, it may be necessary to amend the definition of a bill of exchange, along the following lines:

16 (1) A bill of exchange is an unconditional order, which is, subject to subsection 165(1), in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer. [proposed amended wording underscored]

(b) Presentment for Payment, and Holder, Bearer, Intentional Cancellation and Lost Instrument Provisions

The drafting suggestions below are designed to accommodate the transmission of cheque images and/or relevant cheque information (i.e., codeline information) for purposes of presentment:

(i) Presentment for Payment

The CPA proposes that a separate section be included within Part III of the Act ("Cheques on a Bank"), perhaps as s. 165.1, to specifically deal with electronic presentment for payment of a cheque.

The following wording, which borrows to some extent from wording contained in the Australian Cheques and Payment Orders Act, 1986 and the UK Deregulation (Bills of Exchange) Order 1996, is provided for consideration:

165.1 (1) A bank may, on behalf of a customer, another bank, or any other person, present a cheque for payment by electronically transmitting the essential features of the cheque, instead of presenting the cheque itself, to the bank on which it is drawn in accordance with the by-laws, rules and standards of the Canadian Payments Association.

(2) If a cheque is presented for payment under this section, presentment need not be made at the proper place as defined in section 87 but shall, instead, be made at a designated location in accordance with the by-laws, rules and standards of the Canadian Payments Association.

(3) For the purposes of this section, the essential features of a cheque must be transmitted in a form that is intelligible or easily decipherable by the drawee bank and, at a minimum, must identify the sum ordered to be paid, the serial number of the cheque, the account against which it is drawn, and the code or number that identifies the bank on which the cheque is drawn.

(ii) Definitions of "Holder" and "Bearer"; Intentional Cancellation; Lost Instruments

In order to ensure that the rights of parties in relation to truncated original cheques are not jeopardized by the requirement that they be "in possession", and to avoid any suggestion that the "intentional cancellation" or "lost instruments" sections in the BEA could be construed as applying to truncated cheques that are subsequently destroyed, the following new provision is proposed:

165.2 Where a cheque has been destroyed within the context of a truncation scheme,

(1) the rights of any holder or bearer of that cheque under this Act shall not be affected by the inability of the holder or bearer to demonstrate physical possession of the cheque;

(2) the cheque shall not be considered to have been intentionally cancelled pursuant to s. 142 of this Act; and

(3) the cheque shall not be considered to be a lost instrument pursuant to sections 155 and 156 of this Act.

6. Summary

The CPA and its members believe that the cheque imaging initiative is vital to maintaining the position of Canada’s clearing system as one of the world’s best. Many countries have already taken steps to enable an electronic process for clearing cheques, using either cheque data alone or a combination of data and image exchange.

Further, the initiative will enhance the efficiency and resilience of the Canadian clearing system while providing a range of benefits to financial institutions and their clients. CPA’s consultations have shown that a wide range of payment system users are supportive of a transition to cheque imaging and acknowledge its potential benefits for their organizations, notably improved efficiency and convenience.

In addition, credit union members in Western Canada that have experience with image-based services (based on credit unions capturing images post clearing) have responded very positively to the introduction of these new services, and other financial institutions that have begun to introduce similar image-based services to their clients have received similar reaction. The CPA and its member financial institutions will continue to communicate and consult with key stakeholder groups as the project moves forward.

The CPA believes the initiative is consistent with the objectives outlined by the Government in its Consultation Paper and thus seeks legislative amendments to facilitate the modernization of the clearing system. The CPA welcomes the opportunity to discuss further the proposed amendments and the cheque imaging initiative with the Government.

Part B

Improvements to the Canadian Payments Association’s Governance and Operation and Other Issues of Interest to the CPA

1. Enhancing Interests of Consumers - Electronic Transactions

As a part of its goal to enhance the interests of consumers, the "Government is seeking views on how best to address disclosure and assignment of liability for all forms of electronic transactions."

The CPA generally addresses disclosure and assignment of liability for electronic transactions that are cleared and settled through its systems. More specifically, CPA by-laws and rules set out the roles, responsibilities and liabilities of members involved in the clearing and settlement of electronic payment transactions. Where appropriate, the rules also address responsibilities and liabilities of other users of its systems, including consumers.

For example, CPA Rule H1, which governs pre-authorized debits (PADs), requires that the payor FI re-credit the payor’s account in the amount of the PAD in certain specific circumstances (e.g., if the payor has signed a declaration, within a certain period of time of the PAD being processed, stating that the PAD was not authorized). With respect to disclosure requirements, Rule H1 also sets out the key provisions that must be included in a PAD agreement, including provisions dealing with notices to be given to the payor, revocation of the authorization and recourse offered to the payor.

Other electronic transactions cleared and settled through the CPA’s systems and addressed in CPA rules include point-of-service payment items, direct deposits, on-line payments, bill payments and electronic data interchange transactions. In developing most of the rules applicable to the clearing and settlement of these types of payments, the CPA has sought input from various stakeholders on how best to define the roles, responsibilities and liabilities of each party and on the appropriate level of recourse that should be afforded to end users through the clearing system.

In light of this framework, the CPA believes that, to the extent that there is a lack of clarity with respect to disclosure and assignment of liability for electronic transactions, it relates primarily to services that operate outside the scope of the clearing rules. In this regard, a well-documented trend in the payments industry is the rising visibility and greater prominence of non-financial institutions offering payments-related products and services. While the contribution of these alternative service providers to the efficiency and competitiveness of payment systems is unquestionable, the associated risks are not well-documented and poorly understood, including issues related to assignment of liability.

Accordingly, given the CPA’s role with respect to disclosure and assignment of liability for electronic transactions, as outlined above, should a framework be developed/expanded, the CPA would be pleased to assist the Department of Finance and other interested parties in this area.

2. Improvements to the Regulatory Approval Regime

Another goal that the Government is seeking to achieve in the 2006 federal financial legislation review is to increase legislative and regulatory efficiency. In particular, the "Government is seeking views on removing approval requirements for more routine transactions. The Minister of Finance would continue to oversee transactions that could raise issues of public policy."

One area where the CPA believes it would be appropriate to remove an approval requirement for more routine transactions relates to matters addressed in CPA By-laws (e.g., payments clearing and settlement matters). Given the rapidly evolving payments environment and the increase in the number of players, the CPA needs to be able to adapt its framework quickly and efficiently.

Currently, pursuant to the Canadian Payments Act (CP Act), all CPA By-laws or amendments thereto must be approved by the Governor in Council. This process has proven to be very lengthy and costly, taking approximately two years to effect change. Given the constantly changing payments system landscape, this period of time is viewed by the CPA as inefficient and, depending on the nature of a recommended change, could affect the safety and soundness of the payments system (e.g., change to a default or loss allocation provision) and the ability of the Association to conduct its business.

On this basis, the CPA is seeking an amendment to the CP Act to remove the requirement to have CPA by-laws approved by the Governor in Council. The implication of this amendment would be that CPA by-laws would no longer be considered statutory instruments under the Statutory Instruments Act. This would not affect the Department of Finance’s oversight with respect to by-laws, but would merely have the effect of streamlining the decision-making process.

Instead of having the by-laws approved by the Governor in Council (which entails that they be drafted by the Department of Justice), by-laws could be developed by the CPA and approved by the Minister of Finance (i.e., process similar to the rule disallowance process).

Another option relating to the by-law approval process would be to amend the CP Act to provide for both corporate by-laws (which would be approved by the Board) and statutory by-laws (which would be approved by the Minister of Finance). Issues relating to the business of the Association would be addressed in corporate by-laws such that any required amendment could be effected quickly, and the broader policy issues would be addressed in statutory by-laws requiring Ministerial approval such that the Minister of Finance would continue to oversee public policy issues.

Both approaches suggested are consistent with the Government’s goal to increase legislative and regulatory efficiency and, more specifically, to simplify and streamline the framework, in that they would significantly reduce the amount of time involved in effecting changes and adapting to the dynamic payments environment.

The removal of the Governor in Council approval requirement is also consistent with the Government’s Smart Regulation strategy which, as recently announced, is being implemented as a Government-wide initiative.

Some of the key principles underlying the Smart Regulation initiative relate to effectiveness, cost-efficiency and timeliness. As stated by the External Advisory Committee on Smart Regulation[1],

"Regulation must achieve its intended policy objectives […] It should be based primarily on standards and performance targets, rather than on how those targets are achieved, in order to provide flexibility while serving the public interest. […] The appropriate instrument mix should be designed and implemented in the least costly manner possible to achieve the desired policy objectives. […] Regulatory decisions and government services must be provided in a manner that reflects the pace at which new knowledge develops, consumer needs evolve and business now operates."

In our view, the approaches suggested by the CPA with respect to the approval of its by-laws would adhere to these principles.

In addition to removing the requirement for by-laws to be approved by the Governor in Council, we would like section 18 of the CP Act, which sets out the CPA’s by-law making authority, to be amended to specify that by-laws are policy-based. This amendment would lead to a streamlining of the by-laws, rules and standards structure, such that the by-laws would merely set out the policy framework, with the detailed requirements being addressed in the rules and standards. For the same reasons indicated above, this amendment would also be consistent with the Government’s goal to simplify and streamline the legislative framework and with the Smart Regulation strategy.

3. Adapting the Framework to New Developments - Canadian Payments Systems

In connection with the third goal of the Government as set out in Annex 6, the "Government is seeking views … on ways to improve the Canadian payments system’s operation and efficiency."

In order to improve the operation and efficiency of the Canadian payments system, the CPA is of the view that certain amendments should be made to the CP Act. The amendments proposed below are mostly technical in nature in that they do not confer any substantive new powers to the Association. These amendments are necessary from the perspective of good governance and effective risk management.

(a) By-law Approval Process

As explained in section 2 above, the CPA is seeking an amendment to the CP Act to remove the requirement to have CPA by-laws approved by the Governor in Council. Such an amendment would not only result in an improvement to the regulatory approval regime with respect to payments systems, but would also have the effect of improving the efficiency and operation of the CPA.

(b) Compliance

From a good governance and risk management perspective, and in an effort to improve the payments system’s operation, it is important to have a clear understanding of how the CPA may address compliance by its members. In this respect, while the CPA’s by-law and rule making authority under the CP Act is sufficiently broad to enable the CPA to address compliance, the amendments proposed below would provide more certainty and clarity.

(i) Confer Specific Authority in the CP Act to Make By-laws Respecting Compliance

Sections 18 and 19 of the CP Act set out the CPA’s by-law and rule making authority. In particular, the provisions give the Board broad by-law and rule making powers, including the power to make by-laws and rules respecting the exchange and clearing of payments, respecting settlements and related matters, and establishing penalties to be paid by members for failure to comply with the by-laws and rules. However, there is no specific reference to the authority to make by-laws and rules "respecting compliance".

For greater legal certainty, the legislation should be amended to expressly confer the authority to the CPA to make by-laws and rules respecting compliance.

(ii) Confer Specific Authority to Impose Fines, Interest Payments and Non-Monetary Sanctions

The CPA’s Compliance By-law provides for a number of non-monetary sanctions such as a suspension, reprimand, etc., and the imposition of interest. The LVTS Rules also provide for automatic "fees" to be assessed in certain situations (e.g., extensions). The CPA’s authority to impose non-monetary sanctions in the event of a contravention to its by-laws or rules and to apply interest to unpaid amounts has been questioned in the past.

Although the CP Act gives the Board the express power to make by-laws for the payment of fees for services performed and the establishment of penalties to be paid by members for failure to comply with the by-laws and rules, it does not specifically address non-monetary sanctions or interest payments. The CPA therefore recommends conferring the authority expressly in the CP Act to impose fines, non-monetary sanctions and interest payments. This could be done by broadening the scope of section 18 so as to allow for other types of fines and sanctions.

(iii) Enforceability of CPA Compliance Decisions

As set out in the Compliance By-law, in the event it is alleged that a member has contravened any provision of the CPA’s by-laws or rules, the CPA may establish a compliance panel to address the matter. After having followed the formal process set out in the Compliance By-law, if the compliance panel determines that a contravention has occurred, it may impose certain specified sanctions to the contravening member.

A compliance panel established under the Compliance By-law is a "tribunal" within the meaning and scope of the Federal Courts Act R.S.C. 1985, c. F-7 and the Federal Court Rules, 1998 SOR/98-106. As such, decisions of compliance panels are subject to judicial review. Pursuant to section 424 of the Federal Court Rules, 1998,the Federal Court may enforce an order of a tribunal if so authorized by an Act of Parliament.[2] There has been one instance where the Federal Court upheld a decision of a compliance panel but was unable to enforce the panel’s order since the CP Act does not contain a provision to that effect.

To provide more legal certainty with respect to the effect of compliance panel decisions, a provision should be added to the Act to authorize the Federal Court to enforce CPA compliance panel decisions.

(iv) Confer Specific Authority to Suspend Membership Privileges

The CPA also seeks to clarify in the CP Act that the CPA’s mandate and by-law-making powers give the authority to the CPA to suspend membership privileges in certain circumstances.

While it has been recognized that the objects and by-law making authority provisions are sufficiently broad to include the power to suspend membership rights in certain circumstances (since the General By-law and the Compliance By-law contain provisions to that effect), in order to avoid the possibility of having different interpretations of the CPA’s authority in that regard, it would be useful to amend the Act so that it expressly provides for the power to suspend membership privileges in certain circumstances.

(c) Legal Board and Director Eligibility Requirements

In order to improve the Association’s governance and operation, and to provide more legal certainty with respect to decisions made by the Board of Directors, the CPA is seeking a few minor amendments to the provisions of the Act dealing with the Board of Directors.

(i) Provide that the Board May Continue to Act Notwithstanding a Vacancy

The CP Act should expressly acknowledge that a legal Board exists should there be an insufficient number of nominations received to fill the required elected positions.

By way of background, the CP Act provides for a Board of 16 members, no more, no less. Given the restrictions applicable to directors (e.g., affiliation restriction, employee, director or officer of a member restriction), there could be a possibility that the Association may not have enough candidates to fill all the seats on the Board.

In addition, in the event that a director appointed by the Minister of Finance is unable to complete his or her term, (thereby resulting in a vacancy on the Board since there is no alternate to act for that director) it is unclear whether the Board could continue to act until a replacement director is appointed.

The predecessor legislation expressly provided for a Board smaller than the number required, in certain circumstances.[3] That section, however, was not carried over into the CP Act or regulations. This creates legal uncertainty as to whether, based on the Canada Business Corporations Act, the CPA Board would be a legal Board if it does not consist of 16 members.

The legal Board issue could be addressed by adding a provision stating that the Board of Directors can continue to act in the event of a vacancy. By way of information, the Canada Deposit Insurance Corporation Act R.S.C. 1985, c. C-3, contains the following provision which could serve as an example:

"5(3) A vacancy on the Board does not impair the right of the remaining directors to act."

(ii) Provide that Ministerial Appointees Continue to Hold Office Until Next Appointments are Made

There is no "contingency" provision in the CP Act relating to potential delays in nominating Ministerial Appointees (e.g., as a result of a change in Government). In the event an appointment is not made by the end of a Ministerial Appointee’s term, it is not clear whether (i) the Board of Directors may continue to act in the absence of the required number of Ministerial Appointees; or (ii) the director whose term has expired continues to hold office until the appointment is made.

While the amendment proposed in the previous section would address the issue of the Board’s ability to continue to act, to ensure continuous representation of "independent" directors, it would be preferable to add a provision to the CP Act to specify that, in the event of a delay in the appointment process, a Ministerial Appointee whose term has expired continues to hold office until a replacement is appointed. By way of information, the Bank of Canada Act R.C.S. 1985, c. B-2 contains a provision which could serve as an example:

"9.(1.1) If, on the expiry of a director’s term of office, no new director is appointed, the director whose term of office expired may continue in office until a director is appointed (…)"

(iii) Review Necessity of Citizenship Requirement For Directors

Under the Act, CPA directors must be "Canadian citizen(s) ordinarily resident in Canada". In light of the expanded membership to include authorized foreign bank branches, which may not have employees, directors or officers that meet the requirement, the CPA questions whether requiring all directors to be Canadian citizens is still relevant. In that regard, we note that a number of statutes governing CPA members (e.g., Bank Act, Cooperative Credit Associations Act, Trust and Loan Companies Act) do not include a requirement for all directors to be Canadian citizens. Rather, the requirement is generally that a certain percentage (between half and three quarters) of directors must be resident Canadians.


Effective Date of Membership

With a view to improving the Association’s governance and operation, the CPA is seeking minor amendments to the CP Act to clarify when membership becomes effective and when members cease to be members.

(i) Banks

The CP Act does not specify when banks become members of the Association. Section 32 of the Bank Act provides that a bank comes into existence on the date of issuance of its letters patent. Pursuant to section 4 of the CP Act, every bank is automatically a member of the CPA, regardless of whether it receives its order to commence and carry on business (which can be some time after letters patent are issued).

Given that there is no requirement for banks to apply for membership and to establish entitlement of membership, a provision has been added to the General By-law stating that the membership of a bank is effective on the day that it comes into existence under its letters patent. However, it would be preferable if the CP Act were to be more specific and indicate that the effective date of membership for a bank is when it receives its order to commence and carry on business.

A related question is when do banks cease to be members (e.g., in voluntary liquidation or when they are legally wound up)? The current practice is to only remove them from membership when legally wound up. This can often take a number of years and raises questions with respect to issuing dues assessments or taking them off the books and membership list. Again, it would be helpful to clarify this in the legislation.

(ii) Other Members

Paragraph 4(1)(a) of the CP Act stipulates that "[t]he Association shall consist of the following members [...] any other person who is entitled under this Part to be a member and who, on application, to the Association for membership in the Association, establishes entitlement to be a member." [Emphasis added]. The CP Act does not specify when membership takes effect nor that the membership has to be approved by Board.

During the by-law review process, a question was raised as to the effect of the reference to "on application" in the legislation and, more specifically as to whether it could be interpreted as meaning that the membership of non-bank members becomes effective as soon as the applicant establishes entitlement to membership (i.e., on the date the application is submitted, provided all the documentation necessary to establish entitlement has been provided) or whether it requires Board approval.

A provision was included in By-law No. 1 - General to clarify that the membership of members other than banks takes effect "on the day on which its admission to the Association is approved by the Board". However, for greater legal certainty, it may be preferable to clarify the matter in the CP Act.


General Manager

(i) Reference to President and C.E.O

The official title of the President and C.E.O. (which is consistent with similar positions in the industry) should be reflected in the CP Act. In particular, references to General Manager in the CP Act should be replaced with President and C.E.O.

(ii) Power to Designate Others to Act on Behalf of the President and C.E.O.

The CP Act specifies that the General Manager (i.e., President and C.E.O.) is responsible for the "direction and management of the business of the Association". However, the CP Act is silent on whether another officer of the CPA may be authorized to act in his/her absence. This could raise risk issues in the case of decision making during emergency situations (i.e., ACSS or LVTS events) and the President and C.E.O. is unavailable.

From a good governance perspective, and with a view to improving the Canadian payments system’s operation and efficiency, the CPA therefore seeks to add a provision in the CP Act expressly permitting the President and C.E.O. to designate others to act in his/her absence. By way of information, examples of statutes that contain provisions addressing the ability for others to act in the event of the absence or incapacity a President and C.E.O. include the Canada Mortgage and Housing Corporation Act R.S.C. 1985, c. C-7 (s. 12), the Canada Post Corporation Act R.S.C. 1985, c. C-10 (s. 8) and the Export Development Act R.S.C. 1985, c. E-20 (s. 8).


Statutory Instruments

Subsection 19(1) of the Act stipulates that the Board may make rules as necessary for the attainment of the objects of the Association, and subsection 2(3) expressly states that a rule is not a statutory instrument for the purpose of the Statutory Instruments Act. As such, it is clear that rules do not have to be drafted/reviewed by the Department of Justice and are not subject to scrutiny by the Standing Joint Committee for the Scrutiny of Regulations.

Section 19.1 enables the Board to make statements of principle and standards as necessary for the attainment of the objects of the Association. However, there is no statement similar to that in subsection 2(3) to the effect that statements of principles and standards are not considered statutory instruments.

While statements of principle and standards have been interpreted as also falling outside the scope of the Statutory Instruments Act, for greater legal certainty, it would be preferable to include an express statement to that effect in the legislation. The CPA therefore seeks to clarify in the legislation that statements of principle and standards are also not statutory instruments.

Similarly, in the event the requirement to have all of the by-laws approved by the Governor in Council is removed (see section 2 above), the Act should also specify that by-laws are not statutory instruments.


Stakeholder Advisory Council Process

The CP Act establishes the Stakeholder Advisory Council (SAC) [s. 21.2] and specifies that it must be broadly representative of users and service providers to payment systems. The Act further specifies that members are to be appointed by the Board, in consultation with the Minister of Finance. However, the Act is silent on how the CPA may establish processes (e.g., nomination and selection processes) relating to the SAC. In this regard, the CPA’s authority to set out such processes in a by-law has been recognized (these are addressed in the CPA’s General By-law); however, it would be helpful to expressly authorize the Board to create by-laws respecting the selection and appointment of members to the SAC.

On this basis, the CPA believes that to expressly confer the authority on the CPA to implement the SAC appointment process by by-law (e.g., by amending section 18 to that effect) would contribute to mitigating the possible legal risk associated with these by-law provisions and enhance the effectiveness of our governance structure.

1. Smart Regulation: A Regulatory Strategy for Canada, "Report from the External Advisory Committee on Smart Regulation", September 2004. [Return]

2. By way of information, two examples of federal legislation that contain provisions dealing with enforcement of decisions are the Telecommunications Act S.C. 1993, c.38 (section 63) and the Canada Labour Code R.S.C. 1985 c. L-2 (section 251.15). [Return]

3. See subsections 10(1) and 10(2) of the former Canadian Payments Association Act. [Return]