SOR/2016-283: Canadian Payments Association By-law No. 2 — Finance Canadian Payments Act


November 3, 2016

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the By-law.) Issues Changes to the Canadian Payments Association By-law No. 2 — Finance are required to give effect to a new funding model adopted by the Canadian Payments Association (CPA) Board of Directors to advance its long-term strategy and plan for the modernization of the Canadian payment clearing and settlement system. T... (Click for more)

Published on November 3, 2016

Bill Summary

SOR/2016-283: Canadian Payments Association By-law No. 2 — Finance Canadian Payments Act

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the By-law.) Issues Changes to the Canadian Payments Association By-law No. 2 — Finance are required to give effect to a new funding model adopted by the Canadian Payments Association (CPA) Board of Directors to advance its long-term strategy and plan for the modernization of the Canadian payment clearing and settlement system. The current model no longer aligns dues with the value received and is not optimized to support the future direction of the Association. Background The CPA is a statutory body created by the Canadian Payments Act with a mandate to establish and operate national systems for the exchange, clearing, and settlement of payments between banks, credit unions, and other CPA members (115 members currently). Two systems operated by the CPA are the Automated Clearing Settlement System (ACSS) and the Large Value Transfer System (LVTS). In addition to operating these systems, the CPA develops, implements and updates the rules and standards that govern the clearing and settlement of payments exchanged in Canada. The Association operates on a not-for-profit basis, with annual operating and capital expenditure budgets prepared by the Board of Directors, funded by dues paid by members. The Canadian Payments Act was amended by the Economic Action Plan 2014 Act, No. 2. The amendments established a new governance structure and accountability framework for the CPA, reinforcing the CPA’s mandate to operate in the public interest; meet its statutory obligation to ensure the safety and soundness of CPA systems; and ensure that these systems are efficient and meet the needs of end-users (such as businesses and consumers). Responding to various drivers for change in the broader payments ecosystem, the CPA is broadening its attention from the basic operation and maintenance of its current systems, rules and standards, to modernizing the payments infrastructure to meet the longer term interests of Canadians, the Canadian financial system, and Canada’s economy. The modernization of the Canadian core payments systems is a significant undertaking. The CPA has consulted broadly and retained nationally and internationally leading advisors and has developed a set of working financial models that would help fund the implementation of the modernization project. By-law No. 2 — Finance needs to be amended in order to give effect to the new financial models. Due to the fact that almost all the provisions of the current By-law would need to be amended and that several other elements were already repealed in previous amendments to the By-law, the current By-law No. 2 — Finance would be repealed and replaced by the proposed By-law No. 2 — Finance. Objectives The objectives behind the repeal and replacement of the By-law are mainly to 1. advance the CPA’s modernization initiatives; and 2. allocate costs equitably and consistently to those who benefit from the CPA’s existing and new services. Description The new CPA By-law No. 2 — Finance is designed to generate sufficient funds to cover the fully allocated costs to operate the CPA, enabling the CPA to fund large one-time investments and recover costs in ways that align with the value delivered. Member dues and fees would be equitable and proportional to value received, with increased flexibility to allow for changes over time. Specifically, increased and adjustable annual dues would be established for all members, and the revised funding model would consist of the following key components: common services dues, replacing the indirect dues threshold; transaction fees, aimed at recouping the costs of operating the particular systems (e.g. LVTS, ACSS); and other services fees (similar to those in the current model). (a) Common services dues The CPA performs services that benefit all members (i.e. “common services”). These common services will continue to expand as the CPA responds to growth and evolution in key areas, including risk management, compliance, policy, rules development, education, and outreach. As the larger CPA members (currently ACSS direct clearers/group clearers and LVTS participants) will continue to realize a greater benefit from the common services than other members, only a portion of the common services costs would be allocated to all members, with the remaining portion being incorporated into the costs covered by transaction fees. The portion of the costs for common services to be applied to all members would be set and reviewed annually by the CPA Board, with adjustments applied as necessary to ensure ongoing alignment with value received. The CPA has estimated that about 25% of the total common services costs would be recovered through an assessment against all members in the first year of the new By-law’s implementation. The remaining 75% would be recovered through the transaction fees charged to those who participate directly in the CPA systems (of the current 115 CPA members, 19 participate directly in the LVTS, and 11 participate directly in the ACSS). This distribution was determined based on an assessment of the current relative value of common services and a review of comparable jurisdictions. The result is an increased “base-price” for membership from $10,000 to the range of $30,000 to $35,000 per member. In the event that common services dues collected exceed the costs of providing the services that are of equal benefit to all members, the excess would be held in a research and development reserve fund, which would be capped at a maximum amount to be determined by the Board. Members would be billed for the common services dues annually. (b) Transaction fees Only entities that participate directly in a system would be charged transaction fees. Currently, the ACSS and the LVTS are the direct services provided by the CPA. The participants who use these services would be charged for transactions cleared through the respective systems (both sent and received). The transaction fees for a particular system would be based on the estimated costs of the Association to operate that system and the estimated number of all transactions by all participants; the estimated value of those transactions; or a combination of both. The estimated costs of operating a system would need to take into account the direct costs to operate the respective system; the portion of the common services costs that is not included in the determination of the common services dues or in the determination of transactions fees for another system; a component for the recovery of capital investment in the system, if applicable; and a fee-stabilizing component to build a reserve to accommodate small variations between (a) projected costs of operating the system and projected transaction volumes and values; and (b) actual costs, volumes and values (capped at a maximum amount as determined by the Board). In deciding which factors to use in the determination of the fee structure for a particular system, the Board would need to consider the nature of that system; the number of participants in that system; and the number and value of transactions by each participant in that system. Transaction fee estimates for the current direct services (which for 2017 are planned to be based on the number of transactions by all participants) indicate that fees for ACSS direct clearers and LVTS participants would be similar to the dues they currently pay under the existing By-law. For ACSS clearing agents, the volumes cleared by their indirect clearers is small (around 1% of ACSS volumes) and therefore would not have a material impact on their fees. However, ACSS group clearers would pay slightly more than they currently do because their group members (credit union centrals) have relatively significant ACSS clearing volumes (between 3% and 4% of total ACSS volumes) and currently pay more than $10,000 in dues. Under the new approach, the volumes cleared by these centrals would be attributed to the group clearer resulting in an increase in the group clearer’s volumes. Transaction fees would be billed quarterly, in arrears. (c) Fees for other services The CPA currently assesses fees for other services, such as network and database services, on a cost-recovery basis. These services would continue to be assessed as described in the current By-law, with flexibility to recover all costs associated with providing the services. “One-for-One” Rule The changes to By-law No. 2 — Finance would eliminate some reporting and verification requirements for CPA members. Therefore, the proposed changes would result in a reduction in administrative costs related to those tasks. Currently, indirect members (those members that use the services of a clearing agent or group clearer) are required to report their clearing volumes to the CPA twice a year so that the CPA may calculate their dues. The CPA then follows up with the clearing agents and group clearers, if necessary, to confirm volumes reported and to clarify any discrepancies. This task usually takes one to two days for each clearing agent or group clearer in the ACSS (of which there are currently eight). It would usually take up to one day for indirect members who have clearing volumes through the ACSS (of which there are 74). The ranges reflect the variance in the size of CPA members, where larger members have more complex transaction flows and require more time for compiling and verification. The proposed By-law amendments would change the way members of the CPA are invoiced, and would eliminate the need for such reporting and confirmation requirements by the CPA. This would lead to a reduction in administrative costs to the affected CPA members. For the purposes of calculating the decrease in administrative cost to CPA members, it was assumed that clearing agents and group clearers would need two days for reporting and confirming volumes, while indirect members would need one day to do so. The analysis assumes, consistent with feedback from CPA members, that the labour cost for undertaking reporting and confirmation of volumes is about $46 per hour. All dollar values are measured at 2012 price levels. Over a 10-year horizon beginning in 2017, and discounted at a rate of 7%, the present value of the total decrease in administrative cost is estimated to be $5,441 per business, and $446,200 for all businesses. The annualized administrative cost decrease, discounted to a base year of 2012, is estimated to be $45,295, and the annualized administrative cost decrease per business $552. Small business lens The small business lens does not apply to this By-law, as there are no costs to small business. Consultation The CPA has consulted with its membership through various Board-level and management advisory committees. In addition, the membership was consulted on the By-law No. 2 — Finance amendments through a consultation document. Minimal feedback was received on the consultation document. The comments and concerns that were received were summarized and addressed in a follow-up communication, which was provided to all members. Development of the By-law also included a review of funding models used by organizations similar to the CPA in Canada and other jurisdictions. In addition, the proposed By-law No. 2 — Finance amendments were prepublished in Part I of the Canada Gazette on September 3, 2016, followed by a 30-day comment period. The CPA did not receive any comments through this process. Rationale The CPA’s current funding mechanism is set out in CPA By-law No. 2 — Finance, which was last updated in 2003. Under the current By-law, dues are imposed on members on the basis of direct ACSS and LVTS operating costs and indirect costs (overhead). ACSS dues are allocated to all members based on the percentage share of ACSS payment items (sent and received) cleared through the ACSS in the preceding year. LVTS dues are allocated to LVTS participants based on percentage share of the total volume of LVTS payments (sent and received) processed through LVTS the preceding year. Indirect dues are allocated to all members based on each member’s percentage share of the total combined LVTS and ACSS dues. Members assessed less than $10,000 for indirect dues pay $10,000 in total dues (i.e. do not pay any ACSS or LVTS dues). The current $10,000 threshold, which applies to over 80% of CPA members, was established when operating costs and projected infrastructure investment were much lower. It was originally established to cover approximately 7% of the CPA’s total budget. With increased costs for operations and enhanced services that benefit all members, including risk management, security, compliance, research, education, and improved policies and rules, operating costs and investment are higher while the $10,000 threshold, or “base-price,” has remained the same. As a result, the majority of members are now funding only approximately 3% of the costs to operate the CPA. Some of the challenges and constraints posed by the current By-law include dues are based on the previous year’s volumes, which fail to account for in-year volume fluctuations relative to other members; volume based dues may not result in an equitable distribution of costs for new developments; the current approach can result in significant variations in dues from year to year, especially where there are larger capital investments, which can be challenging for members to manage and plan for over time; and members who do not clear directly through the ACSS self-report their volumes, information which is not verifiable and could lead to inaccurate assessments of dues. The current By-law is inflexible and focused on the short term. It no longer aligns costs with value received and is insufficient to support the future direction of the CPA. The new CPA By-law No. 2 — Finance would enable the CPA to build and maintain operations in the usual course of business and supplement the funding of significant new initiatives in furtherance of the CPA’s legislative mandate and a modernized Canadian payments system. Implementation, enforcement and service standards In accordance with subsection 18(2) of the Canadian Payments Act, by-law changes require approval by the Minister of Finance to come into force. Following ministerial approval, the by-law must be sent to all CPA members by the President of the CPA. The CPA is responsible for ensuring that its members comply with the by-laws, as applicable. The repeal and replacement of By-law No. 2 — Finance do not require any new mechanisms to ensure compliance and enforcement. Contact Deborah Wilson Senior Legal Counsel and Principal Legal and Regulatory Affairs Canadian Payments Association Constitution Square, Tower II 350 Albert Street, Suite 800 Ottawa, Ontario K1R 1A4 Email: [email protected] Footnote a S.C. 2014, c. 39, s. 342(1) to (4) Footnote b R.S., c. C-21; S.C. 2001, c. 9, s. 218 Footnote c S.C. 2014, c. 39, s. 342(5) Footnote d R.S., c. C-21; S.C. 2001, c. 9, s. 218 Footnote 1 SOR/2003-175

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