Archived - Regulatory Impact Analysis Statement (RIAS)
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Canadians benefit from one of the best regulated banking sectors in the world. A strong and efficient banking sector is essential to economic growth and prosperity. A legislative framework that enables banks to compete effectively and be resilient in a rapidly evolving marketplace, taking into account the rights and interests of depositors and other consumers of banking services, contributes to stability and public confidence in the financial system. It is also important to the strength and security of the national economy.
It is desirable and is in the national interest to provide for clear, comprehensive and exclusive national standards applicable to banking products and banking services. The Constitution confers on Parliament exclusive jurisdiction in relation to banking and the incorporation of banks. In this regard, the Bank Act constitutesthe complete and exclusive charter applicable to each bank and its products and services.
Canadians rely heavily on non-cash-based payment products. Market players continue to develop new payment products targeted to satisfy complex consumer and business needs while facilitating safe, convenient and cost-effective transactions.
Relatively new to the Canadian market, payment network–branded prepaid products (prepaid payment products) are used to access funds that a customer has prepaid to a financial institution. The funds are accessed by the cardholder to make purchases or withdraw funds via a payment network such as American Express, MasterCard or Visa. While a credit product is a “pay later” product and a debit product is a “pay now” product, a prepaid product is a “pay before” product. Some prepaid payment products are available through financial institution branches; others, although they are issued by financial institutions, are sold at retail commercial outlets.
Existing legislation, regulations and public commitments afford a framework of consumer protection for consumers of other payment products. However, many of these existing protections do not apply to prepaid payment products. Canadian consumers have raised concerns regarding some features of prepaid payment products issued by federally-regulated financial institutions. The terms, conditions, fees and limitations associated with some products are not always made available prior to purchase and can be cumbersome, unclear or even unfair.
In Budget 2011, the Government of Canada proposed to take action to develop measures to enhance the consumer protection framework with respect to payment network‒branded prepaid cards. The Prepaid Payment Products Regulations (the Regulations) act on this commitment by allowing consumers to have the information they need when making financial decisions, as well as limiting certain business practices that may not be beneficial to consumers and affording consumers increased access to their prepaid funds.
To support informed financial decision making, the Regulations require disclosure of fees in an information box to appear prominently on the exterior packaging and other documentation provided prior to issuance. This allows for easy product comparison while encouraging market efficiency and competition. The Regulations also require that information pertinent to continued usage be available on the product, including where to access the full terms and conditions of usage and a toll-free number to access the remaining balance. In order to maximize consumers’ understanding of the product, the Regulations also require that all disclosure be made and presented in a manner that is clear, simple and not misleading.
The Regulations also limit certain business practices, unique to prepaid payment products, that could be harmful to consumers. For instance, the Regulations, with one exception, prohibit fund expiry to allow consumers full access to their prepaid funds. The Regulations also, with some exceptions, prohibit federally-regulated financial institutions from imposing a dormancy or maintenance fee for at least one year after activation. This gives the consumer a healthy time frame to make use of a prepaid payment product. Finally, the Regulations prohibit fees and interest charges with respect to overdraft without the express consent of the product holder.
The “One-for-One” Rule does not apply as the Regulations do not impose any new administrative burden on federally-regulated financial institutions.
Small business lens
The small business lens does not applyas there are no costs to small business.
Following publication of the Regulations on October 27, 2012, in Part I of the Canada Gazette, comments were received from a wide range of stakeholders representing financial institutions, payment network operators, consumer groups, and industry associations. These views were taken into consideration in the development of the final Regulations.
Overall, comments supported regulations to protect consumers of prepaid products. Comments recommended fine-tuning of the Regulations in order to achieve high standards of consumer protection and preserve consumer choice. These comments have been addressed through technical clarifications and other adjustments.
The majority of stakeholders commented that, while the prohibition on imposing maintenance fees in the first year is appropriate for the majority of prepaid products on the market, consumer choice is diminished when the prohibition is applied to reloadable products. Given that reloadable prepaid products tend to be more sophisticated products (e.g., personalized, higher-value) and intended for frequent usage, consumers may prefer to pay a flat monthly maintenance fee as opposed to per-transaction fees. In order to enhance consumer protection while maintaining consumer choice, the final Regulations allow for monthly maintenance fees on reloadable prepaid payment products with the express consent of the product holder.
Technical changes were made to fine-tune some elements of the Regulations. These include changes that remove duplicative disclosure requirements when both the initial disclosure and additional disclosure documents are received simultaneously. Changes were also made to further clarify the type of product restrictions required to be disclosed, namely, those restrictions that could reasonably be expected to have an impact on a consumer’s decision to acquire a card.
Industry stakeholders commented that time would be needed to make some changes to their systems to implement the new requirements. Accordingly, a coming into force date of May 1, 2014, was chosen.
Some stakeholders requested a clarification RIAS regarding the expiry of physical prepaid cards. To clarify, while funds loaded onto a prepaid card cannot expire, this prohibition does not prevent a physical prepaid card from expiring for security purposes, as is the case with credit cards.
Other broader issues were raised that fall outside the scope of the Regulations. These include applicability of Canada Deposit Insurance Corporation insurance and applicability of the unclaimed balances provisions to prepaid products issued by federally-regulated financial institutions. As prepaid products increasingly penetrate the Canadian marketplace, these issues will be examined in greater depth in order to provide the soundest protection for consumers going forward.
Finally, some comments have not been reflected in the final Regulations. For instance, there were mixed views on whether products issued to Canadians for the purposes of social benefits be covered by the Regulations. By extending the consumer protection framework to all prepaid payment products, Canadians can be assured that they benefit from high standards of protection when using any prepaid product issued by a federally-regulated financial institution.
The enhanced measures afforded by the Regulations are beneficial to a broad spectrum of Canadian consumers. More and better information will be provided to consumers to allow for better product choice. Limitations on expiry and maintenance fees will give consumers increased access to their prepaid funds. This broadens protections for the increasing number of Canadians who frequently use prepaid products.
As with any new regulatory requirement, federally-regulated financial institutions may have to incur minor compliance costs to make some changes to their systems to implement the new requirements. The coming into force date was chosen to minimize this burden.
Implementation, enforcement and service standards (if applicable)
The Regulations do not require any new mechanisms to ensure compliance and enforcement. The Financial Consumer Agency of Canada already administers the consumer provisions in the federal financial institutions statutes, and is able to ensure compliance with the new requirements using its existing compliance tools, including notices of violations, compliance agreements and administrative monetary penalties.
Financial Institutions Division
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