Hurtling towards the future: regulatory development in the financial services sector

The pace of regulatory change in financial services continues to be relentless. Key changes occurred in 2024 that are likely to have a continued impact on financial service providers in the coming year. These developments include the implementation of the new retail payments regime, which captures a wide variety of participants. Significant changes lowering the interest rate that can be legally charged to consumers come into force early in 2025, with more changes potentially to follow. The Code of Conduct for the Payment Card Industry in Canada has been updated to include new disclosure obligations. Consumer-driven finance, commonly referred to as open banking, may be gaining traction.  

Significant changes are also occurring with Canada’s approach to anti-money laundering and anti-terrorist financing. In Québec, consumer protection has been a focus for the provincial government as it has passed amendments to its consumer protection laws, some of which will impact the financial services sector.

Further changes can be anticipated in 2025 arising from the ongoing review of federal financial institutions legislation, and other important developments. Whether federal priorities will shift in the wake of a Canadian federal election to be held no later than October 2025 remains to be seen.

Retail Payment Activities Act implementation is underway

In preparation for the phased implementation of the Retail Payment Activities Act (RPAA), the Bank of Canada (Bank) has published a significant amount of guidance over the course of 2024. Osler maintains a detailed RPAA resource page with guidance for those subject to the RPAA.

The Bank has made it clear through the guidance that it intends to capture a wider scope of participants than might have been anticipated, such as certain buy-now, pay-later lenders, online marketplaces, cloud platforms, and software providers that offer payment gateways. Such PSPs, among others, were required to submit their application for registration under the RPAA in early November 2024.

There will be a transition period of 10 months between mid-November 2024 and September 7, 2025. During this time, the Bank will review registration applications. PSPs who submit their applications after the initial application period, and during this transition period, must submit their application at least 60 days before planning to start conducting retail payment activities. The Bank has indicated that it will publish a list of registration decisions on September 8, 2025, including lists of PSPs that have been approved, and those that have been refused registration. At that time, the provisions dealing with operational risk, incident response, and safeguarding of funds will come into force.

The Bank has already issued final guidance on the operational risk and incident response framework and incident notification reporting. At the time of publishing this article, final guidance on safeguarding of funds has not been published. In the months leading up to September 2025, PSPs will need to review the guidance to ensure that their systems and operations can meet the Bank’s stated expectations and the RPAA requirements set to come into force.

Strengthening the federal financial sector

As we previously reported in our August 2024 Update, the Department of Finance launched the third phase of its review of Canada’s federal financial institutions legislation with a consultation focused on competition in the sector, consumer protection, modernization, geopolitical risks, and the development of a strong regulatory framework. The topics discussed in the consultation will represent significant changes to the federal financial sector. Although the outcome of the consultation remains to be seen, change should be anticipated in 2025.

Key changes occurred in 2024 that are likely to have a continued impact on financial service providers in the coming year.

The proposals that were open for consultation included measures aimed at strengthening the ministerial approvals process. This includes introducing mandatory public consultations where the requested approval raises “material” public interest considerations. Proposed measures would expressly broaden the Minister of Finance’s authority to take factors such as taxation or anti-money laundering compliance into consideration when determining whether to grant approval.

The Department of Finance is also considering whether to update certain key statutory thresholds. One measure under consideration is the public float requirement that currently applies to banks with equity of $2 billion or more, but less than $12 billion. Other limits that may be increased include those on specialized financing activities, investment powers and ownership of certain real assets. As proposed, such limits may be set by way of Office of the Superintendent of Financial Institutions (OSFI) guidance, rather than by means of a regulation to allow regulators to respond more quickly to changes in market conditions.

In a marked departure from existing policy, the consultation asked whether banks should be permitted to engage in light motor vehicle leasing with consumers. If enacted, this could significantly change the current market structure and dynamic.

In response to the rising rate of fraud incidents, the government further proposed measures that are aimed at reducing consumer risk and increasing bank responsibility for fraud. As part of the consultation, the government has inquired whether there should be a maximum liability threshold for victims, similar to the $50 maximum for unauthorized credit card transactions that exists today.

Finally, the government is proposing to strengthen federal involvement in the use of artificial intelligence (AI) in the financial sector. Earlier this year, OSFI and the Financial Consumer Agency of Canada (FCAC) jointly released a risk report on AI outlining key internal and external risks arising from the use of AI. The report indicated that OSFI is planning a second financial industry forum on AI to establish more specific best practices. The industry is also waiting for the release of the final draft of OSFI Guideline E-23 — Model Risk Management, which addresses the use of models, including AI and machine learning. We expect continued focus on AI over the course of 2025.

Criminal interest rate

As discussed in our August 27, 2024 Update, on January 1, 2025, significant changes to section 347 of the Criminal Code (Canada) will come into force. The definition of the criminal interest rate will change from an effective annual rate of interest to an annual percentage rate, and the rate will be lowered from an effective annual rate of 60% to an annual percentage rate of 35%.

At the same time, regulations will come into force that will reduce the impact of the change on commercial loans. These are loans made with a borrower that is not a natural person for business or commercial purposes. First, there will be a full exemption from the criminal interest rate for commercial loans where the amount of credit advanced is more than $500,000. There also will be a partial exemption for commercial loans where the amount of credit advanced is more than $10,000, but less than or equal to $500,000. In this second case, the annual percentage rate must not exceed 48% of the credit advanced. This is roughly equivalent to the current criminal interest rate cap of 60%. There are no exemptions for consumer or small commercial loans.

The regulations also set a federal cap on the cost of borrowing for payday loans, which harmonizes the cost across all provinces that have enacted a payday loan regime. The cap is 14% of the amount of money advanced to the borrower. This limit does not include any default fee that is specifically authorized under applicable payday lending laws, or a fee for any dishonored cheque or payment (NSF fee), provided that the NSF fee is $20 or less.

The federal government has proposed further changes to the criminal interest rate provisions. At a date yet to be announced, section 347 will be amended to add an offence for advertising an agreement that provides for the receipt of interest at a criminal rate. In addition, the government has proposed that the definitions of “insurance charge” and “interest” will be amended so that an insurance charge is expressly included within the definition of interest. The result of this change will be that the premiums for products such as creditor insurance will be included within the 35% rate cap for consumer loans. It remains to be seen whether this latest proposal will come into force as proposed.

Payment Card Code of Conduct

On October 30, 2024, the updated Code of Conduct for the Payment Card Industry in Canada (Code) came into effect. Acquirers will want to take note of the new “Cost per Transaction Disclosure” requirements. Starting on April 30, 2025, card processing applications, quotes and proposals must include certain transaction cost disclosures, together with the data and rationale used to populate such disclosures, such as card mix and volume of transactions, allowing merchants to more easily compare pricing across different providers. Acquirers will want to consider any system changes needed to operationalize these new requirements.

Payment card networks (PCNOs) and acquirers who are looking to increase or introduce new fees in 2025 will also want to consider the notice periods that come into effect on April 30, 2025. PCNO notice to acquirers of non-structural fee changes, being a change in the value of an existing acceptance/processing fee, will increase from at least 90 days to 120 days. PCNO structural fee changes will require at least 210 days’ notice. Acquirers must provide notice to merchants of new or increased acquirer/processing fees that are passed on in part or in full to merchants between 30 and 60 days prior to their effective date.

Consumer-directed banking

Consumer-directed banking, the federal government’s preferred term for open banking, gained momentum over the course of 2024. This began with the announcement in Budget 2024 that the FCAC would be mandated to oversee, administer and enforce Canada’s Consumer-Driven Banking Framework and continued with the passing of the Consumer-Driven Banking Act (CDBA). However, the CDBA, which is not yet in force, lacks key details regarding the implementation of consumer-driven banking and does not address liability, data security standards or governance matters. We understand that closed-door consultations have been taking place and additional details may be forthcoming in the near term. To date, nothing has materialized.

The federal government’s stated goal is to adopt the legislation and implement the governance framework needed for consumer-directed banking by 2025. Given the lack of developments since the passing of the CDBA, the outlook for consumer-directed banking in 2025 remains uncertain.

Other changes affecting financial services

Additionally, significant changes have occurred in Canadian anti-money laundering and anti-terrorist financing, which we discuss in our article on AML.

In Québec, revisions to consumer protection legislation relating to credit contracts and long-term lease contracts have been passed, which are discussed in our October 31, 2024 Update.

Responding to the changing landscape

Together, the changes discussed above will impose additional requirements on financial services businesses. Having a clear understanding of these requirements, together with a comprehensive plan to respond to them, will be important in 2025.