The movement of funds is critical to the health of Canada’s economy, particularly as retail payment activities evolve through technology and innovation. With the rise of various payment service providers (PSPs), such as digital wallets and payment processors, the absence of regulatory oversight poses significant risks, including potential financial losses during insolvencies and threats to the security of personal financial information.

The Retail Payment Activities Act (the Act) was enacted in June 2021, establishing a supervisory framework for PSPs in Canada. Accompanied by the Retail Payment Activities Regulations (the Regulations), this framework aims to ensure the safety and integrity of the financial system while promoting responsible innovation. The Regulations detail operational risk management standards, fund safeguarding requirements, and compliance measures for PSPs, with the Bank of Canada overseeing these entities.

Key objectives of the Regulations include protecting end-user funds and enhancing consumer confidence in payment services. They mandate PSPs to implement risk management frameworks to mitigate operational risks, such as cyber threats, and to ensure that end-users can reliably access their funds. These measures are particularly important as Canadians increasingly rely on digital payment solutions, a trend accelerated by the COVID-19 pandemic.

The Act applies to a range of payment functions performed by PSPs, such as maintaining payment accounts, initiating transactions, and facilitating electronic funds transfers. However, it excludes certain regulated entities, like banks, from its scope, focusing instead on unregulated PSPs. The Regulations are designed to fill gaps in financial sector supervision and align with regulatory approaches in other jurisdictions, including the European Union and Australia.

The Act also empowers the Minister of Finance to address national security risks associated with PSPs, enabling the government to initiate reviews and take necessary actions to protect the financial system.

The Regulations require PSPs to safeguard end-user funds either through trust accounts or segregated accounts, ensuring timely access to funds in case of insolvency. They also mandate that funds be held at prudentially regulated financial institutions and that any insurance or guarantees for these funds be sourced from non-affiliated entities. These measures aim to protect consumers and ensure their funds are accessible and secure.

By establishing clear requirements for operational risk management, fund safeguarding, and national security assessments, the Canadian government aims to foster a more secure and reliable financial ecosystem for all Canadians, promoting confidence in the rapidly evolving digital payment landscape.

Canada (SOR/2023-229) November 22, 2023