Note: This Summary Follows the Outline Provided by Prof. Lemieux

Banking Law, Fall 2015

Prof. Lemieux

Etienne Ravilet Guzman

Note: this summary follows the outline provided by prof. Lemieux.

Contents

Section 2: Regulatory Framework of Payments and the Payment Industry

A. Federal and provincial heads of power

B. Payment, Clearing and Settlement Act

(a) What are clearing and settlement systems?

(b) Definition of “systemic risk”

(d) Minister of finance’s power to designate clearing and settlement systems

(e) Consequences of designation

(f) Class discussion

C. Canadian Payments Act

Class notes: 3 systems the CPA currently operates

(a) Creation, members and objects of CPA (Sections 3 - 5, Canadian Payments Act)

Exchange, Clearing and Settlement

Section 9 (items in dispute)

Section 17 (return of payment item)

Sections 23 and 46 (operation of ACSS)

Sections 56 – 57 (default by a member)

(d) Disallowance of rules and ministerial directives (Sections 19.2 – 19.3, Canadian Payments Act

(e) Stakeholder Advisory Council Canadians Payments Act

(f) Priority payment instruments (Collins v. City of Calgary & s. 31 Canadian Payments Act

(g) Minister of Finance’s power to designate payment systems (Sections 36 - 37, Canadian Payments Act)

(h) Effect of designation (Sections 38, 40, 41 and 42, Canadian Payments Act)

Rules

Minister may issue directive

Information Requirements

Participants

(i) Discussion: Why has the Section 37 CPA power never been used?

D. Regulation of Payment Cards

(A) Payment Card Networks Act (Preamble and sections 1 - 6, Payment Card Networks Act

APPLICATION

FINANCIAL CONSUMER AGENCY OF CANADA

S. 6 Power to make Regulations (NOT IN FORCE!!!) – Payment Cards Networks Act

(b) Credit and Debit Card Industry Code of Conduct (know only re merchant-credit card networks)

Overview of policy elements 1 - 13, Code of Conduct or the Credit and Debit Card Industry in Canada

1. Increased Transparency and Disclosure

2. Minimum 90 day notice when fee re debit/credit increase

3. No penalty if after notification of fee increase merchant wants to cancel K

4. Can’t force merchant to accept debit/credit payments of one network just coz he accepts debit/credit of same network

5. Merchants are allowed to provide discounts for different payment methods

6.Networks cannot offer competing domestic applications on a same debit card

7. Payment card network brands must be represented equally for co-badged debit cards

8. Debit and Credit functions can’t co-reside in same card

9. Premium credit and debit cards can only be given with consent of costumer, need clear indication of premiumness, and only specific kind of customer can get premium cards

10.Can’t force merchants to accept new products/services

11.Can’t force merchants to accept/upgrade to contactless payments

12.Merchant-acquirer agreement terms and conditions must be disclosed in clear, simple, non misleading way

13.Merchants must have access to a clear & timely dispute resolution process

(c) Code for Consumer Debit Card Services (Canadian Code of Practice or Consumer Debit Card Services (Section 5 and 6 of Appendix A) – Midterm Stuff, ignore

(e) Bank Act and Cost of Borrowing Regulations (Section 12(1)(c), (d) and (e) – MIDTERM, DON’T STUDY

Provincial payment laws (Art. 1564 CCQ)

F. Current Challenges for the governance of payments and the payment industry

Task Force for the Payments System Review, The Way We Pay

Marcotte v. Fédération des caisses Desjardins du Québec 2014 SCC 57

Marcotte v Bank of Montreal

Banque Amex du Canada v Adams, 2014 SCC 56

Section 3: BANK ACCOUNTS AND THE BANKER-CUSTOMER CONTRACT

A. Three basic expectations of the accountholder

1. Repayment of the accountholder’s deposits

El-Zayed v. Bank of Nova Scotia - shows dynamics b/w bank and customer wrt instructions/authorization

Tayeb v. HSBC – See section on Money Laundering for full summary

2. Collection of the instruments deposited by the accountholder

Barclays Bank v. Bank of England (1984, arbitration, UK)

3. Confidentiality – no info here

B. The contract that arises between the bank and the depositor by operation of law

Bank of Montréal v. A.G (Québec) (1975, C.A. Québec) – Contents of a banking K include implicit obligation on Bank not to pay forged cheques.

C. The general standard form contract between the bank and its customer

(a) The verification agreement

Section 14, BMO Business Banking Agreement : Account Statements and Verification by you

Arrow Transfer Co. v. RBC, BMO (1972, S.C.C. from BC) – Exculpatory clause in banking agreem excludes bank liability if forged signature on cheque not reported in 30 days, UNLESS bank gross negligence (art. 1474)

(b) The adoption of internal controls to prevent fraud

Section 15, BMO Business Banking Agreement: Your Duty of Care

CP Hotels v. BMO (1987, S.C.C. from On) – NO DUTY of care or duty TO SET UP INTERNAL CONTROLS v fraud unless K say so (unless there is verification agreement like s. 15)

Section 5, BMO Business Banking Agreement: Charges to Account

Legault v. Bank of Montreal (doctrine of estoppel or “fin de non recevoir”)

Bank of Montréal v. Legault (2003, QCA) - Valid but Unenforceable chargeback clause coz bank ~ require client’s endorsement on two cheques with fraudulent endorsements & didn’t cheque authenticity of endorsements (exceptional case where bank loses benefit of charging back to account)

(d) Provisions respecting electronic access to bank accounts

Patco Construction v. Peoples’ United Bank –bank may shift risk of unauthorized transfers per Art. 4 a Uni Com Code to customr through 2 methods, 1 is Test for Commercial Reasonableness of a Bank’s security procedures. See art. 1437 below…

Art. 4A-202 Uniform Commercial Code – Authorized and Verified Payment Orders (customer-bank, transfers, security procedures must be commercially reasonable)

(d) Implicit obligations in the banker-customer contract (custom/usage, reasonableness/necessity)

Art. 1434

Bank of Montreal v. A.G. Quebec (see above)

C.P. Hotels v. Bank of Montreal – See above for full summary

E. Extra-contractual liability of banks involved in payment transactions

Common Law

Civil Law

Boma Manufacturing v. CIBC

(b) Restitution by collecting bank of payment made in error by paying bank

BMP Global v. Bank of Nova Scotia (2007, BC C.A.)

Art. 1491 – Receipt of thing not due

F. Money laundering and terrorist financing

Tayeb v. HSBC Bank (2004, UK finst commercial court)

Section 7, Proceeds of Crime and Terrorist Financing Act – Reporting required if suspicion of $ laundering/terrorist financing

4. WIRE TRANSFERS THROUGH LARGE VALUE TRANSFER SYSTEM (LVTS)

A. Introduction: different kinds of wire transfers & characteristics

International and domestic wire transfers through SWIFT

Pre-authorized debits and direct deposits (ACSS)

Interac P2P

Electronic bill payments – Rule E1 for Point of Sale Debit Transactions

B. LVTS

C. By-law No. 7 Respecting the Large Value Transfer System (Second Midterm!)

(a) Definitions [s. 1]

(b) Scope of By-Law

(d) Exchanging [s. 34-35]

(e) Clearing [s. 38]

(f) Making amount available finally and irrevocably to payee [s. 43, 45]

(g) Exceptions to receiving participant’s duty in s. 43 [s. 44, 46, 47, 49]

(1) Technical malfunctions s. 44(1):

(2) Error [s. 46]:

(3) Inability to credit payee

Tayeb v. HSBC Bank (2004) – UK Commerical Court

5. CHEQUES, BILLS AND NOTES

A. Introduction

The role played by bills of exchange and promissory notes in the economy of the 17th and 18th centuries

The circulation of cheques among the payor (drawer), the payee, the payee’s bank (collecting bank) and the payor’s bank (drawee bank) see below

The “layers of law” governing the relationships between the participants in transactions involving payments by cheque

B. Formal requirements

(a) Bills of lading - S. 16, Bills of Exchange Act

NB: B/L are transport documents, not a payment instrument

(b) Cheques – s. 165, Bills of Exchange Act

C. Negotiation

(a) Negotiation of Bills payable to order or to bearer, s. 59 Bills of Exchange Act

(b) Requirements for negotiation by endorsement, ss. 61-62 Bills of Exchange Act

D. Holders

(a) Definition, s. 2 Bills of Exchange Act

(b) Holders in due course, s. 55(1) Bills of Exchange Act

Boma Manufacturing v. CIBC – if drawer intends to pay a real person but fraud & pays a fictitious person, bank is a holder in due course & not laible for conversion (interference with goods of another)

(d) Payee cannot claim to be holder in due course, s. 55(1) Bills of Exchange Act

E. Rights of holders

(a) To sue, s. 73(a) Bills of Exchange Act

(b) To hold free from defects and defences, s. 73(b) Bills of Exchange Act

Range v. Belvedere Finance Corp [SCC 1969] – Note must be unconditional to give right to sue

(d) To grant valid discharge where title is defective

F. Parties liable

(a) No liability without signature, ss. 126 & 130 Bills of Exchange Act

(b) Drawer’s liability, s. 129 BoE Act

(c) Acceptor’s liability and preclusions from raising certain defences against holders in due course, ss. 127-128 BoE Act

(d) Endorser’s liability and preclusions from raising certain defences against holders in due course, s. 132 BoE Act

G. Return of cheques through ACSS

H. Fraudulent cheques: Overview of recourses of affected parties

(a) Forged drawer’s signature

(b) Forged endorsements

Section 48(1) and (4), Bills of Exchange Act

##AG Quebec v. Bank of Montreal See previous section of summary

Section 49, Bills of Exchange Act (claim by drawee against collecting bank, and claim by collecting bank against last holder subject to reasonable notice)

Return of instrument through Sections 4 – 6, Rule A4 (drawee bank shifting liability for the amount of a cheque bearing a forge endorsement to collecting bank) See above

Boma Manufacturing v. CIBC See above

I. Characteristics of payment by cheque

(a) Cheques are revocable forms of payment, s. 167 BoE Act

(B) Are cheques negotiable? Boma third-party cheques found to be “susceptible of fraud” even in presence of an endorsement)

Section 2: Regulatory Framework of Payments and the Payment Industry

A. Federal and provincial heads of power

Sections 91 and 92, Constitution Act 1867 (sections 91(14), 91(15), 91(18), 91(20) and 92(13))
Unclear where payments fall - 91 or 92. Trilogy of SCC cases: Marcotte v Desjardins, Marcotte v BMO, Amex v Adams. Deal with conflict prov-fed laws dealing with disclosure of payment charges.
S. 91CA 1867.
91: note no references to payment industry only 91 (14) Currency and coinage, 91(15) Banking, incorporation of banks, and the issue of paper money, and 91(18) on bills of exchange.
Old dollars said “promise to pay”= promissory notes. Since 1935 only Bank of Canada issues $.
Bills of Exchange: like a cheque. Not a promise, but an order from one to someone to pay $ to another person. In case of cheque the “someone” is bank. Difference bill of exchange and promissory note: one is an order, latter is a promise. There’s a relationship pre-established in case of bills of exchange with the “someone” that is ordered to pay.
S. 92 CA 1867
92(13) Property and civil rights credit and contracts fall here. 1557 CCQ: payment valid if made to another on the instructions of the creditor.  if you owe me money, I can order payment through bill of exchange to someone else that I owe money to.

B. Payment, Clearing and Settlement Act

(a) What are clearing and settlement systems?

Payment Clearing and Settlement Act  governs critical financial infrastructures, including payments
Canadian Payments Act 1980, establishes manager and operator of payment systems Canadian. Payments Association, which operates two payment systems: ACSS and LVTS (=most payments), does not include credit card networks.
Barclays Bank v. Bank of England
Why study it: description of the clearing and settlement system. Explains:
Clearing = reconciliation of all payment
Settlement = payment of reconciled balances
Cheque clearing:
Payor > Payee > Presenting Bank (payee's bank) > Clearing House > Paying Bank (payor's bank)
B/w Presenting Bank and Paying Bank is a Clearing House
Institution that is object of Payment Clearing & Settlement Act
Facts: Friendly arbitration b/w Bank of England and Barclay's. BoE is central bank behind clearing house (as is true in most countries)
Issue: what is duty of presenting bank to its customers who bring in a customer cheque from another bank? Are images of cheques sufficient to be presented at paying bank?
Relevants parts:
Physical presentment of cheques is impractical so banks are looking for cheaper way
Important for its description of how cheque travels. Takeaway is three words:
Exchange: inter-bank
Clearing: process by which two banks exchange cheques and calculate a net amount owed b/w banks
Two forms of clearing:
1. Debit: where person presenting cheque is one to whom the bank is owed money…since it already has credited its customer (in Canada, ACSS is debit clearing system) "pull". Cheques are credited to presenting bank automatically then sent to paying bank to verify validity of cheques
2. Credit: institution that introduces funds is bank who owes money (LVTS) "push"
Settlement: payment of net amount owing
Settlement is now the role of the Central Bank
Distinguish: “on-us” items = payment instrument that is cashed at same bank that issues it, where no clearance happens, just moving money in same place as issuance of money, same case in LVTS payments between accounts in same bank vs “interbank” items: when $ moves between two banks in any way, those payments need a payment system here case of Barkley Bank beginning of cheques. In 19th century, banks met at tavern: all cheques received from other banks, each clerk counted amounts of each bank so that each bank knew how much it owed to other banks= payments made for the difference owed at the end of the day.

(b) Definition of “systemic risk”

S. 2 PCSA: Systemic risk - inability of participant to meet its obligations in system could contaminate system. Clearing balances are owed and if one is insolvent the inability to pay may prevent the other to pay its money. Contamination of others by insolvency of one (Wall Street crisis). When the act was adopted the idea was to create another payment system that would deal with large amount of money, removing systemic risk from ACSS (remove ACSS and LVTS was created). LVTS is able to function even if one of the participants fail (Bank of Canada essentially may be able to pick up the tab, give loan, etc). LVTS => all obligations are guaranteed.It is built different from ACSS.

(c) Definition of “payments system risk”

S. 2 PCSA: Payment system risk - means if ability of system to function is compromised, its effects are felt on the national economy at 2 levels: 1) individuals/banks can’t pay, 2) loss of confidence. eg. hacking

(d) Minister of finance’s power to designate clearing and settlement systems

NOTE: designation is to id banks that pose a systemic risk or payments system risk to control risk
S. 4.(1) PCSA: may designate systems if clearing and settlement system poses a systemic riskor if it is in the public interest to do so (according to Fed Minister of Finance)

(e) Consequences of designation

S. 5 PCSA: Information to Bank of Canada: Bank of Canada can request in writing any information from clearing house at any time in any form and manner

S. 6 PCSA: Directives to Clearing Houses and Participants –STOPS PARTICIPANTS FROM DEFAULTING OR CONTINUING/STARTING RISKY PRACTICES FOR THE SYSTEM

(1) Governor of Bank of Canada may issue directive in writing to clearing house of a designated clearing and settlement system requiring any corrective measures to control systemic risk or payments system risk in relation to: (a) operation of clearing and settlement system or (b) actual or anticipated acts or omissions of the clearing house or participant
(2) Governor may issue directive in writing to participant requiring corrective measures if Governor finds issues mentioned in (1) AND
clearing house doesn’t comply with directive issued under (1),
clearing and settlement system has no clearing house in Canada, or
(i) risk is being inadequately controlled due to act or omission by participant, (ii) the act or omission is not subject to rules governing the designated clearing and settlement system
(3) No directives may be made in respect of a participant’s (a) capital adequacy, (b) management of investments, (c) corporate governance, (d) relations to customers who are not participants in the designated clearing and settlement system, (e) ownership structure, (f) other matters not directly related to participation in designated clearing and settlement system.

S. 7 PCSA: Bank of Canada’s Powers – BANK OF CANADA TAKES OVER OBS OF DEFAULTING BANK TO IMPEDE COLLAPSE OF OTHER BANKS

May do all of this re a clearing and settlement system and its clearing house:
(a) provide secured/unsecured guarantee of settlement by participants,
(b) make liquidity loans to the clearing house and the central counter-party, and
(c) act as central counter-party to the participants

(f) Class discussion

Name 4 payment systems that we have in Canada
Which of these payment systems has been designated under the Payment, Clearing and Settlement Act as presenting “systemic” risks?
Which other system(s) is(are) susceptible of designation as presenting “payments system risk”?

C. Canadian Payments Act

Class notes: 3 systems the CPA currently operates

ACSS (Automated Clearing and Settlement System)oldest of the 3, was around in 1980

Responsible for clearing and settlement of: cheques, bank drafts, certain electronic forms of payment such as direct deposits and electronic bill payments, certain debit operations

EBUS (Electronic Bulk Exchange of US Instruments) => parallel system to the ACSS used for payment items in US dollars, drawn on a U.S. dollar account at financial institutions in Canada, but settled in the U.S

LVTS (Large Value Transfer System) => secure, real-time transfers of payments over $25 million

Some forms of payment do not go through the CPA=> Cash, Credit Cards, Debit Cards (however they are cleared and settled through the ACSS), certain wire transfers, any international payments (responsible only for domestic transactions)

Note: forms of payments that stay within the same bank do NOT go through the CPA

Only payments or clearing actions which are between numerous banks are governed by the CPA.

(a) Creation, members and objects of CPA (Sections 3 - 5, Canadian Payments Act)

Association established

3.(1)A corporation is hereby established to be called the Canadian Payments Association.

Members of Association

4.(1)The Association shall consist of:

(a) Bank of Canada, (b)every bank, (c)every authorized foreign bank; (c.1)every cooperative credit association, loan company or trust company that is designated as a bridge institution under the Canada Deposit Insurance Corporation Act; and

(d)any other person who is entitled under this Part to be a member (4.2 below!) and who, on application to the Association for membership in the Association, establishes entitlement to be a member.

Entitled members

(2) following are entitled to be a member of Association if meet requirements: