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Canadian Payments Association Submission in Response to Finance Canada's Large Bank Mergers in Canada:

December 19, 2003

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

Dear Mr. Salembier:

I am writing on behalf of the Canadian Payments Association (CPA) in response to the request for input on the Government Response to the Commons and Senate Committee Reports on Bank Mergers and the Public Interest (hereinafter, the consultation paper). As you are aware, the CPA is a not for profit statutory corporation primarily responsible for establishing and operating Canada's payments clearing and settlement systems, and facilitating the development of new payment methods and technologies. The CPA currently has 117 members, including chartered and foreign banks, the Bank of Canada and other deposit-taking institutions (e.g. Credit Union Centrals and Trust and Loan Companies).

The CPA welcomes the opportunity to be consulted on any payments-related matters. With respect to the consultation paper, we offer comments on the issues related to financial sector consolidation policy in Canada that may have an impact on the CPA and its clearing and settlement systems.

Full Functionality of ABMs

In the consultation paper it is noted that during the committees' hearings, ABM full functionality was suggested as a means of overcoming barriers to competition in banking in Canada. It is not in the domain of the CPA to comment on whether full ABM functionality adds an important element of competition in the financial services sector. However, the CPA is of the view that there are operational and risk implications associated with full functionality that would require careful consideration from a payments perspective. Accordingly, if the Government of Canada considers mandating this type of service on a national scale, it should work with the CPA to ensure that ABM full functionality is implemented in a manner that maintains the safety, soundness and efficiency of the payments system and that a sound legal framework is put in place.

In particular, depending on the model(s) pursued, there may be implications to the payments system in terms of the clearing and settlement of the resulting payment items, the treatment of returned or fraudulent items, and with respect to return time-frames, particularly in the area of shared deposits. For example, the shared deposit process could potentially increase fraud losses causing reputational risk to the system; there could also be added complexity to the clearing and return process should a financial institution or third-party ABM operator fail. As a result, the CPA may need to amend rules or create new rules to ensure that proper controls are in place and to provide transparency regarding the roles, rights and responsibilities of members and users that participate in this service, if implemented. CPA rules and procedures, created pursuant to the Canadian Payments Act, are intended to govern the clearing and settlement of payments to ensure that they are exchanged efficiently and in a safe and sound manner.

Potential Impact of Consolidation on the Payments System

Although the broad effects of consolidation on payment and settlement systems are well-documented by the Group of Ten in its 2001 Report on Consolidation in the Financial Sector,^[1] the CPA would like to raise awareness of one potential impact of large bank mergers in Canada to the CPA's Automated Clearing Settlement System (ACSS). This impact is set out below.

By way of background, the ACSS is one of the two systems operated by the CPA for the clearing and settlement of payments; it is the system by which the vast majority of payments in Canada, including cheques, pre-authorized debits, direct deposits and point-of-sale items, are cleared and settled. Participation in the ACSS is structured in a tiered arrangement with 11 of the largest financial institutions in Canada acting as direct clearers and the remaining members of the CPA as indirect clearers. Direct clearers handle the clearing and settlement of payment items for their own customers, while indirect clearers appoint a clearing agent, which is by definition a direct clearer or a group clearer, to exchange payment items and effect settlement on their behalf.

Large bank mergers are relevant to this particular matter in the following way. Currently, to be eligible to become a direct clearer, a CPA member must account for no less than 0.5% of the total national volume of payment items giving rise to clearing through the ACSS.^[2] Moreover, as a result of Government policy, life insurance companies and money-market mutual funds, which are entities eligible for membership in the CPA, are not permitted to act as a direct clearer. Unless the current eligibility conditions associated with direct clearer status are amended, an implication of large bank mergers to the ACSS will be a reduction in the number of direct clearers and hence clearing agents that are entitled to offer settlement services to indirect clearer members. In addition, as the vast majority of members that function as indirect clearers do not meet the current volume criterion, they would be ineligible to act as a direct clearer and settle items on their own behalf.

The CPA is currently working with the Department of Finance and Bank of Canada to study the potential impact of altering the eligibility requirements for direct clearers in the ACSS to permit broader participation. Pending the outcome of this review, these requirements may be revised in the future.

In closing, I would like to thank you for the opportunity to provide comments on Finance Canada's consultation paper. Should you have any questions regarding any matter raised in this letter, please do not hesitate to contact me or Mr. Doug Kreviazuk (Director, Policy and Research) at (613) 238-4173 (ext. 244 and 281, respectively).

Sincerely,

Original Signed By

Guy Legault
President and CEO

cc: Mr. Frank Swedlove, Assistant Deputy Minister, Financial Sector Policy Branch

Mr. Denis Normand, Senior Chief, Department of Finance

^[1] Group of Ten, Report on Consolidation on Payment and Settlement Systems (Bank for International Settlements, January 2001), p. 323. [Return]

^[2] This criterion, which was part of the requirements of the former Clearing By-law, was retained in the Payment Items and ACSS By-law at the request of the Department of Finance. [Return]