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Payment Services Industry Association of Canada Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Payment Services Industry Association of Canada Inc.
298 Garry Street
Winnipeg, MB R3C 1H3
Ph: (204) 957-2800
Fax: (204) 943-2261
May 31, 2005
Mr. Gerry Salembier
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Ottawa, Ontario K1A 0G5
Dear Mr. Salembier:
Re: Payment Services Industry Association of Canada –
Federal Consultation for the 2006 Review of Financial Institutions Legislation
The Payment Services Industry Association of Canada welcomes the opportunity to comment on the Consultation Document for the 2006 Review of Financial Institutions Legislation that was announced as part of the Effective and Efficient Legislative Framework for the Canadian Financial Services Sector in the Federal 2005 Budget.
Payment Services Industry Association of Canada
The Payment Services Industry Association of Canada (PSIAC) promotes its members' ability to provide businesses and individuals with efficient, timely and secure financial transaction processing while contributing to increasing efficiency, safety and soundness of the clearing and settlement systems in Canada. PSIAC represents ADP Canada, Ceridian, CGI, MoneyMart and TelPay. Collectively PSIAC members account for $112.5B or 17% of the Canadian Payments Association (CPA) AFT Credit annual transactions, $115B or 48% of CPA AFT Debit transactions and $41B or 51% of EDI Payment transactions.
Canadian Payments Systems and Cheque Imaging
While the Consultation Document for the 2006 Review of Financial Institutions Legislation covers a number of potential initiatives, the ones most relevant to PSIAC and its customers are related to the Canadian Payments System.
We understandtheGovernment is seeking views on ways to improve the Canadian payments system's operation and efficiency, and we would like to recommend three primary areas for reform:
1. Standards for the Return of Electronic Debit Items
A major concern for PSIAC is related to the continued lack of sufficiently clear standards for the return of electronic debit items which are returned because of non-sufficient funds (NSF) in the payer's bank account.
Current CPA rules allow the return of the item on the business day following receipt of the item. However, the item is only considered to be received when it reaches the business unit within the Payor institution where the pay/nopay decision can most effectively be made. There is however no timeline set as to how long the item can take before it reaches this business unit.
CPA Rule A4, Section 5: Time Limitation for Return
5. Subject to section 6, each Item being returned shall be returned by the Drawee, to the Negotiating Institution, as set out in section 11, no later than the Business Day following receipt by the first organizational unit of the Drawee that is able to make or act upon a decision to dishonour the Item.
As a result, the cashing institution has more time and more leeway than is necessary – given leading-edge electronic transaction technology. Thus, it takes on average 3 full business days beyond a debit due date, and often significantly longer, before the initiator of the debit is informed of the return of the item.
The CPA rule, as currently written, may have made sense many years ago when all transactions were paper-based and had to be physically routed to the individual bank branch so that the item could be posted by hand to a payer's bank account. However, given the advances in our electronic debit systems, such unnecessary delays introduce risk in the system because of the added amount of time that elapses before the initiator of the debit, usually a provider of service, has certitude as to the success of the financial transaction. These delays and timing inconsistencies lack transparency, erode the trust of users of the Canadian Payments system and can be perceived to be arbitrary.
That CPA Rule A4 be revamped to align it to the reality of today's real-time exchange of data and settlement of transactions, as already takes place with INTERAC transactions. This would increase trust, transparency and consistency in the clearing system as well as eliminate settlement risk.
2. Large Value Transfer System (LVTS)
PSIAC believes that the Large Value Transfer System (LVTS) payment system needs to evolve from a settlement system to a true payment system.
A payment system requires that the financial data be accompanied with ancillary information, providing for the identification of the source and the purpose of the payment. This allows the transaction to be processed, applied and reconciled by the recipient of the funds with little or no need for human intervention or repair. This is known as "straight through processing", or STP.
Unfortunately the limited functionality currently provided by the LVTS system does not allow for efficiency of processing in the payments systems. The inclusion or accompaniment of ancillary data with any form of payment will be increasingly important as more internet-based payment systems become available. Transaction volumes and related processing efficiencies will render the accompanying data as important as the financial transaction it supports. Increased usage of the LVTS system will only be fostered by increasing its practicality and usefulness.
That the Government of Canada align payment related data with the payment transaction itself, starting with our most critical high value payment system, LVTS.
3. Clarification of "On Us" Rules
PSIAC believes that there needs to be clarification as to applicable rules as it relates to "on us" items.
Although all payment and debit transactions exchanged through the CPA ("off-us" items) are subject to its rules, similar transactions which are not exchanged are not subject to CPA rules, but rather to the discretionary internal business rules of the involved financial institution.
For example, if client A cashes a cheque at Bank X, which has been issued by client B and drawn on client B's account at the same Bank X, then that item is subject to the internal business rules of Bank X, not the CPA rules.
Likely a very large proportion of the population is unaware of this inconsistency in treatment of financial transactions. Increased transparency and understanding would increase fairness and benefit all.
That the Government of Canada provide a fair and level playing field for "off-us" items by ensuring the same rules are applied consistently to both "off-us" items and "on-us" items.
The Department of Finance's commitment to conduct regular reviews of the federal financial services regulatory framework, and in particular, its review of Financial Institutions Legislation, will contribute greatly to the streamlining and harmonization of Canada's electronic processing systems, and we applaud the work of the Government of Canada in this matter.
PSIAC which represents significant users of the payments system believes that addressing these three straightforward issues would contribute to greater efficiency, order, and less risk in the system.
On behalf of PSIAC, I appreciate your consideration of our comments, and would be pleased to discuss them further with you. To that end, should you have any questions, or require additional information, please do not hesitate to contact either myself at (204) 957 2840 or Philippe Visintini (Vice President, Banking, ADP Canada) at 416-207-7664.