Code of Conduct for Credit and Debit Card Industry – Guidance Issued by FCAC Commissioner

On February 13, 2013, the Financial Consumer Agency of Canada (FCAC) issued Commissioner’s Guidance (the Guidance) to clarify three issues related to the Code of Conduct for the Credit and Debit Card Industry in Canada (the Code). The Guidance applies to payment card network operators (PCNOs) that operate in Canada and their participants, including independent sales organizations (ISOs) and other service providers (e.g. processing, terminal leasing). The full text of the Guidance can be accessed here.

The Code, introduced in April 2010, is meant to help promote greater transparency for Canadian merchants and consumers who use credit and debit cards. The Guidance is meant to help merchants, payment card network operators, card issuers and acquirers better understand their obligations under the Code.

The Guidance focuses on three major issues identified by FCAC through its supervisory work:

  1. inappropriate sales and business practices;
  2. disclosure to merchants in multiple provider agreements; and
  3. multiple contract cancellation penalties, costs or fees.

Sales and business practices

The Guidance notes that the FCAC has received a number of complaints related to sales practices that did not promote increased transparency and as such are not in accordance with the Code. Examples of the types of practices include:

  • failing to provide merchants with complete copies of the merchant-acquirer agreement in a timely manner (e.g. not providing a copy of applicable transaction and processing fees and rates at the time the merchant enters into the agreement);
  • unilaterally modifying a merchant-acquirer agreement governing payment card transaction processing without providing advance notice (e.g. 30 days or more before the changes);
  • sales representatives advertising and promising rates and fees that participants are not able to honour;
  • inconsistencies between the information disclosed in the merchant-acquirer agreement and the merchant’s monthly statements (i.e. different terminology used to describe fees and rates or different fees / rates in agreement and statements); and
  • misrepresenting contractual terms.

In order to address these complaints, the Guidance notes that the following actions should be taken by PCNOs:

  • PCNOs will work directly with their participants to promptly address sales or business practices within their networks that are inconsistent with the requirement to provide clear and simple disclosure to merchants or that may be misleading to merchants.
  • PCNOs will work with their participants to establish appropriate time frames within which to address concerns raised by merchants in connection with sales or business practices within a participant’s network and to develop appropriate processes to address such issues within a reasonable time period. PCNOs will also work with their participants to ensure that appropriate remedies are implemented in a timely manner, including amending or voiding contracts that were entered into through such sales practices.

Disclosure in Multiple Service Provider Agreements

The Guidance notes that merchants often find multiple service provider agreements opaque and difficult to understand in part because of the many different but interconnected payment services they require. Therefore, it is difficult for merchants to make reasonable and informed decisions. In order to address this issue, the Guidance notes that the following actions should be taken by PCNOs:

  • PCNOs will work with their participants to improve the clarity of disclosure to be provided to merchants before they enter into a multiple ISO / service provider agreement or agreements where there is a business connection between the participant and ISO / service providers, by requiring that key information be presented in a manner that is easy for merchants to find and understand.
  • Specifically, PCNOs and their participants will work together to ensure that the following information is provided to merchants, in a consolidated fashion, such as a cover page to the multiple service provider agreement or agreements, before they are entered into by the merchant: (a) the name, coordinates, contact information of each service provider and the nature of the services being provided by each; (b) the effective date of each agreement; (c) information on the expiry and renewal (e.g. whether the contract automatically renews if not cancelled before a specific date) for each agreement; (d) detailed information on any applicable fees and rates for each participant; (e) information on how statements will be provided to merchants (e.g. on paper or online); (f) the cancellation terms of each agreement entered into with the merchant, including specific information on any cancellation fees that could apply; (g) if point-of-sale services are offered to a merchant, general information on buying, leasing or renting options of point-of-sale hardware to enable merchants to make an informed decision; and (h) the complaint-handling process for each participant; including how a merchant can contact the complaints department of each.

The Guidance notes that participants are strongly encouraged to adopt an “information summary box” cover page format in their disclosure (the Guidance includes a sample of such disclosure).

Multiple Contract Cancellation Penalties, Costs or Fees

The Guidance notes that the FCAC has encountered situations where merchants, who have signed a merchant-acquirer agreement with a participant, later discover that they had actually entered into additional contracts for related services (related service contracts) that each contained different cancellation clauses and related penalties, fees or costs. When a merchant sought to cancel the merchant-acquirer agreement without penalty following a transaction fee increase or the introduction of a new fee, as permitted under the Code, the merchant was able to cancel the contract with the participant without penalty, but often faced additional costs or penalties to terminate related service contracts. In some cases, the merchant did not exercise its right to cancel the merchant-acquirer agreement without penalty because of these penalties under the other contracts. As a result, these penalties undermine the rights granted under the Code. In order to address this issue, the Guidance notes the following:

  • The principal of Element 3 of the Code relating to merchants’ right to cancel without penalty under certain circumstances should not only apply to the merchant-acquirer agreement, but also to any related service contracts with service providers. In situations where there is a business connection between the participant and the service providers, services should be considered related and as a single service package.
  • PCNOs will work with their participants to ensure that, consistent with Element 3 of the Code, merchants will be permitted to cancel the merchant-acquirer agreement and all related service contracts without penalty, following notification of any new or increased fees by any participant or related service providers.
  • The only exception is in a situation where a merchant, on its own initiative, enters into separate contractual arrangements with unrelated service providers. In such situations, the contract(s) with the separate service provider(s) should be treated as separate agreement(s).
  • If the participant or one of the related service providers introduces or increases a fee, the merchant may terminate the contracts with the participant and any related service providers without penalty, in accordance with Element 3 of the Code. However, any agreement separately entered into between the merchant and an unrelated service provider would not be covered by Element 3 of the Code, and as such, the merchant could be subject to a cancellation penalty if it wished to cancel this contract.

Implementation and Timing

The Guidance notes that the FCAC expects that (a) all PCNOs will publicly commit to this Guidance and incorporate the required amendments into their operating rules within 90 days of the date of the Guidance, and (b) all participants will comply with the Guidance and will incorporate any required changes to improve documentation, processes or approaches within 180 days of the date that PCNO operating rules are amended.