Publication date: August 21, 2024
The following fictional case scenarios illustrate the application of the securities exclusion in paragraph 6(b) of the Retail Payment Activities Act.
The examples provided are not a replacement for the Criteria for registering payment service providers supervisory policy, but rather they are meant to complement the policy. They should be read in conjunction with the policy.
These examples build off each other. We recommend reading them in the order they appear.
Case scenario: Securities dealer operates accounts only for securities trading
Company A operates an online investing application (i.e., an app). Its app enables customers to trade various investment products, including individual stocks and exchange-traded funds, and invest in managed accounts based on model portfolios. Company A is registered as an investment dealer with the securities regulators in each province and territory in Canada.
To use Company A’s app, customers must create an account by providing personal information as well as details about their investing goals, risk tolerance and other know-your-customer information. Customers may then fund their account through transfers from their bank account as needed, and they may use the funds in their account to trade in securities through the app.
In this example, Company A is performing payment functions in relation to electronic fund transfers (EFTs) when it provides the services offered to customers through its app. It provides user accounts in relation to future EFTs and holds end-user funds for the purpose of securities trading; therefore, it performs the provision or maintenance of an account and holding of funds payment functions. Company A also interfaces directly with securities exchanges and other marketplaces to transfer user funds in exchange for securities held on the user’s behalf. It therefore performs the payment function of initiation, as well as authorization, transmission, reception or facilitation of instructions in relation to EFTs.
However, Company A’s activities are excluded from the Retail Payment Activities Act (RPAA) because they fall under the activity-based exclusion for securities transactions under section 6(b) of the RPAA. In particular, the payment functions that Company A performs are all for the purpose of enabling trading in securities, and all of its activities fall under the jurisdiction of provincial and territorial securities regulators. As such, its activities are prescribed “securities-related transactions,” as defined in s.2 of the Retail Payment Activities Regulations.
As a result, Company A does not need to register with the Bank of Canada.
Case scenario: Securities dealer also operates a cash spending account
Company A begins offering a new product, which consists of a separate cash and spending account function within its app. The new account function enables customers to fund cash accounts instead of their securities trading accounts. Company A enables customers to use the funds held in their cash accounts to send peer-to-peer payments to other users and to pay bills.
Company A does not charge fees for its cash account product, and it encourages customers to use it by offering interest on balances held, similar to conventional savings accounts. Company A offers higher interest rates on cash account balances if customers hold total assets with Company A over a certain threshold, including in their cash and securities accounts.
In this example, Company A’s securities-related activities continue to be excluded from the RPAA. However, the activities it carries out for the purposes of its cash account product involve retail payment activities made for purposes other than securities-related transactions. Company A is engaging in the provision or maintenance of an account payment function, as well as the holding of funds. Company A also enables users to place payment orders through their interface and confirms account balances in customers’ cash accounts to authorize transactions, thereby performing the function of authorization, transmission, reception or facilitation of instructions in relation to EFTs.
These activities are not incidental to Company A’s securities activities. The cash account is a separate function that is not necessary for Company A to perform its securities business. Although Company A expects to receive some benefits to its securities business from customers that also adopt its cash account, this does not mean the cash account directly supports its securities-related activities. Rather, this is a sign that Company A derives commercial advantage from the cash account, which is an indicator that this is not an incidental activity. In addition, this product is marketed to customers as a payment product, and customers expect to receive services related to payments and not securities when they use the service. Indeed, customers can sign up for a cash account without being required to use Company A’s securities offering.
As a result of the introduction of this new product, Company A now meets the definition of a payment service provider (PSP). Company A needs to register with the Bank, assuming it meets the other registration criteria. When submitting an application, Company A will provide information relating to only its cash account business line and will exclude any information relating to its securities activities.
Disclaimer
The case scenarios are illustrative examples reflecting the Bank of Canada’s interpretation of certain requirements set out in the Retail Payment Activities Act (RPAA). All names, facts and descriptions in these scenarios are entirely fictitious and do not reflect any real or actual individuals or entities.
Additionally, they do not represent legal advice and should not be used as a replacement for seeking such advice if an individual or entity is unsure about whether they are required to register with the Bank of Canada as a payment service provider. The nature of the products and services offered by each individual or entity will vary, as will the circumstances around offering these products and services. Therefore, any individual or entity that may be subject to the RPAA should assess their own situation on a case-by-case basis according to their own facts and circumstances. Any entity or individual that may be subject to the RPAA is ultimately responsible for determining whether they are required to register with the Bank.
The examples provided are not a replacement for the Criteria for registering payment service providers supervisory policy, but rather they are meant to complement the policy. They should be read in conjunction with the policy.