Payments Canada Amends Pre-Authorized Debit Agreement Requirements in Canada
The current framework for processing pre-authorized debit agreements (“PADs”) is through Payments Canada’s ACSS Rule H1 (Pre-Authorized Debits) (“Rule H1”), which outlines the procedures to clear and settle PADs under an ongoing agreement between a Payor and a Payee.
Following a public consultation conducted by Payments Canada earlier this year (which we discussed in an earlier blog post), amendments to Rule H1 came into effect on October 3, 2022 (the “Amendments”). The Amendments reflect considerable technological and payment advances that will make it easier, according to Payments Canada, for users to understand their PAD obligations and enhance their overall experience.
There will be a transition period whereby Payees will have until December 31, 2023 to comply with the revised Rule H1. During the transition period, both versions of Rule H1 will be applicable and Payors will be able to comply with either version. The version prior to October 3, 2022 can be found here and the revised version can be found here.
On and after December 31, 2023, if there is a conflict between the provisions of an existing Payor’s PAD agreement and the revised Rule H1, the requirements in the revised Rule H1 will be applicable.
Revised Rule H1 includes the following key changes:
Removal of the distinction between electronic and paper PAD agreements: The Amendments remove the distinction between electronic and paper PADs, ensuring consistency in the PAD onboarding experience and reducing the time required for the onboarding of electronic agreements. This means that electronic PADs no longer require that the Payee first verify that the personal and/or banking information set out in a PAD actually belongs to the Payor. Furthermore, a uniform procedure means the following will be applicable to all PADs:
- The default period to notify the Payor prior to the first PAD is 10 calendar days. This can be waived or reduced upon authorization by the Payor. If the period is waived, the Payee must provide a confirmation within 5 calendar days following the date of the first PAD.
- The confirmation notification can be by written copy of the PAD to the Payor or in the form provided in Appendix IV of Rule H1.
- The default time period to notify the Payor of a change in the amount or date of a PAD is 10 calendar days.
Cancellation of goods and services contracts and PADs: The Amendments provide that where the Payor and Payee have entered into another agreement that sets out a cancellation period that does not exceed 30 calendar days, this can result in a cancellation of the PAD as well, which becomes effective at the end of the cancellation period.
One-Time PADs only permit a single PAD: The revised Rule H1 includes a new concept of a One-Time PAD, which means there is a one-time payment occurring on a set date. If a Payor’s PAD is for a One-Time PAD, the agreement will now automatically terminate once the payment is completed. This means the Payee will be required to obtain a new PAD agreement for any subsequent PAD.
Definitions of “Authorization” and “Commercially Reasonable Methods” have been revised:
- The revised definition of Commercially Reasonable Methods now allows a Payee to use procedures for verifying a Payor’s identity which are reasonable and appropriate, having regard to the particular circumstances of the PAD and the business between the Payee and Payor. This includes having regard to the methods for verifying identity in general use for similar types of business and payment applications, and other commercial circumstances of the Payor and the Payee at the time the verification method is used.
- Furthermore, in each Payee Letter of Undertaking (a written agreement between a Payee and its sponsoring member), the Payee will have to confirm that it has read and understands the definition of Commercially Reasonable Methods, has such methods in place and agrees to use such methods when verifying a Payor’s identity for a PAD.
- The examples of Commercially Reasonable methods of verification in the prior Rule H1 have been removed to avoid the perception that they represented an exhaustive list, which was never the intention.
- The revised definition of Authorization now simply refers to the consent or agreement, in accordance with applicable law, of a Payor whose identify has been verified by Commercially Reasonable Methods.
Payee-Initiated cancellation of PAD :
- A Payee will be allowed to terminate a Payor’s PAD in accordance with the terms of the agreement.
- If the agreement does not address termination by the Payee, the Payee will be permitted to terminate the agreement with authorization from the Payor or by providing at least 30 calendar days’ written notice to the Payor before ceasing to issue PADs.
- If the Payor provides authorization to the Payee to terminate the PAD, the Payee will have to provide a written statement specifying the date of the final PAD and the effective termination date of the agreement within 10 calendar days after the final PAD.
Third-Party/Payment Service Providers: If a Payee is collecting payments on behalf of an entity that is providing the Payor with goods/services, the PAD must include a statement that describes the arrangement between the Payee and the entity providing the goods/services to the Payor.
Optional disclosure in PAD agreements: A PAD may now include the following optional disclosure:
- Governing law and choice of forum clause.
- The impact of termination of an underlying contract for goods and services on the PAD (e.g. whether this triggers the termination of the PAD as well).
If you or your business requires assistance in determining the impact of the revised Rule H1 on PADs with your Payors, please feel free to reach out to the authors of this post.
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