This Bulletin summarizes key regulatory developments impacting the payments and AML/ATF regulatory sectors in 2023 and looks ahead to 2024.
Regulatory Regime for PSPs Launches in 2024
The Bank of Canada and the federal government made significant progress in 2023 on the new regulatory framework for Payment Service Providers (PSPs). These include individuals or entities who perform payment functions (other than as incidental to another service or business activity, such as banking) within a prescribed geographic scope.
The final Retail Payment Activities Regulations under the Retail Payment Activities Act (RPAA) were published in November 2023. The RPAA and its regulations will require PSPs to register with the Bank of Canada, establish a risk management and incident response framework, assess arrangements with third parties and, if the PSP holds end user funds, meet safeguarding of funds requirements. For more information about the RPAA, please refer to our bulletin “Federal Government Releases Draft Legislation to Regulate Retail Payments”. For more details on the regulations, please see our bulletins titled “One Step Closer to a Regulatory Regime for Payment Service Providers – Draft Retail Payment Activities Regulations Released” and “Final Retail Payment Activities Regulations Released”.
Supervisory guidance from the Bank of Canada regarding the criteria for registering payment service providers was released on December 12, 2023 and provides additional information about how potential PSPs should assess whether they fall under the RPAA. Additional guidance is expected from the Bank of Canada in 2024 on managing operational risks, safeguarding funds and incident reporting.
Registration requirements under the RPAA will come into effect on November 1, 2024. New PSPs, who file an application for registration outside of the 15-day transition window (between November 1, 2024 – November 16, 2024), will be subject to a 60-day delay before being able to perform retail payment activities. The application review process for registration will include a national security review by the Department of Finance Canada, which is currently under development.
The risk management framework and safeguarding of funds framework will come into force on September 8, 2025. For more information about the Bank of Canada’s overall governance framework for PSPs, please refer to our publication titled “Bank of Canada Releases Retail Payments Supervisory Framework”.
Continued Efforts to Strengthen AML/ATF Regime
There have been a number of developments in Canada’s anti-money laundering and anti-terrorist financing regime:
The federal Fall Economic Statement announced various new measures that were included in Bill C-59, which if passed will amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and related statutes. The changes will expand the mandate of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to, among other things, use its expertise to oppose sanctions evasions and combat environmental crimes. It will also expand the AML/ATF framework to entities providing certain services for private automatic banking machines.
As required by the PCMLTFA and announced in the 2023 budget, the federal government consulted in 2023 on various other changes that may find their way into upcoming legislation, such as the potential creation of a new Canada Financial Crimes Agency, updated sectors to be covered by the PCMLTFA, and differentiating between money services businesses and PSPs. For more information, see our bulletin “Department of Finance Launches Consultation to Strengthen Canada’s AML Regime”
Regulations under the PCMLTFA were amended to bring businesses in the armoured car sector and mortgage lending entities within the scope of the PCMLTFA. As a result, effective July 1, 2024 for the armoured car sector, and October 11, 2024 for mortgage lending entities, these businesses will be subject to the PCMLTFA. For more information, please refer to our bulletin “Final Regulations Released Amending Canada’s AML Regime” and its related publications.
The same regulatory changes will require Canadian financial entities to conduct enhanced risk assessment and maintain records for foreign entities with which they have correspondent banking relationships, effective October 11, 2024. FINTRAC’s related guidance is expected to be updated before then.
In order to cover its expanded scope, FINTRAC will implement a new cost-recovery funding model starting on April 1, 2024, that will impose compliance costs on financial institutions, life insurance companies, and any reporting entities that submit 500 or more threshold reports during a fiscal year.
Guarding Against FI Digital Risks
Digital innovation continued to underscore the possible impact of non-financial risks on payments operations and the resiliency of traditional financial institutions. Regulators issued several new guidelines that apply to banks and insurance companies and relate to their payments operations:
Open Banking and Other Initiatives
The federal Fall Economic Statement also contained two key announcements to support further innovation in the payments industry:
The Canadian Payments Act will be amended by Bill C-59 to expand membership eligibility in Payments Canada to PSPs supervised by the Bank of Canada, credit union locals that are members of a credit union central, and operators of designated clearing houses. Together with the proposed Payments Canada clearing rules for “real-time rails” that are expected in 2024, these changes have the potential to foster significant innovation by expanding payment system access to non-traditional firms.
The federal government released a policy statement outlining its plans for consumer driven “open banking” in Canada. More details are expected in legislation to be introduced in 2024.
At the same time, artificial intelligence promises to transform the financial services sector. Please see our bulletin “Artificial Intelligence in Financial Services: The Canadian Regulatory Landscape” for a more in-depth discussion.
The next year will continue to be busy for payments regulatory developments. As outlined, new framework details are expected to be unveiled for payment service providers, clearing systems and consumer driven “open banking”, with concurrent changes to guard against the related risks.