Payments Canada Releases Consultation Paper on Pre-Authorised Debits (PADs) Rule
Prepared with the assistance of Adina Chis of the Firm's London office.
Payments Canada released the consultation paper “A Proposed Revised Framework for Pre-Authorised Debits” on November 17, 2021, seeking to gather views on proposed changes to Pre-Authorised Debits (“PAD”) over the Automated Clearing Settlement System (“ACSS”).
Payments Canada notes that the proposed amendments could impact operational processes, costs, protection of data and recourse options and so the implementation of the proposed changes would occur in multiple phase with first phase, becoming effective from mid-2022.
Payments Canada has invited interested parties to send comments on the proposals by January 14, 2022 to [email protected].
Pre-Authorised Debits Framework
The current framework for processing PADs is through Payments Canada’s ACSS as set out in Payments Canada’s Rule H1. This Rule outlines the procedures for the clearing and settlement of PADs that are supported by an ongoing agreement between a Payor and a Payee.
According to Payments Canada’s 2020 report, PADs represented the third highest total of all payment types cleared through the ACSS system, with over 956 million transactions representing $909 million in value. PADs are a convenient way to make recurring, sporadic or one-time payments between the accounts of an end user (Payor) and a third-party (Payee). They have a wide range of usage such as mortgage and utility payments, membership dues, charitable donations, RSP investments and insurance premiums.
Payments Canada noted the fact that the last review of Rule H1 occurred in 2008 and that changes are needed to better reflect the actual payment ecosystem with the objective to: (1) embrace technological advancements and an evolving marketplace; (2) enhance consumer protection and convenience; and (3) improve operational efficiency.
Phase one of the changes would involve the following:
- Definition of “Commercially Reasonable”- Due to the significant growth in electronic agreements, a more efficient onboarding process for the authorization of PADs is needed starting with a clearer definition of what constitutes a “commercially reasonable” method for authorizing electronic agreements. The current definition has been interpreted as if it provides an exhaustive list of verification examples when that was not the intention and other wording has been found to be confusing.
The paper proposes to (i) make wording of the definition easier to understand, (ii) update the list of considerations that could be taken into account to assess the reasonableness of particular methods used to verify Payee identity, and (iii) remove the list of verification examples, and replace them with clear wording that a Payee is able to use a method of verification that meets the circumstances of the PAD, their relationship with the Payor, and meets their operational capabilities, as long as that verification method can ultimately be upheld by a court of law.
- Paper vs. Electronic PADs - The procedural distinction between Paper-Based and Electronic Agreements is a legacy of the early operational challenges faced by Payees, however with technological development, these distinctions almost became unnoticeable. The paper proposes a uniform procedure and the following changes which would apply to all Payor PAD Agreements:
- Default period to notify the Payor prior to first PAD should be 10 days.
- Mandatory notification information provided prior to the first PAD should be: account name; financial institution (Name & Transit #); account number; amount of payment; frequency of payment; payment start date; type of pre-authorized debit (Business or Personal); and statement with regard to pre-notification.
- Payee can process a PAD Payment as long as the mandatory information has been provided to the Payor prior to the first PAD – i.e. no minimum time period.
- Default time period to notify the Payor of a Change of amount/date of PAD should be 10 days.
- Removal of the requirement (that was only applicable to Electronic Agreements) that prior to carrying out other steps the Payee must first verify the personal and/or banking information set out in a PAD agreement actually belongs to the subject Payor.
- Cancellation of Goods and Services Contract and PAD Agreements - Having PADs as a method of payment, but not addressing the requirements or terms of any associated goods and services contract between the Payor and Payee can cause issues especially where the Payor cancels the goods and services contract with the Payee, but does not cancel the PAD Agreement. The paper proposes introducing a mandatory element stating that Payor’s cancellation of the goods and services agreement results in the automatic termination of the Payor PAD to solve this issue.
- One-Time PADs - PADs can be used as one-time payment, but the cancellation of a PAD agreement still requires the Payor to initiate a cancellation request to terminate even though the one-time debt was extinguished, leading to confusion and additional risk of having unapproved PADs. The paper proposes to update the definition of one-time PAD agreement to be used only for a one-time transaction.
- Third-Party/Payment Service Providers - The role of third-party/Payment Service Providers (PSP) administrating PADs, as it currently stands, creates confusion as Payors are not aware of the PSP’s role and responsibility in the payment arrangement. The proposed changes include an update of the letter of undertaking to reflect what information the PSP must ensure their client includes in the PAD Agreement so that the Payor is made aware of which PSP is processing their payments and whom to contact if an issue occurs.
- Rule H1 Appendix Changes:
- Jurisdiction - The current rule does not require the Payee’s jurisdiction to be identified which causes problems for the Payor, particularly because the privacy policies and protection regulations differ by province. The paper suggests including the jurisdiction element within the mandatory requirements of a PAD agreement.
- Funds Transfer PADs from a Joint Account - The current ambiguity related to the Funds Transfer PADs from a joint account can cause issues. Normally a Funds Transfer PAD can only be initiated if the Payor and Payee are same individual but the concept of joint account includes a person who might not have authorized the account to be debited. To ensure that the appropriate permission is obtained, the PAD agreement templates should include a declaration statement which provides clarification to the Payor and Payee that the Payor is duly authorized to debit the account.
- Payee-Initiated Cancellation of PAD Agreement - The inability of a Payee to cancel the PAD agreement under the current rule is problematic, for example, in a situation where a Payee wants to cancel the PAD Agreement but not the underlying goods or services contract. The proposed change seeks to have a consistent and transparent set of rules that mimics the current Payor’s initiated cancellation requiring, among other things, written notification.
- Business Reimbursements Claims - Due to technological advances, the paper proposes updating the format in which a Payor of a Business PAD can submit a reimbursement claim (to allow written or recorded formats) to align with the current requirements for Payors of Personal or Funds Transfer PADs.
The next phase of changes to Rule H1 being considered would address additional technological enhancements and their impact in four key areas: (1) Payor’s control, (2) data- rich payments, (3) speed of payment and (4) onboarding of a new Payor. Accordingly, Payments Canada is seeking comments in these areas as well and has set out the following specific questions for comment:
- As a Payee, how important is the speed of PAD, from the time you initiate your PAD payment request until you receive the funds in your account? Please provide details on what timing would be beneficial for your business.
- As a Member, would you find it beneficial for your customers if they were asked to approve each PAD amount prior to funds being debited from their account?
- As a Payee, what factors are used when selecting PADs as your payment choice (i.e. costs, data, control, onboarding, automation, etc.).
- In addition to the future possibilities with PADs, what other capabilities do you feel would be beneficial to your organization in a future batch payment system?
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