In just six months time, the Bank of Canada’s (the “Bank”) operational framework for payment service providers (“PSPs”) goes live under the Retail Payment Activities Act(RPAA) and Retail Payment Activities Regulations(RPAR). As part of this, PSPs will need to work with their financial institution (“FI”) and their legal advisors to comply with all of the Bank’s safeguarding requirements for end-user funds on or before September 8, 2025.
Safeguarding End-User Funds
The Bank’s Safeguarding End-User Funds Supervisory Guideline (the “Guideline”) was finalized on December 12, 2024 and sets out the Bank’s expectations for PSPs that are subject to the RPAA and have obligations to safeguard end-user funds. The Guideline notes that requirements relating to safeguarding end-user funds are intended to achieve two objectives: (1) to ensure that end users have reliable access without delay to their funds held by a PSP, and (2) to protect end-user funds against financial loss in the event of a PSP’s insolvency.
Subsection 20(1) of the RPAA notes that a PSP that performs a payment function involving holding “funds on behalf of an end user until they are withdrawn by the end user or transferred to another individual or entity” must safeguard those end-user funds.
It also prescribes how a PSP can safeguard end-user funds. The PSP can either (1) hold the end-user funds in trust in a trust account that is not used for any other purpose, or (2) hold the end-user funds in an account that is not used for any other purpose and hold insurance or a guarantee in respect of the funds that is in an amount equal to or greater than the amount held in the account.
This bulletin focuses on safeguarding requirements pertaining to trust and indirect arrangements.
Safeguarding Requirements
Valid Trust Arrangements
To hold end user funds in trust in jurisdictions other than Québec, a PSP must establish a valid express trust under Canadian common law.
To hold end-user funds in Québec, the PSP must ensure that the trust arrangement qualifies as a “trust” as defined in the Civil Code of Québec or a simple administration arrangement where the PSP holds and administers the end-user funds as administrator of the property of the end-users.
Financial Institution Trust Accounts
Indirect Arrangements
Where a PSP wishes to rely on a third party to act as an intermediary providing access to safeguarding accounts at an FI, the Bank considers this to be an indirect arrangement. Using indirect arrangements for safeguarding purposes may not comply with the RPAA or other applicable laws due to significant regulatory barriers and operational challenges. These barriers and challenges include:
- The intermediary may not be a registered trust corporation and/or may not have obtained the appropriate authorizations or exemptions to undertake activities as a trustee and comply with applicable trust laws.
- The delegation of safeguarding functions to an intermediary may violate certain provisions under the Civil Code of Québec applicable to the relevant trust arrangement.
- The return of funds to end users, should either the client PSP or intermediary become insolvent, would be complex and operationally challenging because multiple entities are involved. It would also create a greater risk that end users’ access to their funds would be impeded.
Legal Advice
As legal analysis should be completed in advance of the RPAA implementation date, PSPs are encouraged to review their product and service terms, operational processes and banking arrangements with their legal advisors sooner rather than later.
Trust Arrangements
The Bank expects PSPs to seek legal advice to assess both the validity of its trust arrangements and how the operational arrangements satisfy applicable law. Section 2.24 of the Guideline sets out this requirement, particularly for “a PSP with more complex arrangements for holding and safeguarding funds”. As the framework launches, the Bank has encouraged all PSPs to obtain legal advice regardless of complexity.
To demonstrate compliance to the Bank, the PSP will be expected to provide substantive analysis provided by their legal advisors that: (a) all characteristics of the trust are met, and (b) the trust arrangement meets the spirit of the safeguarding objectives.
Indirect Arrangements
If a PSP chooses to enter into an indirect arrangement, the Bank will expect the PSP to demonstrate compliance. In order to do so, the PSP will need to obtain a legal opinion affirming that the arrangement meets the relevant safeguarding objectives and requirements under the RPAA.
