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REGULATORY UPDATES OF INTEREST TO MSBs

REGULATORY UPDATES OF INTEREST TO MSBs. CMSBA Spring Sessions Vancouver May 1st, 2018. OVERVIEW. The new framework proposed by the federal government for the retail payment industry The Competition Bureau’s report on innovation in the payment industry

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REGULATORY UPDATES OF INTEREST TO MSBs

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  1. REGULATORY UPDATES OF INTEREST TO MSBs CMSBA Spring Sessions Vancouver May 1st, 2018

  2. OVERVIEW • The new frameworkproposed by the federalgovernment for the retailpaymentindustry • The CompetitionBureau’s report on innovation in the paymentindustry • Payments Canada’s initiatives to modernizeourcorepaymentsystems • The proposedreview of the PCMLTFA

  3. 1. The new framework proposed by the federal government for the retail payment industry • Background • Perimeter • Measures • Innovation and competition • Regulatoryauthority The full text of the proposedframeworkisavailable online at: www.fin.gc.ca/activity/consult/rpof-cspd-eng.asp

  4. 1.A Background “The current oversight of payment systems in Canada is focused on the core national payment clearing and settlement systems and, to a lesser extent, on retail payment systems supported by regulated financial service providers such as debit and credit card networks. This leaves other non-bank retail payment services providers without specific regulation or oversight, resulting in an inconsistent approach for addressing similar risks posed by the activities of different payment service providers.”

  5. 1.b Perimeter • The frameworkwillapply to payment service providers thatperform one of the followingfunctions: • Provision and maintenance of a paymentaccount • Payment initiation • Authorization of transactions and/or transmission of payment messages • Holding of funds in an account • Clearing and settlement of payment items • Exclusions: transactions made entirely in cash or with crypto-currencies, transactions at ATMs, etc.

  6. 1.c Measures • End-user fundsafeguarding • Operational standards • Disclosures • Dispute resolution • Liability for unauthorized transactions • Registration • Protection of personal information

  7. 1.d Innovation and competition • The oversightframeworkwould encourage innovation and competition • The oversightframeworkwouldapplymeasurescommensurate to the level of riskposed by each PSP

  8. 1.e Regulatoryauthority • The oversightframeworkwouldleverage the mandate and expertise of existingregulators • The regulatorwould have a combination of compliance toolsthatwouldallow for effective intervention withany type of PSP

  9. 2. The Competition Bureau’s report on innovation in the payment industry • Background observations • Access to banking services for new entrants • Access to corepaymentsinfrastruture • Conclusions and recommendations The full text of the report isavailable online at: www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04322.html

  10. 2.a Background observations • “The prominence of traditional providers of payment services, such as banks and debit and credit card networks, is being challenged by non-traditional providers” • “Closed-loop systems, like e-wallets and international remittance services, can provide enhanced convenience to end users by improving transaction speeds and providing a more customized, flexible payment experience”

  11. 2.b Barriers to entry(page 1 of 3) • “During this study, several FinTech entrants expressed difficulty in obtaining the basic banking services required to operate. In particular, some PSPs or money-transfer firms (e.g. peer-to-peer transfers, closed-loop foreign exchange networks) operate as money services businesses (MSBs), a category of business defined by FINTRAC. With few institutions willing to provide services to MSBs, these entrants have faced delays in getting banking services set up as well as the termination of their services with little or no explanation.”

  12. 2.c Barriers to entry(page 2 of 3) “During this study, several FinTech entrants expressed difficulty in obtaining the basic banking services required to operate. In particular, some PSPs or money-transfer firms (e.g. peer-to-peer transfers, closed-loop foreign exchange networks) operate as money services businesses (MSBs), a category of business defined by FINTRAC. With few institutions willing to provide services to MSBs, these entrants have faced delays in getting banking services set up as well as the termination of their services with little or no explanation.”

  13. 2.c Barriers to entry(page 3 of 3) • How has thisproblem been handled in other countries? • FinCENstatement (2014): “FinCENdoes not support wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk” • FCA statement (2016): “Banks should not use AML as an excuse for closing account swhen they are closing them for other reasons” • EU Payment Service Directive: TPPSPs must have access to bank accounts on an “objective, non-discriminate and proportionate manner”

  14. 2.d Recommendations(page 1 of 2) • “Adhering to regulatory requirements, such as AML/CTF and the new retail payments oversight framework, should afford FinTech entrants the opportunity to maintain bank accounts and access established payments infrastructure.” • “When terminating or refusing to provide account services to a business, such as an MSB, financial institutions should be required to provide their reasoning along with supporting evidence.”

  15. 2.d Recommendations(page 2 of 2) • “Payments Canada should consider allowing non-financial institutions to access the exchange function of payment systems such as the ACSS and in the future, the real-time rail.” • “Payments Canada should assess the possibility of moving toward a real-time settlement model for its core clearing and settlement system in an effort to provide broader direct access to the payment systems operated by Payments Canada for PSPs and financial institutions.”

  16. 3. Payments Canada’s initiatives to modernize our core payment systems • Background of modernization initiatives • New payment system infrastructure • Access to paymentsystems For a more detailedaccount, see Payments Canada, Modernization Target State, December 2017, available online at: https://www.payments.ca/sites/default/files/21-Dec-17/modernization_target_state_en_final.pdf

  17. 3.a Background of modernization initiatives • Task Force for the Payments System Review, Moving Canada into the Digital Age (2011), all reports availableonlie at: https://www.fin.gc.ca/n12/data/12-030_1-eng.asp • Payments Canada, Vision for the Canadian PaymentEcosystem(2016) • Payments Canada, Industry Roadmap and High-Level Plan (2016)

  18. 3.b New infrastructure • Lynx • RegulatedDesignatedSystematicallyImprtantPayment System • Will replace LVTS • SettlementOptimization Engine (SOE) • RegulatedDesignatedProminentPayment System • Will replace ACSS • Real-Time Rail (RTR) • New always-on system to facilitate the real-time delivery of low-value payments in immediatelyavailablefunds

  19. 3.c Access to paymentsystems • Access to Lynx limited to regulatedfinancial institutions (same as currentaccess to LVTS) • Access to SOE limited to regulatedfinancial institution (same as currentaccess to ACSS) • Access to RPR possible by regulatedfinancial institutions as well as non financial institutions whomeetcriteria and standards to bedetermined

  20. 4. The proposed review of the PCMLTFA(page 1 of 4) • Expand definition of HIO and clarifydefinition of PEP • Requiremeasures to betaken to mitigateriskswhenbeneficialownerisidentified as a PEP • Expand scope of PCMLTF to white-label ATMs and armoured cars • Prohibit the structuring of transactions to avoidreporting • Standardize record keeping and client identification monetarythresholds

  21. 4. The proposed review of the PCMLTFA(page 2 of 4) • Expand the knowledge component of the money laundering criminal offence to suspicion and recklessness • Cross-border EFTs passing through Canada where Canada is not the sending or recipient destination • Registry for businesses that deal in high volumes of cash • Addressing the issue of MSB de-risking • Strengthening the MSB registration application and procedures

  22. 4. The proposed review of the PCMLTFA(page 3 of 4) • Enhancing and strengthening identification methods in an environment of rapiddevelopment and emerging technologies • Exemptive relief and administrative forebearance (regulatorysandboxes) • Administrative monetary penalties • Public naming of penalty recipients • Confidentialityorders in judicialproceedingsrelted to penalties • Penalty calculation

  23. 4. The proposed review of the PCMLTFA(page 4 of 4) • Clarify the « travelrule » • Mitigation of lowerrisks as well as high risks • Evaluation of correspondent relationships • Creation of a Uniform reportingschedule • RepealfoAlternate Large Cash Transaction Record

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